Fran Heiser v. Islamic Republic of Iran

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 24, 2013 Decided November 19, 2013
No. 12-7101
FRAN HEISER, INDIVIDUALLY AND AS CO-ADMINISTRATOR OF
THE ESTATE OF MICHAEL HEISER, ET AL.,
APPELLANTS
v.
ISLAMIC REPUBLIC OF IRAN, ET AL.,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:00-cv-02329)
Dale K. Cathell argued the cause for appellants. With him
on the briefs was Richard M. Kremen.
James L. Kerr argued the cause for appellees Wells Fargo
Bank, N.A., et al. With him on the brief was Karen E. Wagner.
Benjamin M. Shultz, Attorney, U.S. Department of Justice,
argued the cause for amicus curiae United States of America.
With him on the brief were Stuart F. Delery, Principal Deputy
Assistant Attorney General, Ronald C. Machen, U.S. Attorney,
and Mark B. Stern and Sharon Swingle, Attorneys.
2
Before: BROWN, Circuit Judge, and EDWARDS and
RANDOLPH, Senior Circuit Judges.
Opinion for the court filed by Senior Circuit Judge
RANDOLPH.
RANDOLPH, Senior Circuit Judge: In 1996, an explosion
tore apart the Khobar Towers apartment complex in Dhahran,
Saudi Arabia. Nineteen American military personnel died and
hundreds of others were wounded. Investigations revealed that
the terrorist organization Hezbollah had attacked the Towers
with Iran’s assistance. The opinion in Estate of Heiser v. Islamic
Republic of Iran (Heiser I), 466 F. Supp. 2d 229, 252-54, 260-65
(D.D.C. 2006), describes Iran’s intimate involvement in
planning, supporting, and approving the attack.
The estate of Michael Heiser, one of the victims, and other
victims’ families and estates, sued Iran and several of its
agencies and instrumentalities alleging their liability for the
attacks. Plaintiffs obtained a default judgment, id. at 356, later
modified under the 2008 National Defense Authorization Act,
Estate of Heiser v. Islamic Republic of Iran (Heiser II), 659 F.
Supp. 2d 20, 22-23, 30-31 (D.D.C. 2009). The judgment now
totals approximately $591 million in punitive and compensatory
damages. Estate of Heiser v. Islamic Republic of Iran (Heiser
III), 885 F. Supp. 2d 429, 450 (D.D.C. 2012). The propriety of
that judgment is not before us.
Plaintiffs, attempting to collect on this judgment, had writs
of attachment issued to Bank of America, N.A., and Wells
Fargo, N.A., seeking any assets held by the banks in which Iran
had an interest. The banks responded with lists of accounts
having some connection to Iran, after which plaintiffs moved for
the banks to turn over the funds in these accounts. In response,
the banks conceded that some accounts were potentially subject
3
to attachment. Id. at 447 n.6. These “uncontested accounts” are
the subject of an interpleader action in the district court. Id. at
434, 449.
The remaining “contested accounts” are the subject of this
appeal. Id. at 432. The accounts contain the proceeds of
electronic funds transfers that were blocked under various
sanctions programs the Treasury Department’s Office of Foreign
Assets Control implemented. Id. at 432-33, 446. These concepts
need to be explained.
An electronic funds transfer is a series of transactions by
which one party, called the “originator,” transfers money
through the banking system to another party, called the
“beneficiary.” See U.C.C. § 4A-104(a).1 Suppose O wants to
transfer $100 to B. If O and B have an account at Bank X, then
the transaction is simple. O can instruct Bank X, which will
debit O’s account and credit B’s account with $100. But suppose
O has an account at Bank X, and B has an account at Bank Y.
Unless Banks X and Y are members of the same lending
consortium, they must involve a third “intermediary” bank with
which Banks X and Y both have accounts. The transaction
would proceed as follows: (1) O instructs Bank X to pay B; (2)
Bank X debits O’s account and forwards instructions to the
intermediary bank; (3) the intermediary bank debits Bank X’s
account, credits Bank Y’s account, and forwards instructions to
Bank Y; and (4) Bank Y credits B’s account. The entire process
1
The following explanation is drawn from Shipping Corp. of
India, Ltd. v. Jaldhi Overseas Pte Ltd., 585 F.3d 58, 60 n.1 (2d Cir.
