2003 International Law Update, Volume 9, Number 10 (October)

2003 International Law Update, Volume 9, Number 10 (October)

Legal Analyses published by Mike Meier, Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com.  

COMITY

In deciding whether to recognize Mexican bankruptcy court order, Fifth Circuit finds that foreign proceeding, to receive comity, must provide defendant with specific notice and opportunity to be heard

International Transactions, Ltd. (ITL), sued to confirm an arbitration award against five Mexican companies (Agrals). In 1994, ITL invested in one of the Agrals, Embotelladora Agral Regiomontana, S.A. de C.V. (Embotelladora), through Sharp Capital, Inc. (Sharp), its undisclosed agent, to build a Pepsi-Cola bottling plant in Monterey, Mexico. To cover this investment, Embotelladora made out a promissory note payable to NationsBank of Texas, N.A. (NBT). NBT endorsed the Note over to Sharp “as custodian” without recourse. The remaining Agrals guaranteed the Note. The Note contained arbitration and venue clauses that required enforcement actions to be brought in Texas. Only Sharp knew that ITL was the investor.

In 1996, Embotelladora defaulted on the Note, and Sharp began arbitration proceedings against the Agrals in Dallas, Texas. Without any indication of ITL’s role, Sharp obtained an arbitration award of $11,374,859. At this point, the Agrals knew that there was an investor but did not know that it was ITL.

Shortly after the arbitration award, four of the five Agrals filed for suspension of payments in Monterey, Mexico. This action later turned into a bankruptcy proceeding wherein Sharp filed a claim to confirm and recognize the arbitral award. In 1998, without ITL’s authorization, Sharp assigned the arbitral award and the Note to Jose Trevino Canamar, a Mexican attorney, in exchange for a business customer and for payment of Sharp’s legal fees. There were also allegations that Canamar is related to Sharp’s president and is the brother of the attorney that Sharp had hired to collect the award. Canamar later assigned the arbitral award and the Note to an affiliate of the Agrals at a fraction of the face value. Moreover, the Securities and Exchange Commission had investigated Sharp and Sharp’s president later pleaded guilty to fraud charges.

In January 1999, the Mexican court denied Sharp’s claim in the Agral bankruptcy proceeding. The following month, ITL sued Sharp in a Texas federal court to gain control of the award, and two years later Sharp’s Special Master conveyed it to ITL. ITL then sued the Agrals in Texas federal court, seeking confirmation of the arbitral award.

Meanwhile, the Mexican court found – apparently ex parte – that Sharp, having assigned the award and Note to a third party, was no longer a creditor. In December 2001, the Agrals merged into the affiliate which had previously bought the award and Note from Canamar. The Mexican court dismissed the bankruptcy proceedings in January 2002.

In their Texas case, the Agrals put in evidence of Sharp’s dismissal by the Mexican court. Based on comity, the district court then dismissed the action to confirm the arbitration award because ITL lacked standing to collect on the award by virtue of the Mexican bankruptcy court order.

The U.S. Court of Appeals for the Fifth Circuit vacates and remands because the Agrals had failed to show that ITL and/or Sharp had received notice and a chance to be heard in the Mexican proceedings.

“Comity is ‘the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.’ ... The rationale underlying the grant of comity to a final foreign money judgment is similar to that underlying the application of res judicata to domestic judgments.’ ... While a foreign court may not render a binding money judgment against one over whom it has no jurisdiction based solely on one’s dealings with a foreign corporation, a creditor of an insolvent foreign corporation may be required to assert its claims before a duly convened foreign bankruptcy tribunal to preserve claims against a foreign bankrupt. ...”

“Under principles of international comity, a foreign court’s judgment on a matter is conclusive in a federal court when (1) the foreign judgment was rendered by a court of competent jurisdiction, which had jurisdiction over the cause and the parties, (2) the judgment is supported by due allegations and proof, (3) the relevant parties had an opportunity to be heard, (4) the foreign court follows procedural rules, and (5) the foreign proceedings are stated in a clear and formal record. ...”

“Comity is an affirmative defense and the parties urging comity - the Agral Companies in this case - have the burden of proof on the issue. ... Although ITL challenges the district court’s decision on comity on several grounds, the critical question is whether ITL had notice and an opportunity to be heard in the Mexican bankruptcy court on its claim to the Award. Answering that question requires an analysis of what type of notice is required for this purpose.” [Slip op. 9-12]

Here, it appears that neither ITL nor Sharp had notice that the Mexican bankruptcy court had dismissed Sharp as a creditor. Nor does the record indicate any lack of diligence by ITL that might have obstructed the Mexican court’s notice to Sharp. The Mexican court in fact signed the order removing Sharp without notice to any interested party. Consequently, the Agrals failed to meet their burden of proving entitlement to comity.

Citation: Int’l Transactions, Ltd. v. Embotelladora Agral Regiomontana, SA de CV, No. 02-11280 (5th Cir. October 20, 2003).

EQUITABLE REMEDIES

New South Wales appellate court rules that neither judicial “merger” of law and equity proceedings nor sound policy empower it to change domestic law that bars equity award of punitive damages for breaches of fiduciary duties

Beginning in 1996, Digital Pulse Pty. Ltd. (Digital or plaintiff) ran a small information technology business in Australia, apparently headquartered in New South Wales. It specialized in supplying computer‑based multimedia services to its clients. In April 1998, a Mr. Harris began working for the plaintiff, and, in October 1999, a Mr. Eden became one of plaintiff’s employees. Each was under a contractual duty not to compete with plaintiff during the course of their employment.

Nevertheless, while working for Digital in November 1999, Harris and Eden secretly decided to leave plaintiff and found their own business, Juice‑D Media Pty. Ltd. (Juice). They went about obtaining contracts for Juice with plaintiff’s potential clients and carried out projects for plaintiff’s clients. Juice even charged fees to some of those clients fees invoiced by Juice. On February 4, 2000, the plaintiff fired Mr. Harris and the next day Mr. Eden resigned.

