|February 16, 2017|
Previously published on February 15, 2017
A recent decision by the United States District Court for the Southern District of New York delivered a victory to banks seeking to prevent judgment creditors from attaching assets “blocked” pursuant to Office of Foreign Assets Control (OFAC) regulations.1 In Harrison v. Republic of Sudan, 15 sailors in the US Navy (Petitioners) attempted to attach certain assets controlled by multiple large international banks (Respondents) after the sailors obtained a $314 million judgment against the Republic of Sudan for injuries they sustained when al-Qaeda operatives attacked the USS Cole as it refueled in Aden, Yemen.2 Among other things, Petitioners sought to attach the proceeds of electronic funds transfers (EFTs) that El Nilein Industrial Development Bank (El Nilein)—an entity Petitioners alleged is an “agency or instrumentality” of Sudan—transmitted to Respondents through an intermediary bank. Respondents ultimately blocked the funds pursuant to Sudanese Sanctions Regulations promulgated by OFAC.
On cross-motions for summary judgment regarding the ETFs, Petitioners argued they were entitled to attach the funds under the Foreign Sovereign Immunities Act3 (FSIA) and the Terrorism Risk Insurance Act of 20024 (TRIA), which respectively provide the federal courts jurisdiction to attach property, including blocked funds, to satisfy a judgment against a foreign state (FSIA), a terrorist party (TRIA), or an agency or instrumentality of either a foreign state or a terrorist party. Respondents countered that Petitioners could not attach the funds because: (1) El Nilein was not an “agency or instrumentality” of Sudan or, alternatively, (2) the funds were not subject to turnover under the FSIA or the TRIA. The court agreed with Respondents on both grounds.
Concerning Respondents’ first point, the court held that El Nilein did not qualify as an agency or instrumentality of Sudan under the FSIA or the TRIA. In so holding, the court reaffirmed that an entity’s agency or instrumentality status under the FSIA and the TRIA is determined on the date the petitioner initiates an action for the turnover of assets. In the alternative, the court agreed with Respondents that the funds at issue were not subject to attachment under the FSIA and the TRIA because the funds did not belong to El Nilein. As noted, El Nilein transmitted the underlying EFTs to Respondents through an intermediary bank. Looking to New York State law, the court held that EFTs are neither the property of the originator nor the beneficiary while in the possession of an intermediary bank. Thus, the intermediary is the only entity with a property interest in a stopped EFT, and El Nilein therefore had no interest in the property in question.
The court rejected an argument by Petitioners that the intermediary was a branch of one of the Respondents such that the transfer was effectively a direct transaction between El Nilein and the Respondents. The court’s holding is a positive development for global banks that fear that the judiciary might broaden the scope of entities that qualify as an agency or instrumentality of a foreign state or a terrorist party.
1 OFAC requires financial institutions to “block” certain assets by promulgating regulations that prohibit, among other things, the transfer of property or interest belonging to certain foreign entities and terrorist organizations.
2 Harrison v. Republic of Sudan, No. 13-cv-3127 (PKC) (S.D.N.Y. Feb. 10, 2017) (order on cross-motions for summary judgment).
3 28 U.S.C. § 1610(g).
4 Pub. L. No. 107-197, 116 Stat. 2337.