2009) and 3 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM
COMMERCIAL CODE § 22-1 (5th ed. 2008). See also Heiser III, 885 F.
Supp. 2d at 446-47; 7 LARY LAWRENCE, ANDERSON ON THE UNIFORM
COMMERCIAL CODE §§ 4A-101:1, 4A-101:6, 4A-103:4, 4A-104:4 to
104:11 (rev. ed. 2007).
4
occurs rapidly through a sequence of electronic debits and
credits.
In this case, electronic funds transfers were never completed
because of blocking regulations.2 The intermediary
banks—affiliated with either Wells Fargo or Bank of
America—electronically screened each funds transfer they
received. The screening found references to one of several
designated Iranian banks. Because of those references, the banks
froze the transfers and deposited the proceeds in separate
accounts. The money never reached the beneficiaries or their
banks, but instead became the subject of litigation.
The blocking regulations cast a wide net. The regulations
froze and prohibited the “transfer[]” of “property and interests
in property” of designated entities. See 31 C.F.R. §§ 544.201(a),
594.201(a). These terms were defined broadly. See id.§§ 544.308, 544.309, 594.309, 594.312. Assets could be blocked
even though Iran had no “traditional legal interests” in them.
Holy Land Found. for Relief & Dev. v. Ashcroft, 333 F.3d 156,
2
Blocking regulations are promulgated under the International
Emergency Economic Powers Act, Pub. L. No. 95–223, tit. II, 91 Stat.
1625, 1625-26 (1977) (codified at 50 U.S.C. §§ 1701-1706), which
gives the President “broad powers” to impose economic sanctions on
actors who threaten American interests. Consarc Corp. v. U.S.
Treasury Dep’t, 71 F.3d 909, 914 (D.C. Cir. 1995). Although Iran-
specific blocking regulations exist, see 31 C.F.R. pts. 535 (Iranian
Assets Control Regulations), 560 (Iranian Transactions and Sanctions
Regulations), 561 (Iranian Financial Sanctions Regulations), 562
(Iranian Human Rights Abuses Sanctions Regulations), the transfers
in this case were blocked under two different programs: Weapons of
Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. pt.
544; see Exec. Order No. 13,382, 70 Fed. Reg. 38,567 (June 28,
2005), and Global Terrorism Sanctions Regulations, 31 C.F.R. pt. 594;
see Exec. Order No. 13,224, 66 Fed. Reg. 49,079 (Sept. 23, 2001).
5
162-63 (D.C. Cir. 2003) (internal quotation marks omitted).
Blocking was not based on legal ownership.
The breadth of the blocking regulations is evident here.
Iranian entities were not the originators of the funds transfers.3
Nor were they the ultimate beneficiaries. The transfers were
blocked because the beneficiaries’ banks were Iranian. They
were blocked, in other words, because Iranian banks would have
had a contingent future possessory interest in the funds.
These are the funds that plaintiffs seek in satisfaction of
their judgment against Iran. Plaintiffs argue that the Iranian
banks’ contingent possessory interests are sufficient for them to
attach the contested accounts under two statutes. The first, 28
U.S.C. § 1610(g), “subject[s] to attachment” “the property of a
foreign state . . . and the property of an agency or
instrumentality of such a state” against which a plaintiff holds
a judgment under 28 U.S.C. § 1605A. The second, § 201(a) of
the Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297,
116 Stat. 2322, 2337 (codified at 28 U.S.C. § 1610 Note
“Satisfaction of Judgments from Blocked Assets of Terrorists,
Terrorist Organizations, and State Sponsors of Terrorism”),
“subject[s] to execution or attachment” “the blocked assets of
[a] terrorist party (including the blocked assets of any agency or
3
One of the uncontested accounts holds the proceeds of a funds
transfer for which an Iranian entity was an originator’s bank, and
another holds proceeds of a transfer with which an Iranian entity had
an unknown relationship. The question whether a judgment creditor
can attach assets that bear those relationships to Iran is not before the
court.
