Rule 19 and Continuing Litigation in Peterson v. Bank Markazi

Last November, the Second Circuit decided in Peterson v. Bank Markazi that Bank Markazi, Iran’s Central Bank, remained immune from suit under the Foreign Sovereign Immunity Act (FSIA) despite the enactment of 22 U.S.C. § 8772, which subjects certain Iranian assets to “execution or attachment” to satisfy judgments against Iran. The district court will now have to decide whether the case can proceed with the remaining defendants under Federal Rule of Civil Procedure 19(b) despite the bank’s absence. In an earlier case involving a foreign sovereign, The Republic of Philippines v. Pimentel (2008), the Supreme Court reasoned that “where sovereign immunity is asserted, and the claims of the sovereign are not frivolous, dismissal of the action must be ordered where there is a potential for injury to the interests of the absent sovereign.” The district court’s Rule 19(b) decision in Peterson will depend in part on how it applies Pimentel.

Background

The plaintiffs in Peterson are victims of a 1983 Hezbollah bombing of U.S. Marine barracks in Beirut, Lebanon, who seek to execute judgments they hold against Iran. From 1994 to 2008, Bank Markazi held bonds (Markazi Bonds) in an account with Clearstream, a Luxembourg-based financial services company. The principal and interest payments on the Markazi Bonds were paid into a New York bank account held by Clearstream and then transferred to Bank Markazi’s account with Clearstream. In 2008, Bank Markazi created an account with UBAE, an Italian Bank, who then created an account with Clearstream. Clearstream began transferring the payments on the Markazi Bonds into UBAE’s Clearstream account, but froze UBAE’s account several months later “after learning of allegations by OFAC [Office of Foreign Assets Control] that UBAE held the account for the purpose of obscuring Bank Markazi as the owner of the assets.” From July 2008 to October 2012, $1.68 billion was paid into Clearstream’s New York bank account; Clearstream then credited “a right to payment for the same dollar amount” to a Luxembourg “sundry blocked account” held by Clearstream that neither UBAE nor Bank Markazi can access.

The Peterson plaintiffs seek to “recall the Bond Proceeds to New York” and a turnover of the assets held in the Luxembourg sundry account. Foreign states, including their agencies or instrumentalities, are immune from suit in the United States under the FSIA unless an exception applies. Foreign sovereigns’ property within the United States is “separately immunized” from execution, attachment, or arrest in different sections of the FSIA. As the Central bank of Iran, Bank Markazi benefits from both forms of immunity and no FSIA exception applies to the turnover claim. Plaintiffs argued, however, that Iran’s (and thus Bank Markazi’s) immunity was abrogated by a later statute—22 U.S.C. § 8772 which subjects certain Iranian assets to “execution or attachment” to satisfy judgments against Iran. The statute provides:

“[N]otwithstanding any other provision of law, including any provision of law relating to sovereign immunity, and preempting any inconsistent provision of State law, a financial asset that [meets the specifications of subsections (a)(1)(A)—(C)] shall be subject to execution or attachment in aid of execution, or to an order directing that the asset be brought to the State in which the court is located and subsequently to execution or attachment in aid of execution. . .”

Drawing a parallel to Second Circuit’s previous interpretation of a similar clause in the Terrorism Risk Insurance Act, the plaintiffs argued that § 8772 provides “an independent grant of subject matter jurisdiction.” The Second Circuit disagreed, reasoning that the statute only abrogates execution immunity, not jurisdictional immunity. The court based its conclusion on the statute’s reference to “assets that are ‘subject to execution or attachment in aid of execution, or to an order directing’ turnover” and lack “of an explicit reference to jurisdictional immunity.”

Pimentel and Dismissal under Rule 19(b)

Because the district court lacked subject matter jurisdiction over the turnover claim against Bank Markazi, the Second Circuit vacated the judgment and instructed the district court to decide whether the turnover claim can continue against the remaining defendants. On remand, the district must accordingly decide whether to dismiss the case under Rule 19. When making this determination, the court must first decide if Bank Markazi is a required party under Rule 19(a), and if so, whether under Rule 19(b) the case can proceed “in equity and good conscience” in Bank Markazi’s absence. The rule directs judges to consider four factors when deciding whether a case should be dismissed:  

(1) the extent to which a judgment rendered in the person’s absence might prejudice that person or the existing parties;

(2) the extent to which any prejudice could be lessened or avoided by;