In the courts of New South Wales, Digital sued Harris, Eden and Juice (defendants), inter alia, for breach of fiduciary duty, the existence of which is undisputed. The trial judge found that Harris and Eden had breached their contractual and fiduciary duties of loyalty and that Harris had also misused confidential information. These actions brought about losses to Digital and generated unwarranted profits to defendants.

The court ordered defendants to render an accounting for these profits. It also ordered Harris to pay equitable compensation of $11,000 for misusing plaintiff’s confidential information. Finally, the court ordered Harris and Eden to pay Digital exemplary damages of $ 10,000 each. Harris and Eden asked for leave to appeal against the award of exemplary damages. With two concurring opinions and one dissent, the Supreme Court of New South Wales -- Court of Appeal allows the appeal in part.

The majority decides overall that no power now exists in the law of New South Wales to award exemplary damages for equitable wrongs such as those alleged in this case nor should this Court recognize such a power. The holdings in the main Australian authorities cited clearly support this proposition. Nor can the majority find any persuasive reasoning in the authorities in Canada or New Zealand or the United States.

Noting that the U.S. state law is conflictual on this issue, the present Court refers to some key U.S. authorities. “Convenient collections of cases permitting or refusing the award of exemplary damages in equity up to 1956 may be found in ‘Power of Equity Court to Award Exemplary or Punitive Damages’ 48 ALR (2d) 947. Later cases may be found in ... Zitter, ‘Punitive Damages: Power of Equity Court to Award’ 58 ALR (4) 844; ... Leavell, Love, Nelson and Kovacic‑Fleischer, Cases and Materials on Equitable Remedies, Restitution and Damages, 2000, p 1218.”

“The traditional view was that ‘a court of equity is not an instrument for the punishment of an individual or for the exacting of vengeance’: Orkin Exterminating Co. of South Florida Inc. v. Truly Nolan Inc., 117 So.2d 419 (1960) at 422. That view apparently commended itself to all nine justices of the Supreme Court in Tull v United States, 481 US 412 (1987) at 422: ‘Remedies intended to punish culpable individuals, as opposed to those intended simply to extract compensation or restore the status quo, were issued by courts of law, not courts of equity.’”

“However, neither the traditional reluctance of United States courts to award exemplary damages for equitable wrongs, nor the more recent trend in favour of this course, are intrinsically significant for present purposes. What may be significant is the principle on which the various cases rest.” [N/A]

A review of the history of English and Australian parliamentary action significantly tends to reduce the scope of punitives in the common law sphere. Where it has created new statutory rights, it has seldom granted plaintiffs a right to exemplary damages. The fact that parliament has often limited or declined to broaden the power to award such damages indicates that it remains a matter more effectively dealt with by the legislature.

Nor is the traditional equity power to order an accounting of profits penal in nature, although it does possess a deterrent aspect. The scope of this remedy turns on the extent to which the fiduciary has enriched himself, not on his probity. Moreover, equity limits the account itself to actual misbegotten profits.

Furthermore, the fact that equity can and often does set a higher interest rate on errant trustees who take part in the gross misuse of funds does not show that equity has the power to grant punitives. The equity court merely estops the trustee from denying the receipt of interest at a rate that should have been received and fashions an award that precludes the erring fiduciary from keeping any ill-gotten gains. This doctrine is not, at bottom, punitive in character.

On the other hand, equity principles do allow the granting of relief against penalties and forfeitures and rarely enjoins the commission of crimes. These doctrines tend to bolster the defendants’ contentions that equity does not award punitive damages.

Plaintiff then points to the traditional rule that courts can grant punitives in tort actions. In the Court’s view, however, this should astonish no one in light of the intertwined roots of the common law of tort and crime. No similar entanglement between equity and crime or between contract and crime. As distinct from common law crimes, moreover, equitable duties do not depend on the actor’s mental states.

The Court rejects plaintiff’s reliance on judicial use of the terms “penal,” “punitive,” “punishment” and “prophylactic” in litigation dealing with remedies for breach of fiduciary duty as missing the exemplary damages target. Judges often refer to these terms in a loose sense. Both bench and bar should not lose sight of this type of usage.

“All the plaintiff sought to [show] was that labels should be avoided and that to grant exemplary damages in equity was only a small change in the law if it was a change at all. On the contrary, it is a radical change having no justification in traditional thinking, properly understood. Whether it is a desirable change is a question outside the proper province of an intermediate appellate court.” [N/A]

“... [T]here are some cases in which an ultimate court of appeal can and should vary or modify what has been thought to be a settled rule or principle of the common law on the ground that it is ill‑adapted to modern circumstances. If it should emerge that a specific common law rule was based on the existence of particular conditions or circumstances, whether social or economic, and that they have undergone a radical change, then in a simple or clear case the court may be justified in moulding the rule to meet the new conditions and circumstances.’”

“But there are very powerful reasons why the court should be reluctant to engage in such an exercise. The court is neither a legislature nor a law reform agency. Its responsibility is to decide cases by applying the law to the facts as found. ... The court does not, and cannot, carry out investigations or enquiries with a view to ascertaining whether particular common law rules are working well, whether they are adjusted to the needs of the community and whether they command popular assent. ... In short, the court cannot, and does not, engage in the wide‑ranging inquiries and assessments which are made by governments and law reform agencies as a desirable, if not essential, preliminary to the enactment of legislation by an elected legislature.” [N/A]

The concurring Justice makes these further points. “Equity is concerned with the conscience of both parties, from which can be deduced the general principle that equity does not punish. A punitive monetary award does not involve the balancing of rights and interests between two parties, but the imposition of a burden upon one party for purposes unrelated to the relationship between them.”