6
instrumentality of that terrorist party)” against which a plaintiff
holds a judgment under 28 U.S.C. § 1605(a)(7).4
The United States submitted a statement of interest to the
district court, and has filed a brief amicus curiae in this appeal.
The government took “no position” on the question whether Iran
owns the contested accounts. United States Amicus Br. at 1. It
addressed only the proper construction of § 201 and § 1610(g).
The government argued that the statutes “do not . . . permit a
plaintiff to satisfy a judgment against a terrorist party by
attaching property that the terrorist party does not own.” United
States Amicus Br. at 2. The government’s interpretation of § 201
and § 1610(g) is the same as the banks’.
The district court held that the contested accounts were not
attachable under either statute. It first held that the word “of” in
§ 201 and § 1610(g) denotes ownership and that Iran must
therefore own any accounts plaintiffs may seek to attach. Heiser
III, 885 F. Supp. 2d at 437-43. It then determined that ownership
of the contested accounts should be governed by a federal rule
of decision because the Foreign Sovereign Immunities Act,
which includes both § 201 and § 1610(g), preempts state law. Id.
at 443-45. The court adopted Uniform Commercial Code Article
4A as a federal rule of decision. Id. at 445-47. Applying Article
4A principles, the district court found that Iran did not own the
4
The National Defense Authorization Act of 2008 repealed 28
U.S.C. § 1605(a)(7) and replaced it with 28 U.S.C. § 1605A. Heiser
II, 659 F. Supp. 2d at 23. Plaintiffs’ original judgment was awarded
under the former provision. Heiser I, 466 F. Supp. 2d at 248, 265-66,
356-59. The modified judgment, including punitive damages, was
awarded under the latter. Heiser II, 659 F. Supp. 2d at 23-24.
7
contested accounts. The court therefore denied plaintiffs’ motion
for a turnover of the funds. Id. at 447-49.5
The parties agree that most of the requirements of § 201 and
§ 1610(g) are satisfied. Iran is obviously a “foreign state.”
Section 201 defines a “terrorist party” as “a foreign state
designated as a state sponsor of terrorism,” 28 U.S.C. § 1610Note (d)(4), and Iran has been so designated, Valore v. Islamic
Republic of Iran, 700 F. Supp. 2d 52, 67-68 (D.D.C. 2010). The
funds are also property and blocked assets. Heiser III, 885 F.
Supp. 2d at 433, 437, 442. As discussed above, plaintiffs hold a
judgment under 28 U.S.C. § 1605(a)(7), which was modified
under 28 U.S.C. § 1605A. See supra note 4.
Whether plaintiffs can attach the contested accounts thus
depends on whether those accounts are the “property” or
“blocked assets” of Iran. Plaintiffs ask us to treat the word “of”
as encompassing any Iranian relationship with the contested
accounts. Although the word “of” may signify ownership,
plaintiffs claim that an ownership definition is inappropriate
here. Instead, they say the word “of” should draw its meaning
from the surrounding language. In § 201 Congress used “of” to
modify “blocked assets,” and assets may be blocked on the basis
of Iranian interests far less significant than ownership. This
5
The district court’s holding that § 201 and § 1610(g) require
Iran to own the contested accounts accords with Calderon-Cardona
v. JPMorgan Chase Bank, N.A., 867 F. Supp. 2d 389, 403-07
(S.D.N.Y. 2011). Three other opinions from the same district have
disagreed and held that § 201 does not require an ownership interest
for attachment. Hausler v. JPMorgan Chase Bank, N.A., 845 F. Supp.
2d 553, 562-68 (S.D.N.Y. 2012); Levin v. Bank of N.Y., No. 09-CV-
5900, 2011 WL 812032, at *13-19 (S.D.N.Y. Mar. 4, 2011); Hausler
v. JP Morgan Chase Bank, N.A., 740 F. Supp. 2d 525, 533-39
(S.D.N.Y. 2010).
