Foreign sovereigns are presumptively immune from suit in the United States. The Foreign Sovereign Immunities Act (“FSIA”) codifies that immunity and its exceptions, and since 2008 has contained an exception allowing suits against certain states for acts of terrorism, including torture, hostage-taking, or extrajudicial killing. This “terrorism exception” can be used to bring suits against states that the Secretary of State designates “state sponsors of terrorism,” a short list that includes Iran, Syria, Cuba, and North Korea. Successful plaintiffs, however, often face high hurdles to enforcing their judgments. State sponsors of terrorism often have few assets in the United States, and what assets they do have are often frozen by sanctions.
Two federal statutes provide plaintiffs with some hope of relief: FSIA § 1610(g) and the Terrorism Risk Insurance Act (“TRIA”) § 201(a) both provide that assets of a terrorist state that are frozen (or “blocked”) by U.S. sanctions may be used to satisfy a judgment under the terrorism exception. Plaintiffs often seek to attach frozen assets under these statutes, and a common issue in those cases is whether frozen assets (typically bank accounts or transfers) are “of” a terrorist state—that is, whether they are sufficiently connected to the terrorist state to be attachable by a plaintiff.
The U.S. Court of Appeals for the D.C. Circuit recently considered this question and interpreted these statutes in an expansive way that may allow attachment of more terrorist-connected assets than was previously thought possible. In Estate of Levin v. Wells Fargo Bank, N.A., 45 F.4th 416 (D.C. Cir. 2022), the court ruled that bank transfers that can be “traced” to terrorist states—using general principles of asset tracing—can be attached by a plaintiff. This decision splits with the Second Circuit’s more restrictive jurisprudence, under which a plaintiff can attach the funds only if the terrorist entity or its bank directly transferred the funds to the blocked account. The D.C. Circuit’s decision may provide creative plaintiffs with new options for attaching assets to satisfy judgments against terrorist states.
Background
The FSIA’s terrorism exception, 28 U.S.C. § 1605A, abrogates the sovereign immunity of a foreign state designated as a “state sponsor of terrorism” by the Secretary of State when a plaintiff brings an action against that state for personal injury or death resulting from certain terrorist activities. Once a plaintiff obtains a judgment against a foreign state under § 1605A, two statutes allow a plaintiff to attach assets of the foreign state to satisfy the judgment. First, FSIA § 1610(g) “subject[s] to attachment” “the property of a foreign [terrorist] state . . . and the property of an agency or instrumentality of such a state.” Second, TRIA § 201(a) “subject[s] to execution or attachment” “the blocked assets of [a] terrorist party (including the blocked assets of any agency or instrumentality of that terrorist party).”
In 2019, an Omani company, Taif Mining Services, attempted to buy an oil tanker from a Liberian company, Crystal Holdings Limited. As part of the transaction, Taif deposited $10 million with its escrow agent in London, and that escrow agent then attempted to transfer the money from Lloyds Bank in London to Crystal’s Swiss bank account. Wells Fargo, based in New York, served as an intermediary bank. When Wells Fargo received the transfer, however, it immediately froze the money instead of transferring it on, recognizing that Taif Mining was formed by two members of the Iranian Islamic Revolutionary Guard Corps—a sanctioned entity—in an apparent attempt to purchase the oil tanker on behalf of Iran.
Two groups of plaintiffs believed that the frozen funds presented an opportunity to satisfy FSIA § 1605A judgments against Iran. One group had obtained almost $1 billion in judgments against Iran in connection with al-Qaeda’s 1998 bombing of the U.S. embassies in Kenya and Tanzania. The other group of plaintiffs had obtained $30 million in judgments for the 1984 kidnapping and torture of Jeremy Levin by Hezbollah, an organization backed by Iran. Both groups of plaintiffs sued to attach the frozen funds under the FSIA § 1610(g) and the TRIA § 201(a). The United States intervened and moved to quash the attachment, hoping to preserve the frozen funds for disbursement through a federal program, the United States Victims of State Sponsored Terrorism Fund.