“It is oppressive to impose a burden on a defaulting fiduciary going beyond the benefit received by him or her, and unjust for the beneficiary to receive a windfall benefit. On occasion, such an effect may result from the operation of an equitable doctrine such as laches or lack of clean hands. There is, however, no example of equity providing a remedy on a solely punitive basis.” [N/A]

“But to reason that, while in the past, while the common law was administered in common law courts and equity in its own courts, common law courts awarded exemplary damages and equity courts did not, the fact that the two systems are now administered in the one court entails the conclusion that the common law remedy of exemplary damages is available for equitable wrongs is to fall into a crude ‘fusion fallacy.’ The conclusion arrived at could only be justified if there was some particular provision in the legislation effecting the administration of the two systems in a single court compelling it. There is none in the New South Wales legislation.” [N/A]

Citation: Harris v. Digital Pulse Pty. Ltd.,197 A.L.R. 626, 44 A.C.S.R. 390 (Sup. Ct. N. S. W., Ct. App. 2003).

FOREIGN SOVEREIGN IMMUNITY

In insurance dispute involving Irish insurance company owned by Irish government, Third Circuit holds that, for sovereign immunity purposes under FSIA Section 1603(b)(2), “organ” of foreign government requires public activity by company on behalf of foreign government

USX Corporation and Bessemer and Lake Erie Railroad Company (“B&LE”) (USX’s subsidiary during the relevant time) (jointly referred to as USX) sought indemnification from approximately 50 insurance companies under umbrella liability insurance policies. These insurance arrangements had been set up beginning in the 1970s and included layers of insurance, as well as coverage of up to $325 million.

In 1982, B&LE had pleaded nolo contendere to violations of the Sherman Antitrust Act (15 U.S.C. Section 1) for its part in a conspiracy to restrict the transport of iron ore to inland steel mill locations. For example, the railroads allegedly prevented the introduction of self-unloading vessels and refused to let non-railroad-owned docks and trucking firms share in iron ore transport. Massive litigation later arose which became known as the In re Lower Lake Erie Iron Ore Antitrust Litigation. The final judgments totaled $638.5 million, and B&LE was left as the sole defendant after all other defendants settled or were dismissed.

The insurers denied coverage and in 1995 USX brought a coverage action in Pennsylvania state court against the insurers of the catastrophic liability insurance program. Claiming to be an “agency or instrumentality of a foreign state,” ICAROM plc, successor to the Insurance Corporation of Ireland (ICI), removed the action to federal court. USX then voluntarily dismissed its state court action and filed a similar action in federal court, the only difference being that it excluded ICAROM because it was an “agency or instrumentality of a foreign state.” Three of the named insurers, however, brought third-party complaints against ICAROM. [USX unsuccessfully sought a remand to state court.] The district court eventually gave summary judgment to defendants.

The U.S. Court of Appeals for the Third Circuit affirms. Title 28 section 1441(d) permits a foreign state, as defined in the FSIA, to remove state actions brought against them to federal court. Section 1603(b)(2) of the FSIA defines a foreign state to include an “agency or instrumentality of a foreign state” which is (1) a separate legal person, and (2) an organ of a foreign state or political subdivision thereof, or majority-owned by a foreign state.

One of the key issues in this appeal is whether the district court had subject matter jurisdiction. Here, it appears that the district court would only have removal jurisdiction if ICAROM is an “agency or instrumentality of a foreign state” under the FSIA.

ICAROM is the successor of the Insurance Corporation of Ireland, which began in 1935 and became the largest liability and marine insurer in Ireland. In the 1970s, it expanded into foreign markets, including the London Insurance Market. In the early 1980s, Allied Irish Banks acquired the company and found its financial situation precarious due to losses in London. To avoid a collapse, the Irish government received all company shares for Irish Pounds 5 and gave them to a company called Gebhard Limited solely as custodian.

Two high-ranking civil servants held Gebhard’s shares in trust for the Irish Minister for Industry, Trade, Commerce, and Tourism. By Act of Parliament, the government effectively acquired the holding company. In 1990, the company sold its business, changed its name to ICAROM, and serves only as a “runoff company” to wind down its remaining liabilities.

While this appeal was pending, the U.S. Supreme Court considered this jurisdictional issue in Dole Food Co. v. Patrickson, 123 S.Ct. 1655 (2003). [See 2003 International Law Update 71]. In Dole, the Supreme Court rejected the “tiered” ownership reading of the FSIA and held that a subsidiary of an instrumentality is not itself an instrumentality. Instead, Section 1603(b)(2) applies “only if the foreign state itself owns a majority of the corporation’s shares.” Dole, 123 S.Ct. at 1662.

As for ICAROM, the Court notes the Irish Government’s significant role in company affairs. For example, the ICAROM administrator frequently consults with the Irish Department of Enterprise, Trade, and Employment, and the company makes all its important decisions with the Department’s approval.

The FSIA, however, does not define the term “organ” in Section 1603(b)(2). Other circuits have developed a flexible approach to determine whether an entity qualifies as an organ of a foreign state and is thus an “agency or instrumentality. We agree with the Court of Appeals for the Ninth Circuit that for an entity to be an organ of a foreign state it must engage in a public activity on behalf of the foreign government. Requiring less would open the door to situations in which a party only tangentially related to a foreign state could claim foreign state status and avail itself (and incidentally, any other defendants in the case) of the FSIA’s procedural provisions which ... plaintiffs are not likely to welcome.”