8
language choice, according to plaintiffs, conveys Congress’s
intent to compensate victims of terrorism with blocked assets.
Thus, plaintiffs conclude, the contested accounts may be
attached for the same reason they were blocked: because an
Iranian bank would have served as a bank to the ultimate
beneficiary.
The banks and the United States both reject this
interpretation, citing Supreme Court cases defining “of” in
various statutes as requiring ownership. See Bd. of Trs. of the
Leland Stanford Junior Univ. v. Roche Molecular Sys., Inc., 131
S. Ct. 2188, 2195-96 (2011); Poe v. Seaborn, 282 U.S. 101, 109
(1930). The district court relied, in part, on these and other
Supreme Court decisions. Heiser III, 885 F. Supp. 2d at 438.
While the decisions establish that “of” denotes ownership in
some statutes, the word may carry a different meaning in others.
See, e.g., Prot. & Advocacy for Persons with Disabilities v.
Mental Health & Addiction Servs., 448 F.3d 119, 125-26 (2d
Cir. 2006). None of the Supreme Court decisions the parties or
the district court cited purport to define “of” conclusively and
for all purposes. Its meaning depends on context.
With respect to § 201 and § 1610(g), plaintiffs’
interpretation conflicts with the established principle that “a
judgment creditor cannot acquire more property rights in a
property than those already held by the judgment debtor.” 50
C.J.S. Judgments § 787 (2013); see United States v. Winnett, 165
F.2d 149, 151 (9th Cir. 1947); Zink v. Black Star Line, Inc., 18
F.2d 156, 157 (D.C. Cir. 1927); Lewis v. Smith, 15 F. Cas. 498,
498-99 (C.C.D.C. 1825) (No. 8,332). If a debtor merely holds
property as an intermediary for a third party, but does not own
the property, then a creditor cannot attach it. See Carpenter v.
Nat’l City Bank of Chi., 48 App. D.C. 133, 134-35, 136 (D.C.
Cir. 1918). These principles carry significant weight because
“statutes should be interpreted consistently with the common
9
law.” Manoharan v. Rajapaksa, 711 F.3d 178, 179 (D.C. Cir.
2013) (per curiam) (quoting Samantar v. Yousuf, 560 U.S. 305,
130 S. Ct. 2278, 2289 (2010)). Congress can “abrogate” the
traditional common-law principles governing execution of
judgments, but to do so it must “speak directly to the question
addressed by the common law.” Id. at 179-80 (quoting United
States v. Texas, 507 U.S. 529, 534 (1993) (internal quotation
marks omitted)).
Congress has not done so here. The statutory text is silent
on this issue. Nothing in the legislative histories of § 201 or
§ 1610(g) suggests that Congress intended judgment creditors of
foreign states to be able to attach property those states do not
own. Indeed, a House Report addressing § 1610(g) states that
the section was intended to let debtors attach assets in which
foreign states have “beneficial ownership.” H.R. REP. NO. 110-
477, at 1001 (2007) (Conf. Rep.). The House Report on the
Terrorism Risk Insurance Act does state that § 201’s purpose “is
to deal comprehensively with the problem of enforcement of
judgments rendered on behalf of victims of terrorism . . . by
enabling them to satisfy such judgments through the attachment
of blocked assets of terrorist parties.” H.R. REP. NO. 107-779, at
27 (2002) (Conf. Rep.). But this merely repeats the language of
the statute. It does not show that Congress’s “comprehensive[]”
solution was to abrogate the common law.
Plaintiffs cite the floor debate over § 201 to argue that
Congress wanted to compensate terrorism victims with blocked
assets. But plaintiffs misinterpret the debate. Congress had a
narrower concern. Even before the Terrorism Risk Insurance
Act was passed, 28 U.S.C. § 1610(f)(1) purportedly allowed
creditors holding judgments under § 1605(a)(7) (and, later,
under § 1605A) to attach blocked property. But the President
was authorized to “waive any provision” of § 1610(f)(1) “in the
interest of national security.” 28 U.S.C. § 1610(f)(3). The
10
President waived § 1610(f)(1) in almost all cases after finding
that attachment of blocked property would “impede the ability
of the President to conduct foreign policy” and “impede the
effectiveness of . . . prohibitions and regulations upon financial
transactions.” Determination to Waive Requirements Relating
to Blocked Property of Terrorist-List States, 63 Fed. Reg.
