Case of the Day: Swezey v. Merrill Lynch

Ferdinand Marcos, the former Philippine president, left behind a trail of human rights and financial litigation in the Philippine and United States courts. In 1972, Marcos organized Arelma, S.A., a Panamanian company, and Arelma deposited $2 million in a brokerage account with Merrill Lynch in New York. By 2000, the account had grown to $35 million. In the Pimentel case, a class of plaintiffs alleging human rights violations against Marcos won a $2 billion judgment against him in the District of Hawaii. The Pimentel plaintiffs sought to enforce their judgment by attaching the assets in the Arelma account, but the Republic of the Philippines claimed that it owned the account, since under Philippine law, misappropriated public assets were forfeited to the state at the moment of misappropriation. Merrill Lynch brought a statutory interpleader action in the District of Hawaii naming the Republic, Arelma, and the Pimentel plaintiffs, among others as plaintiffs. The Philippines asserted sovereign immunity and moved to dismiss under Fed. R. Civ. P. 19(b) on the grounds that it was what we used to call an indispensable party and the action could not proceed in its absence. The Supreme Court agreed, citing comity considerations, even over Merrill Lynch’s objection that in the absence of a judgment, it would be exposed to the risk of inconsistent judgments, which is the whole point of the interpleader remedy.

In the case of the day, Swezey v. Merrill Lynch (N.Y. App. Div. 2011), the plaintiff class took another crack at the Arelma assets. Swezey was the class representative. The plaintiffs had registered the judgment in New York and then commenced a “turnover” proceeding against Merrill Lynch under Section 5225 of the New York Civil Procedure Law, the same statute at play in Samsun Logix Corp. v. Bank of China, the case of the day from March 15. The Appellate Division of the New York Supreme Court again sided with the Republic on comity grounds:

Like the Supreme Court in Pimentel, we find the overriding consideration in this case “the prejudice which may accrue from the nonjoinder . . . to the person not joined”. … [T]he Republic plainly has a substantial claim to the Arelma assets, even if it cannot be said with absolute certainty that its claim would prevail if it were fully litigated on the merits in New York. The Republic’s asserted interest in the Arelma assets would be irretrievably lost if those assets were disposed of, and dispersed to the class, pursuant to a judgment rendered in this proceeding. To require the Republic to participate in this proceeding to avoid such a result would essentially negate the Republic’s sovereign immunity. “Th[e] privilege [of sovereign immunity] is much diminished if an important and consequential ruling affecting the sovereign’s substantial interest is determined, or at least assumed, by a federal [or state] court in the sovereign’s absence and over its objection” (Pimentel, 553 US at 868-869). We think it inappropriate for the courts of New York to put the Republic to a Hobson’s choice between, on the one hand, its right not to litigate in this state and, on the other hand, protecting its interest in property that (through no fault of the Republic itself) happens to be located here. Hence, like the Pimentel Court, we conclude that a proceeding should not be allowed to go forward if it would result in the issuance of “a definitive holding regarding a nonfrivolous, substantive claim made by an absent, required entity that was entitled by its sovereign status to immunity from suit” (553 US at 868). Stated otherwise, “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 plaintiff class’s legitimate interests in proceeding against the assets “cannot overcome the weight to which the ‘[c]omity and dignity interests’ (Pimental, 553 US at 866) protected by sovereign immunity are entitled.”

As Judge Catterson pointed out in dissent, the case is not exactly in the same posture as Pimentel. In Pimentel the Republic was named as a defendant, and the competing claims of the various stakeholders really could not be adjudicated fairly without its presence. But in Swezey, the plaintiffs, having learned the lesson of Pimentel, did not name the Republic as a party. Instead, they simply sought to execute their judgment against the assets being held in New York. No one was forcing the Republic to appear before the court. And while the court consistently characterized the Philippine government’s position as an assertion of sovereign immunity, in fact, the Philippines had never come into court to assert immunity at all. Judge Catterson quoted a New York case involving an “assertion” of immunity by a Native American tribe:

The Tribe has chosen to be absent. Nobody has denied it the opportunity to be heard … While sovereign immunity prevents the Tribe from being forced to participate in New York court proceedings, it does not require everyone else to forego the resolution of all disputes that could affect the Tribe. While we fully respect the sovereign prerogatives of the Indian tribes, we will not permit the Tribe’s voluntary absence to deprive these Petitioners (and in turn any member of the public) of their day in court.

I think the majority has the better of the argument in light of cases such as Rubin v. Islamic Republic of Iran, the case of the day from June 10. In Rubin, the Seventh Circuit suggested that the foreign state property’s immunity from attachment inheres in the property:

As we have explained, the statute cloaks the foreign sovereign’s property with a presumption of immunity from attachment and execution unless an exception applies; under § 1609 the property is protected by immunity and may not be attached absent proof of an exception. It follows from this language that the immunity does not depend on the foreign state’s appearance in the case. The immunity inheres in the property itself, and the court must address it regardless of whether the foreign state appears and asserts it.

If this is right, then I would suggest that the Philippine’s failure to appear was not the key point.

About Ted Folkman

Ted Folkman is a shareholder with Murphy & King, a Boston law firm, where he has a complex business litigation practice. He is the author of International Judicial Assistance (MCLE 2d ed. 2016), a nuts-and-bolts guide to international judicial assistance issues, and of the chapter on service of process in the ABA's forthcoming treatise on International Aspects of US Litigation, and he is the publisher of Letters Blogatory, the Web's first blog devoted to international judicial assistance, which the ABA recognized as one of the best 100 legal blogs in 2012, 2014, and 2015.

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