(A) protective provisions in the judgment;

(B) shaping the relief; or

(C) other measures;

(3) whether a judgment rendered in the person’s absence would be adequate; and

(4) whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder

In his concurrence, Judge Lohier acknowledged that the Rule 19 decision is ultimately within the district court’s discretion, but opined that this case is distinguishable from Pimentel—a case in which the Supreme Court reasoned that under Rule 19(b) the district court should not proceed in the Philippine’s absence. Pimentel instructs courts to consider the “potential injury to the interests of [an] absent sovereign” when weighing Rule 19(b)’s “equity and good conscience” factors. Bank Markazi argued in its motion to dismiss that the “[r]ule 19(b) factors analyzed in Pimentel all point the same way here.” In the Bank’s view, Pimentel’s proposition that “where sovereign immunity is asserted, and the claims of the sovereign are not frivolous, dismissal of the action must be ordered where there is a potential for injury to the interests of the absent sovereign” requires a court to dismiss any case where, as here, an absent sovereign’s interests are affected.

As Judge Lohier points out, Rule 19(b) decisions are made on a case-by-case basis. Pimentel itself recognized this by stating “the Rule . . .indicates that the determination whether to proceed will turn upon factors that are case specific” and then weighing the Philippines’ sovereign interests as part of its analysis of the FRCP 19(b) factors. This is consistent with an early Supreme Court case that addressed Rule 19(b), Provident Tradesmens Bank & Trust Co. v. Patterson (1968), and that reasoned “whether a particular lawsuit must be dismissed in the absence of that person, can only be determined in the context of particular litigation.” The D.C. Circuit held in De Csepel v. Republic of Hungary (2023) that Hungary was a required party, but did not treat Pimentel as dispositive and did not find that “equity and good conscience” required dismissal. When considering whether or not to dismiss Peterson, the district court should follow Judge Lohier’s advice and not treat Pimentel as a bright-line rule requiring dismissal any time an absent sovereign’s interests are implicated.

Distinctions between Pimentel and Peterson

A closer look at the prejudice that Bank Markazi would face if the case proceeds in its absence reveals important differences between Peterson and Pimentel. Most obviously, the Pimentel plaintiffs did not contest that the Philippines was a required party under Rule 19(a)(1)(B)(i). Here, however, whether Bank Markazi is a required party under Rule 19(a) is disputed. A party is “required” if it has an interest in the case and proceeding in its absence would “as a practical matter impair or impede the person’s ability to protect the interest.” Bank Markazi’s absence from the case would “as a practical matter impair or impede [it’s] ability to protect” its interests in the assets, making it a required party under Rule 19(a)(1)(B)(i). In De Csepel, the D.C. Circuit reasoned that because Hungary and the plaintiffs had “‘opposing but irreconcilable claims to the same’ property,” proceeding in Hungary’s absence “could impair [Hungary’s] ability to protect its asserted interests in the artworks.” Similarly, in Peterson, Bank Markazi and the judgment creditors have “‘opposing but irreconcilable claims” to the assets in the Luxembourg sundry blocked account. Bank Markazi claims it holds “at least a beneficial interest” in the assets, but the judgment creditors seek a turnover of the assets to execute their judgments against Iran. Therefore, deciding the turnover claim in the bank’s absence would impair the bank’s ability to protect its interest the assets in question, making it a required party under Rule 19(a).

Assuming the district court finds that Bank Markazi is “required” under Rule 19(a), the court will then need to decide whether Rule 19(b)’s “in equity and good conscience” factors allow the case to proceed in the bank’s absence. As Judge Lohier points out, in Pimentel, the Philippines had an interest in resolving the claims in their own courts; this is not a concern here because Iran apparently does not have an interest resolving these claims within their own courts; the alternative forum is Luxembourg, not Iran.  The district court will also need to address whether the remaining defendants would adequately protect Bank Markazi’s interest if the litigation goes forward in its absence.

Conclusion

The decision to dismiss the turnover claim under Rule 19(b) is ultimately within the district court’s discretion. However, as Judge Lohier pointed out in his concurrence, the district court cannot rely on Pimentel as a bright-line rule requiring dismissal and must instead consider the 19(b) factors within the context of this specific case. The sovereign interests at play in Peterson are distinguishable from those in Pimentel and may allow this turnover claim to proceed when the Pimentel case could not.