“This result would be unfair to plaintiffs, who in some such cases might not have reason to know of the slight relationship of their dealings with the foreign states, and who, therefore, likely would not have had the opportunity to consider this important fact when negotiating contracts by, for example, negotiating for waiver clauses, or when initiating suit by following the special procedures required by the FSIA. ... Requiring less would not further the goal of avoiding adverse foreign relations. On the other hand, requiring more would pose potential foreign relations problems.” [Slip op. 45-46]

The Fifth and Ninth Circuits have applied various factors. These include (1) the circumstances surrounding the entity’s creation; (2) the purpose of its activities; (3) the degree of supervision by the government; (4) the level of government financial support; (5) the entity’s employment policies and whether the government is involved in hiring and paying salaries; (6) the entity’s obligations and privileges under the foreign state’s laws.” The Third Circuit adds another factor, the ownership structure of the entity.

The Court then applies these factors to the case at bar. Five factors favor a finding of “organ” status: An Act of the Irish Parliament authorized the government’s assumption of control over ICI; the purpose was to protect the Irish insurance and banking industries; the Irish government supervises the company; the Irish government provides financial supports; and the Irish government indirectly has complete control of the company’s ownership.

Only two factors suggest otherwise: The company’s employment policies do not require the hiring of Irish civil servants, and the company’s pension plan is not a government plan; and the company has no special obligations or privileges. The Court concludes that ICAROM is clearly an organ of Ireland for purposes of Section 1603(b)(2).

Citation: USX Corp. v. Adriatic Ins. Co., No. 00-3424 (3rd Cir. September 25, 2003).

FORFEITURE

In proceeding to forfeit illegal drug proceeds in foreign bank accounts, Third Circuit decides that district court where underlying criminal acts occurred has jurisdiction over such property

In 1992, agents of the Drug Enforcement Administrations (DEA) arrested Tasneem Jalal, a Pakistani citizen, for taking part in a heroin delivery in New Jersey. During a later search of Jalal’s home, DEA agents found various bank records from the U.S., Pakistan, and the United Arab Emirates (UAE). The UAE accounts, located in Dubai and Sharjah two of the seven sheikdoms comprising the UAE) recorded deposits worth approximately $500,000. In 1993, a federal court convicted Jalal of heroin-related offenses. Seven years later, the U.S. deported him to Pakistan.

DEA representatives met with Dubai police in 1994, to discuss the civil forfeiture of Jalal’s accounts pursuant to 28 U.S.C. Section 1355 as the probable proceeds of narcotics trafficking. During this time, Dubai and Sharjah had submitted a joint report to the Interior Ministry on money laundering in the UAE. The document seemed to suggest that the UAE would help out though they lacked asset forfeiture legislation.

In 1995, the U.S. Department of State requested Dubai to seize the accounts pursuant to the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (20 December 1988, 28 I.L.M. 493). Almost four years later, the UAE Ministry of Foreign Affairs replied that it would need a U.S. court order to take this action. In 2000, the U.S. filed a forfeiture complaint in a U.S. district court and submitted certified copies of the complaint and warrants for arrest in rem to Dubai officials.

The district court denied Jalal’s motion to dismiss or, alternatively, for summary judgment, claiming that the government failed to bring the action within the five-year statute of limitations period under 19 U.S.C. Section 1621. The district court disagreed. It later handed down a consent judgment forfeiting Jalal’s accounts and directing that the funds be deposited into the Department of Justice’s Asset Forfeiture Fund. Jalal reserved his right to challenge the district court’s determination that the action was not time barred and noted his appeal. The U.S. Court of Appeals for the Third Circuit affirms.

The Court holds that the lower court had subject matter jurisdiction over this forfeiture action pursuant to 28 U.S.C. Section 1355(b)(2), as amended. It provides in part that “(2) Whenever property subject to forfeiture under the laws of the United States is located in a foreign country, or has been detained or seized pursuant to legal process or competent authority of a foreign government, an action or proceeding for forfeiture may be brought ...”

The Court first points to the Second Circuit’s reservations about the enforceability of a U.S. court order to seize property located in a foreign country. “In discussing the meaning of Section 1355(b), the Second Circuit set forth the following language from the explanatory statement of the amendment: ‘It is probably no longer necessary to base in rem jurisdiction on the location of the property if there have been sufficient contacts with the district in which the suit is filed. No statute, however, says this and the issue has to be repeatedly litigated whenever a foreign government is willing to give effect to a forfeiture order issued by a United States court and turn over seized property to the United States if only the United States is able to obtain such an order. [Cite]”

“However, the next sentence from the explanatory statement, ... states that “subsection (b)(2) resolves this problem by providing for jurisdiction over such property in the United States District Court ... for the district in which any of the acts giving rise to the forfeiture occurred ...” 137 Cong. Rec. S16640, S16643 (1991). Based on the language of the statute and statements such as this one, we conclude that Congress intended to grant specified district courts jurisdiction over property subject to forfeiture that is located in a foreign country.” [Slip op. 12-14]

The Court then turns to the issue of the statute of limitations. Jalal argued that the five-year statute of limitations of 19 U.S.C. Section 1621 had run out by the time the government filed its complaint. At the time the government filed the action, Section 1621 provided, in relevant part, that “[n]o suit or action ... [for] forfeiture of property ... shall be instituted unless such suit or action is commenced within five years after the time when the alleged offense was discovered; ... except that ... (2) the time of the absence from the United States of the person subject to the penalty of forfeiture, or of any concealment or absence of the property, shall not be reckoned within the 5-year limitations period.”

Here, Jalal urges that Congress could not have intended to set up an indefinite limitations period for foreign property subject to forfeiture. The Court disagrees.

“Under the plain language of Section 1621, the forfeiture proceedings against the accounts in the U.A.E. commenced during the ‘absence of the property’ from the United States. However, even if we found it necessary to consider the legislative history of this provision, we do not believe that Congress’ silence signifies that it did not intend for the statute of limitations period to be tolled indefinitely for bringing forfeiture actions against the proceeds of drug sales located in foreign countries. The Government faces a huge task in securing assistance to stem the international drug trade and deal with its effects. Congress very well may have considered the effects to the tolling provision contained in Section 1621 and simply intended to give law enforcement some leeway.” [Slip op. 20-21]

Citation: Contents of Account Number 03001288 v. United States, No. 02-1839 (3rd Cir. September 25, 2003).