59,201 (Oct. 21, 1998).6 Congress responded to this perceived
“flaunting [flouting of?] the law,” 148 CONG. REC. 23,121 (Nov.
19, 2002) (statement of Sen. Harkin), by passing § 201, which
“builds upon and extends the principles in section 1610(f)(1) . . .
and eliminates the effects of any Presidential waiver issued prior
to the date of enactment.” H.R. REP. NO. 107-779, at 27; see also
Ministry of Def. v. Elahi, 556 U.S. 366, 386 (2009). The floor
debate clearly demonstrates that at least some members of
Congress wanted to use Iran’s assets to pay its victims, whether
or not the executive agreed. But that purpose is a far cry from
paying Iran’s victims with assets Iran does not own.
Adopting plaintiffs’ interpretation of § 201 and § 1610(g)
risks punishing innocent third parties. Plaintiffs’ position is that
these sections allow a creditor to satisfy a judgment with
property the debtor does not own. But if the debtor does not own
6
Section 1610(f) was passed as part of the Omnibus Consolidated
and Emergency Supplemental Appropriations Act, 1999, Pub. L. No.
105-277, Treasury Department Appropriations Act, tit. I, § 117(d),
112 Stat. 2681-480, 2681-491 to -492. The original language allowing
the President to waive the “requirements of this section,” was codified
as a note to 28 U.S.C. § 1610(g). See id. That language was repealed
by the Victims of Trafficking and Violence Protection Act of 2000,
Pub. L. No. 106-386, div. C, § 2002, 114 Stat. 1464, 1543, which
added the current language allowing the President to waive “any
provision of paragraph (1).” The President then executed a
superseding waiver pursuant to this new language. Determination to
Waive Attachment Provisions Relating to Blocked Property of
Terrorist-List States, 65 Fed. Reg. 66,483 (Oct. 28, 2000).
11
that property, then someone else must. And that someone could,
and very well might, be an innocent person who then unjustly
bears the costs of the debtor’s wrong. This court has construed
“strictly against the garnisher” a statute “in derogation of the
common law,” because it risked penalizing “a garnishee who
owed the principal defendant nothing.” Austin v. Smith, 312 F.2d
337, 340-43 (D.C. Cir. 1962); see also Rieffer v. Home Indem.
Co., 61 A.2d 26, 27 (D.C. 1948) (“The weight of authority
clearly favors a strict construction of attachment statutes.”),
modified on other grounds, 62 A.2d 371 (D.C. 1948). And the
need to protect innocent parties is particularly acute with
blocked assets. In a statement of interest submitted in a different
case, the government explained that the Sudan Sanctions
Regulations—which have similar breadth to the sanctions in this
case, see 31 C.F.R. §§ 538.201, 538.301, 538.310,
538.313—could block “personal remittances by persons not
subject to sanctions” merely because the remittances were sent
through a Sudan-owned bank. Statement of Interest of the
United States of America at 6-7, Rux v. ABN Amro Bank N.V.,
No. 08-CV-6588 (S.D.N.Y. Apr. 14, 2009), ECF No. 132. These
personal remittances could include tuition payments for health
care training or money paid by a Sudanese embassy employee
to purchase a personal vehicle. Id. Exhibit 1 at ¶¶ 14-15 (Decl.
of John E. Smith).
The record does not disclose whether the originators or
beneficiaries in this case are entirely innocent. But they may be.
And that prospect would be contrary to Congress’s intent. If
potentially innocent parties pay plaintiffs’ judgment, then the
punitive purpose of these provisions is not served. Quite the
opposite. To the extent innocent parties pay some part of a
terrorist state’s judgment debt, the terrorist state’s liability is
ultimately reduced. Congress could not have intended such a
result.