The parties disagreed on whether the frozen funds were property of Iran. The disagreement focused on the wording of FSIA § 1610(g) and the TRIA § 201(a), both of which allow attachment of the property “of” a foreign state. This language requires that the terrorist state have a property interest in the frozen funds, but does not provide guidance on how to evaluate ownership in a multistep bank transfer.
The district court believed that the issue was controlled by the D.C. Circuit’s decision in Heiser v. Islamic Republic of Iran, 735 F.3d 934, 936 (D.C. Cir. 2013). There, the D.C. Circuit ruled that UCC Article 4A—which addresses property interests in the context of an interrupted bank transfer—should provide the rule of decision for determining whether a terrorist state owns the frozen transfer. Under UCC Article 4A-402, the only party holding a property interest in an uncompleted midstream electronic transfer is the party immediately upstream of the bank holding the frozen funds. The district court thus quashed the plaintiffs’ attachment of the frozen funds, ruling that only the party immediately upstream of Wells Fargo, Lloyds Bank, had a property interest in the funds. In other words, because the funds were property only of Lloyds, they were not property of Iran, and could not be attached by the plaintiffs. The district court’s application of UCC Article 4A as the rule of decision in this circumstance mirrored a similar rule adopted by the Second Circuit.
The D.C. Circuit’s decision
The D.C. Circuit reversed in an opinion authored by Judge Randolph.
The court focused on whether the frozen transfers were property of Iran but rejected Heiser’s application of the UCC to this question. The court instead distinguished Heiser, pointing out that the sanctioned entity in that case had been the intended beneficiary, not the originator (as in this case), of the frozen transfer. Incorporating UCC Article 4A was appropriate when the originator of the transfer is not a sanctioned entity. But when the funds at issue originate with the sanctioned entity, the court wrote, it is inappropriate to incorporate UCC Article 4A, which is at odds with the purpose of blocking terrorist assets: the whole point of Article 4A is to unravel uncompleted funds transfers and return the funds to the originator. As the court observed, doing so is impermissible when the originator is a sanctioned entity. This rejection of UCC Article 4A as the rule of decision created a split with the Second Circuit, which applies Article 4A even when a terrorist is the originator of an electronic funds transfer.
Having held that UCC Article 4A does not apply when the originator of a transfer is a sanctioned entity, the D.C. Circuit sought to clarify what rule does apply in that circumstance. In a single short paragraph, the court pointed to the rules of tracing used by federal courts in cases involving, for example, fraud and bankruptcy. The court did not expound on how principles of tracing should be applied to determine whether a transfer is property of a terrorist owner, other than to note that in this case, the frozen funds were traceable to Taif and so were “the blocked assets of a terrorist party” under TRIA § 201(a). The clear conclusion, however, is that unlike in the Second Circuit, a plaintiff may attach blocked assets from a terrorist state that were transferred several times before being frozen.
Judge Pillard concurred in a separate opinion. She noted that principles of tracing do not supply a method of determining ownership. Instead, they are used to trace funds that belong to an original owner. As a result, tracing “does not identify any legal rule for establishing ownership” and “stops short of specifying any rule of decision to substitute for U.C.C. Article 4A in providing the statutorily required showing of ownership.” Judge Pillard therefore suggested that, in addition to tracing, courts should apply common-law ownership and agency principles to reduce uncertainty for innocent subsequent transferees.
Conclusion
The court’s decision expands the pool of potential assets that may be available to satisfy a judgment under TRIA § 201(a). While the D.C. Circuit’s prior use of UCC Article 4A in Heiser would bar attachment of frozen funds unless they were transferred directly from a sanctioned entity, the new rule allows creditors to attach any funds “traceable” to the sanctioned entity. The court did not place a limit on this tracing, raising the possibility that plaintiffs can seek out assets many steps removed from a terrorist state to attach. Judge Pillard’s concurrence suggested principles for limiting this broad reference to tracing, but it remains to be seen whether they will be adopted in a majority opinion.
This decision also creates a split with the Second Circuit, which applies UCC Article 4A to bank transfers from sanctioned entities. This split means that plaintiffs who seek to attach frozen transfers from a sanctioned entity will fare much better in the D.C. Circuit, and may increasingly bring their attachment actions there to take advantage of this split—at least until it is resolved, whether by en banc review or by the Supreme Court.