                                

TERRORISM

Second Circuit affirms dismissal of declaratory judgment action by September 11, 2001, survivors against Iraq and other parties which sought to attach Iraqi assets under Terrorism Risk Insurance Act

Raymond Smith brought an action as the executor of the estate of his brother, George Smith, who was working in the World Trade Center’s South Tower and perished on September 11, 2001. Smith based his case on 18 U.S.C. Section 2333(a), which authorizes actions to remedy injuries from international terrorism. The initial defendants included the Islamic Emirate of Afghanistan, the Taliban, al Qaeda, and Osama bin Laden. After consolidation with another action, the plaintiffs added Saddam Hussein and the Republic of Iraq as defendants.

When none of the defendants appeared, the district court entered a default judgment against all defendants. After expert testimony by former CIA Director Robert James Woolsey, Jr., and Iraq expert Dr. Laurie Mylroie, that implicated Iraq in the 9/11 attacks, the district court awarded plaintiffs total damages of approximately $104 million. It found Iraq liable for $63.5 million of the damages.

Plaintiffs later brought this declaratory judgment action against the Federal Reserve Bank of New York and the Secretary of the Treasury (jointly referred to as Bank), seeking to attach Iraqi assets held by the Bank. The Terrorism Risk Insurance Act [Pub.L. No. 107-297, 116 Stat. 2322 (November 26, 2002)] (TRIA), Section 201, provides that “in every case in which a person has obtained a judgment against a terrorist party on a claim based upon an act of terrorism, ... the blocked assets of that terrorist party ... shall be subject to execution ... in order to satisfy such judgment.”

The Bank moved for summary judgment. It made two main claims. The first was that President George W. Bush had issued Executive Order No. 13,290 to confiscate all frozen Iraqi assets and to vest those assets in the U.S. Department of the Treasury (see 68 Federal Register 14,307 (March 20, 2003)). Secondly, Section 1503 of the Emergency Wartime Supplemental Appropriations Act of 2003 (EWSAA) [Pub.L. No. 108-11, 117 Stat. 559 (April 16, 2003)] gave the President the authority to “make inapplicable with respect to Iraq” any law “that applies to countries that have supported terrorism.” The President did in fact make TRIA inapplicable to Iraq.

The district court granted summary judgment in favor of defendants. On plaintiffs’ appeal, the U.S. Court of Appeals for the Second Circuit affirms. After reviewed the extensive statutory provisions governing the disposition of Iraqi assets, it turns to plaintiffs’ TRIA claims.

Plaintiffs argued that, like an appropriation, TRIA Section 201 is a Congressional mandate that the frozen Iraqi assets be used only to compensate plaintiffs who have judgments against Iraq. The Court differs.

“First, we do not believe that TRIA Section 201 is analogous to an appropriation. Although Plaintiffs consistently imply that TRIA is an appropriation - most notably through their repeated reference to the President’s confiscation as a ‘reappropriation’ - nowhere do they argue directly that section 201 operates literally as an appropriation. If they did, they would have to confront the challenge of explaining how these funds constituted ‘appropriations.’ See 31 U.S.C. Section 1301(d) (‘A law may [only be] an appropriation ... if the law specifically states that an appropriation is made.’) ...”

“Second, the language of section 201 cannot reasonably be read to mandate that terrorist assets be blocked in perpetuity. It states simply that blocked assets ‘shall be subject to execution or attachment in aid of execution.’ ... We believe that the plain meaning of that language is to give terrorist victims who actually receive favorable judgments a right to executive [sic] against assets that would otherwise be blocked. Thus, although the statute applies broadly to ‘every case in which a person has obtained a judgment,’ it confers no entitlement on victims who have not yet obtained judgments.”

“Neither does it guarantee that any blocked assets will in fact be available when a particular victim seeks to execute on a judgment. Most important, nothing in the statutory language evinces Congressional intent to divest the President of authority to confiscate terrorist assets as provided in the International Emergency Economic Powers Act (IEEPA) Section 1702(a)(1)( c)).” [Slip op. 18-19]

The President, within his authority under Section 1702(a)(1) ( c)) of IEEPA, confiscated blocked Iraqi assets before the plaintiffs had obtained a final judgment. Thus, those assets held by the Bank were no longer “blocked assets” against which the plaintiffs could execute. Because this disposes of the case, the Court does not address the plaintiffs’ other argument that Congress did not authorize the President to make TRIA inapplicable to Iraq.

Citation: Smith v. Federal Reserve Bank of New York, No. 03-6195 (2d Cir. October 3, 2003).

TORTS

House of Lords, in four-to-three vote, holds, citing U.S. and other authorities, that disabled mother who bore healthy child because of negligent sterilization operation is not entitled to have National Health Service pay costs of bringing up child

The claimant, Ms. Karina Rees, is a single woman now 31 years of age and unable to work. She is suffering from a severe and progressive visual disability -- a genetic condition known as retinitis pigmentosa. Since the age of two she has been sightless in one eye and has limited vision (6/36) in the other. She is seriously impaired visually and there is evidence of continuing deterioration of her condition.

Feeling unable to carry out the usual duties of a mother and afraid that she might become pregnant, Ms. Rees wished to be sterilized. She made her wishes known to a gynecologist consultant employed by the defendant, Darlington Memorial Hospital NHS Trust. He carried out a sterilization operation, but negligently failed to occlude the right fallopian tube. Unaware of this, Ms. Rees later became pregnant and, in April 1997, she gave birth to a normal healthy boy named Anthony.