12
Plaintiffs claim that even if Iranian ownership is required,
they should still prevail because Iran actually owns the contested
accounts. They argue that ownership interests include any
interest in the property bundle, including the Iranian banks’
contingent future possessory interests in the accounts, an
interpretation that harmonizes with the broad definitions of
“property” and “interests in property” contained in the blocking
regulations. Plaintiffs urge us not to adopt U.C.C. Article 4A as
a rule of decision, reasoning that federal law preempts this
Uniform Commercial Code provision.
We agree with plaintiffs that Article 4A does not apply of
its own force. But it is not correct to treat this as an issue of
preemption. Federal law, specifically § 201 and § 1610(g), is
controlling. The question is the content of this federal law.
Congress has not provided a rule for determining ownership
under § 201 or § 1610(g). Nor has Congress directed the federal
courts to adopt state ownership rules under this statutory
scheme. See RICHARD H. FALLON, JR. ET AL., HART &
WECHSLER’S THE FEDERAL COURTS AND THE FEDERAL SYSTEM
632-33 (6th ed. 2009); Paul J. Mishkin, The Variousness of
“Federal Law”: Competence and Discretion in the Choice of
National and State Rules for Decision, 105 U. PA. L. REV. 797,
797 n.1, 811 (1957). Our task is thus the “normal judicial filling
of statutory interstices.” Henry J. Friendly, In Praise of
Erie—and of the New Federal Common Law, 39 N.Y.U. L. REV.
383, 421 (1964). We must fashion a “rule of decision” for
applying § 201’s and § 1610(g)’s ownership requirement, and
that rule, though federal, may sometimes “follow state law.” Id.
at 410; see Clearfield Trust Co. v. United States, 318 U.S. 363,
366-68 (1943).
Article 4A provides an appropriate rule of decision. Article
4A is a particularly convenient and appropriate measure of
13
ownership because it has been adopted by all fifty states and the
District of Columbia, and addresses ownership of electronic
funds transfers, the issue presented in this case. See Heiser III,
885 F. Supp. 2d at 447. The Uniform Commercial Code is often
used as the basis of federal common-law rules. See Caleb
Nelson, The Persistence of General Law, 106 COLUM. L. REV.
503, 510-11 & n.33 (2006). To be clear, we do not hold that the
District’s or any state’s version of Article 4A applies of its own
force. Rather, we hold that Article 4A is a proper federal rule of
decision for applying the ownership requirements of § 201 and
§ 1610(g).
Applying the principles of Article 4A, we agree with the
district court that Iran does not own the contested accounts.
Heiser III, 885 F. Supp. 2d at 447-49. Iran was not the
beneficiary or originator, but the owner of the beneficiary’s bank
for each funds transfer, and “[l]egal title does not pass to the
beneficiary’s bank until it accepts the payment order from the
intermediary bank.” Id. at 448; see Shipping Corp. of India Ltd.
v. Jaldhi Overseas Pte Ltd., 585 F.3d 58, 71 (2d Cir. 2009);
Regions Bank v. Provident Bank, Inc., 345 F.3d 1267, 1277
(11th Cir. 2003). The Iranian beneficiary banks never received
a payment order because the funds transfers were blocked at the
intermediary banks, and they never held legal title to the money
in the contested accounts. Heiser III, 885 F. Supp. 2d at 448.
Article 4A’s subrogation provisions further support this view. If
the intermediary bank is prohibited from completing a transfer,
then the originator is subrogated to its bank’s right to a refund.
U.C.C. § 4A-402(d)-(e). As the district court explained, this
provision means that claims on an interrupted funds transfer
ultimately belong to the originator, not the beneficiary or its
bank. Heiser III, 885 F. Supp. 2d at 448.
14
Because plaintiffs could not attach the contested accounts
under either § 201 or § 1610(g) without an Iranian ownership
interest in the accounts, and because Iran lacked an ownership
interest in the accounts, the order of the district court is
Affirmed.