Ms. Rees then sued the defendant hospital, alleging that she was entitled to receive damages to cover the cost of rearing Anthony to adulthood. In May 2001, a judge of the first instance court held, as a preliminary matter, that Ms. Rees was not entitled to recover any part of the costs of bringing up Anthony. Claimant took an appeal. A majority of the Court of Appeal (Civil Division) ruled that she could recover the additional expenses she would have to put forth to the extent that they were imputable to her disability.

The hospital took that decision to the House of Lords. It contended before seven Lords of Appeal that it was at war with a previous decision of the House, namely McFarlane v Tayside Health Board [2000] 2 A.C. 59. In McFarlane the House was dealing with the healthy, normal married parents of a healthy child who decided they did not want any more children than the four they already had. When a fifth healthy child arrived as the result of a negligent vasectomy advice, the House decided that the parents could not recover in tort for the cost of its upbringing. At the same time, the House did conclude that the lower courts may award a modest solatium in respect of the pain and suffering of the unwanted pregnancy and childbirth. The House allows the present appeal, reversing the Court of Appeal in a four-to-three vote.

In the McFarlane situation, the present Appellate Committee discerns three plausible approaches to a woman in Ms. Rees’ predicament. The first is that the courts may allow her full damages against the tortfeasor for the cost of rearing the child, subject to the usual limitations of reasonable foreseeability with no discount for joys, benefits and support, leaving restrictions upon such a recovery to such as a Parliament with authority to do so may enact. Secondly, the courts could authorize the recovery of damages in full for the reasonable costs of rearing an unplanned child to the age when that child might be expected to be financially self‑reliant, whether or not the child is “healthy” or “disabled” or “impaired”. (This solution would make room for a deduction for the joy and benefits received, and for the potential financial support to be derived from the child.) The third solution would be to bar any recovery of the long term expenses of upbringing where the child has entered the world in good health and without disability or impairment.

The lead majority opinion does not “find it surprising that [the first] solution has been supported by the line of English authority which preceded McFarlane (...), by decisions of the Hoge Raad in the Netherlands and the Bundesverfassungsgericht in Germany (...) and now by a majority of the High Court of Australia [in Cattanach v Melchior, [2003] H.C.A. 38.].” [¶ 4]

Moreover, six American state courts have adopted the second approach. Neither side here, however, has supported this choice. “While it would be possible to assess with some show of plausibility the likely discounted cost of rearing a child until the age when the child might reasonably be expected to become self‑supporting, any attempt to quantify in money terms the value of the joys and benefits which the parents might receive from the unintended child, or any economic benefit they might derive from it, would, made when the child is no more than an infant, be an exercise in pure speculation to which no court of law should lend itself.” [¶ 5]

“It is indeed hard to think that, if the House had adopted the first solution discussed above, its decision would have long survived the first award to well‑to‑do parents of the estimated cost of providing private education, presents, clothing and foreign holidays for an unwanted child (even if at no more expensive a level than the parents had provided for earlier, wanted, children) against a National Health Service found to be responsible, by its negligence, for the birth of the child. In favouring the third solution, holding the damages claimed to be irrecoverable, the House allied itself with the great majority of state courts in the United States and relied on arguments now strongly supported by the dissenting judgments ... in Melchior.” [¶ 6]

According to the instant majority, the crux of McFarlane’s third choice was that the House had been loath to view a child, even if unwanted, as an economic burden and nothing more. It recognized that the courts could not quantify the rewards that parenthood, even if involuntary, might or might not bring. The Lords also felt that to award potentially very large damage amounts to the parents of a normal, healthy child against a National Health Service always in need of funds to meet pressing demands would affront, and rightly so, the community’s sense of how to allocate public resources. Finally, in McFarlane, the Lords were well aware how hostile to House practice it would have been to upset such a four-year-old and unanimous decision.

The House, therefore, reaffirms the applicability of McFarlane to Ms. Rees’ case --subject to one qualification. It supposes that the English courts should not look upon an unwanted child as nothing more than a financial liability and that any effort to count the costs of bringing up a child against the impalpable rewards of parenthood is unacceptably conjectural. The fact does remain, however, that the medical experts have legally wronged the parent of a child born following a negligently done vasectomy or sterilization, or after careless guidance on the effects of such a procedure.

An award relating only to the unwanted pregnancy and birth neither gave enough credit, nor did justice, to the loss of Ms. Rees’ freedom to limit the size of her family. Accordingly, in all such cases, the courts should provide a conventional non-compensatory award of L 15,000 to give some recognition to the wrongful injury and loss, over and above the award for the pregnancy and birth expenses.

The following passage from one of the dissenting opinions catches the essence of their rationale on one of the central issues. “On balance ... I have come to the view that the fact that the child’s parent is a seriously disabled person does provide a ground for distinguishing McFarlane and that it would be fair, just and reasonable to hold that such extra costs as can be attributed to the disability are within the scope of the tortfeasor’s duty of care and are recoverable.” [¶ 63]

“Disadvantages which are the result of the parent’s choice of life‑style prior to the unwanted conception can be said, without hesitation, to fall into an entirely different category. So too, although this is a harder case, are disadvantages that flow from circumstances beyond the parent’s control such as social deprivation, racial discrimination or family breakdown. The decision in McFarlane applies across the board, to every healthy and normal parent, in whatever social or family condition they may find themselves. The seriously disabled parent is in a different category.”

“It is the inescapable fact of her disability which marks the case of the seriously disabled parent out from these cases. The fact that this category too must be applied across the board, irrespective of the social or family situation in which the parent finds herself, indicates the fundamental nature of the characteristic that gives rise to it. Her social or family circumstances may, of course, affect the amount of the costs that can be considered to be recoverable. But it is the inescapable fact that the seriously disabled parent cannot, however hard she tries, do all the things that a normal, healthy parent can do when carrying out the ordinary tasks involved in a child’s upbringing that place this parent’s case into distinct category.” [¶ 65]

Citation: Rees v. Darlington Memorial Hospital N.H.S. Trust, [2003] U.K.H.L. 52, [2003] All E.R. (D) 271 (House of Lords, Oct. 16).

EU amends rules to make several agencies’ activities more transparent. The European Union has issued a series of amending regulations for several common EU agencies. These include the Environment Agency, the Environment Information and Observation Network, the Food Safety Authority, the Aviation Safety Agency, the Maritime Safety Agency, and the Agency for the evaluation of Medicinal Products. The new regulations all implement similar requirements for these agencies. For example, the new regulations deal with public access to documents applicable to these agencies; complaints about agency decisions may be made to an Ombudsman; and the financial management and disclosure rules must comply with Regulation No 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities. Citation: 2003 O.J. of European Union (L 245) 1-43, 29 September 2003.

U.S. State Department re-designates foreign terrorist organizations. The U.S. Secretary of State has re-designated 25 groups as “Foreign Terrorist Organizations” because otherwise their designation as terrorists would have expired on October 3, 2003. The re-designation maintains the government’s ability to act against these groups under U.S. laws, for example by blocking their assets in the U.S., denying visas to their members, and ensuring that they do not receive support from U.S. persons. The total number of designated Foreign Terrorist Groups is 36, and includes the Abu Nidal Organization, Hizballah, and the Communist Party of the Philippines. Citation: 68 Federal Register 56860 (October 2, 2003); U.S. Department of State Press Statement (October 2, 2003).

EU adopts international accounting standards (IASs). The European Union has adopted all international accounting standards (except IAS 32 and IAS 39 because of impending amendments) in the form of a Regulation directly applicable to all Member States. The reason is that Regulation 1606/2002 on the application of international accounting standards requires that beginning on January 1, 2005, all publicly traded companies prepare consolidated accounting statements according to international standards. The Commission’s Accounting Technical Committee has decided that the international accounting standards as of September 14, 2002, meet the criteria of Regulation 1606/2002. The Commission therefore decided to make the international accounting standards directly applicable. The international accounting standards (from IAS 1: Presentation of financial statements, to IAS 41: Agriculture, as well as their interpretations) are published in an Annex to this Regulation, in the same issue of the Official Journal of the European Union. Citation: Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards ..., 2003 O.J. of the European Union (L 261) 1, 13 October 2003.

NAFTA adopts two transparency measures. At the annual meeting of the NAFTA Free Trade Commission in Montreal, the Commission issued two statements to improve NAFTA’s investor-state arbitration system (see Chapter 11 of the NAFTA Agreement). It affirmed the authority of the investor-state tribunals to accept written third party submissions (e.g., amicus curiae briefs), along with recommended procedures for tribunals on how to handle such submissions. The measures also endorsed a standard form for the Notice of Intent to initiate arbitration that investors must submit under Article 1119 of NAFTA. Additional information about the annual meeting is available in the brochure “NAFTA, A Decade of Strengthening a Dynamic Relationship” at “www.ustr.gov.” Citation: U.S. Trade Representative press release 2003-65 (October 7, 2003).

U.S. implements Madrid Protocol rules for international trademark registration. The U.S. Patent and Trademark Office has issued new regulations to carry out the Madrid Protocol Implementation Act of 2002 (MPIA) [Pub.L. No. 107-273, 116 Stat. 1758]. [See 37 C.F.R. Parts 2 and 7]. The MPIA provides that an owner of a U.S. trademark application or registration may seek trademark protection in 58 other countries that are parties to the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (Madrid Protocol) [see “www.wipo.int/madrid/en/”] by submitting a single international application through the Office of the International Bureau of the World Intellectual Property Organization. Citation: 68 Federal Register 55748 (September 26, 2003).

U.S. restricts imports of archeological material from Cambodia. The Department of Homeland Security (DHS) has issued a final rule to restrict the import of archeological material from Cambodia [19 C.F.R. Part 12]. These regulations are based on an agreement between the U.S. and the Kingdom of Cambodia entered into under the authority of the Convention on Cultural Property Implementation Act [Pub.L. 97-446, 19 U.S.C. Section 2601], according to the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property [823 U.N.T.S. 231 (1972)]. The final rule adds Cambodia to the list of countries for which the U.S. has import controls for such materials in place. Citation: 68 Federal Register 55000 (September 22, 2003). [Further information on controls of foreign cultural property is available at “exchanges.state.gov/education/culprop”.]

German Court reverses dismissals in proceedings to recover Jewish properties confiscated by Nazi regime. The German Federal Administrative Court (Bundesverwaltungsgericht, BVerwG) ruled, on October 23, 2003, that general allegations filed by the Jewish Claims Conference are valid if they can be supported by official documents at a later date. The Conference is trying to recapture Jewish property taken by the Nazis in what later became East Germany. The Court also reverses two lower court decisions in Berlin and Leipzig that blocked several claims on a legal formality. The decision remands the issues to these courts for reconsideration. The Court’s ruling effectively applies to the states of former East Germany the post-WWII restitution laws set up by the Allies in what was then West Germany. In 1990, East Germany had merged with the West. After reunification, the Conference had a December 31, 1992, deadline by which to file its property claims and to back them up with specific documentary evidence identifying the original owners and the value. While the Conference had specifically referred to many archival documents, it was unable to get hold of them by the deadline. The Court held that these references were enough for an initial application as long as the Conference could later supply the necessary documentary evidence. Citation: [German] Bundesverwaltungsgericht 7 C 62.02 und 8.03; Pressemitteilung [Press Release] Nr. 48/2003 (23/10/2003); Associated Press (from findlaw.com), Frankfurt, Thursday, October 23, 2003 [byline of Melissa Eddy, AP Writer]; Agence France Presse report of October 23, 2003.

Hague Tribunal has sentenced three Serbs for “ethnic cleansing.” On October 17, 2003, the International Criminal Tribunal for Yugoslavia (ICTY) at The Hague sentenced three former Bosnian Serb regional officials Blagoje Simic, Miroslav Tadic and Simo Zaric for the “ethnic cleansing” of Muslims and Croats during the 1992‑5 Bosnia war. The Tribunal convicted all three men (who had all turned themselves in) of planning and carrying out a campaign of killing, detention, torture and deportation against non‑Serbs in the Bosanski Samac area of northern Bosnia. Prosecutors declared that defendants were senior regional officials active in the Serb seizure of Bosanski Samac in the Spring of 1992. The indictment charged defendants as having “committed, planned, instigated, ordered or otherwise aided and abetted a campaign of persecutions for the common purpose of ridding the Bosanski Samac and Odzak municipalities of all non‑Serbs.” The ICTY sentenced Simic (43) to 17 years in prison as a high-ranking official in a joint criminal enterprise. It ordered the imprisonment of Tadic (66) for eight years and of Zaric (55) to six. Citation: Findlaw Legal News (from Reuters), the Hague, Friday, October 17, 2003.

Japanese government bars Japanese citizenship to twins conceived through U.S. surrogate mother. On October 23, government officials announced that Japan has declined to grant citizenship to a Japanese couple’s twin boys because an Asian-American, rather than a Japanese, surrogate mother had donated the necessary eggs. According to ministry official, Yoshikazu Nemura, Japanese law requires that the biological mother be a Japanese citizen. Surrogate births are extremely rare in Japan; society disapproves of the practice and the Health Ministry is pushing for the legislation of stiff penalties against the practice. Lack of Japanese citizenship would bar the children from most schools. The boys were born last October in California. This makes them U.S. citizens, a status Japan recognizes, Mr. Nemura said. The couple reportedly has some alternative courses of action. First, they could seek judicial review in the Japanese courts. Second, they could petition the immigration authorities to award a change of citizenship. Finally, the couple might also legally adopt the two children. To do so, they would have to produce the birth certificates with the surrogate mother listed as the infants’ mother. They must then offer proof that the twins were conceived with sperm from the father. They would also have to produce immigration documentation proving that the children are in Japan. Citation: Associated Press (online), Tokyo, Thursday, October 23, 2003, at 19:52:54 GMT (byline of AP writer Kozo Mizoguchi).

U.S. Treasury revises Iraq sanctions regulations and monetary sanctions under several sanctions regulations. The U.S. Treasury, Office of Foreign Assets Control (OFAC), has amended the Iraqi Sanctions Regulations [31 C.F.R. Part 575] to remove provisions that preceded the substantial lifting of sanctions in late May 2003. On May 22, 2003, the United Nations Security Council adopted Resolution 1483 which substantially lifted the multilateral economic sanctions imposed on Iraq. The following day, on May 23, OFAC issued a general license to authorize most transactions with Iraq that had previously been prohibited. The amended regulations provide, for example, that U.S. persons may trade in Iraqi commercial or sovereign debt in secondary markets under certain conditions (Section 575.419); and numerous license restrictions in Section 575 have been removed. – In a related matter, OFAC issued a final rule to amend the Reporting, Procedures and Penalties Regulations, the Iraqi Sanctions Regulations, the Foreign Terrorist Organizations Sanctions, and the Foreign Narcotics Kingpin Sanctions Regulations [31 C.F.R. Parts 501, 575, 597, 598]. The purpose is to implement the requirement of the Federal Civil Penalties Inflation Adjustment Act of 1990 [Pub.L. 101-410, 104 Stat. 890, 28 U.S.C. Section 2461 note, as amended] to adjust for inflation the maximum amounts of the civil monetary penalties provided for in those regulations. The resulting increases in the penalty amounts are in the range of 10 percent. Citation: 68 Federal Register 61362 [amended Iraqi sanctions regulations] & 61359 [monetary penalties] (October 28, 2003).

European Court of Justice issues two trademark related decisions. The European Court of Justice (ECJ) has issued two decisions that interpret EU trademark rules. In the first case (C-191/01 P), chewing gum manufacturer Wm. Wrigley Jr. Company applied to the Office for Harmonization in the Internal Market (Trade Marks and Designs) (OHIM) to register the word “Doublemint” as a Community trade mark. OHIM refused the application. The ECJ holds that a Community trademark cannot be issued for a word if one of its possible meanings designates a characteristic of the goods or services concerned. – In another case (C-408/01), the ECJ holds that a proprietor of a trade mark with a reputation cannot prevent the use of a similar sign that is used purely as a decorative element. Sports accessory manufacturer Adidas uses a motif of three vertical stripes on its products. Fitnessworld, a sports clothing manufacturer, uses a similar motif consisting of two vertical stripes as a decorative element of its clothing. Adidas challenged Fitnessworld’s use of the two stripes in a court in The Netherlands. When the case reached the Dutch Supreme Court, it was referred to the ECJ for a preliminary ruling on the EU directive on trademarks (Directive 89/104/EEC approximating the laws of the Member States relating to trade marks). The ECJ holds that trademark infringement occurs when the relevant section of the public establishes a link between the sign at issue and the registered trade mark even though it does not confuse them. However, where the relevant section of the public regards the sign purely as an embellishment, the proprietor of the mark cannot prevent the use of that embellishment by a third party. Citation: European Court of Justice (ECJ), decisions in cases C-191/01 P & C-408/01; ECJ Press Releases Nos. 94/03 & 95/03 (23 October 2003). The full text of the decisions is available on the ECJ website “www.curia.eu.int”.