The case of the day is EIG Energy Fund XIV, LP v. Petroleo Brasileiro, S.A. (D.C. Cir. 2018). The case arose out of the Petrobras scandal in Brazil, in which Petrobras, the state oil company, allegedly defrauded EIG and other investors who sank millions into a major oil extraction project off the Brazilian coast, only to suffer losses when corruption in the Brazilian government and in Petrobras killed the project. The details of the alleged corruption aren’t important for our story. What’s important is that several EIG entities brought actions against Petrobras, and Petrobras asserted that it was immune from jurisdiction under the FSIA. The question was whether Petrobras’s commercial activity had caused a direct effect in the United States.
What makes the case interesting to me is the structure EIG used to invest in the project:
Six of the eight EIG funds were based in Delaware but the other two were based in the Cayman Islands, which Brazil has designated as a tax haven. Because investors from designated tax havens are ineligible for the tax incentives provided FIP investments, EIG formed EIG Sete Parent SARL (EIG Sete Parent), a Luxembourg corporation, which in turn formed EIG Sete Holdings SARL (EIG Sete Holdings), also a Luxembourg corporation. EIG’s investment in Sete therefore flowed from the eight funds to EIG Sete Parent, to EIG Sete Holdings, to FIP Sondas and, ultimately, to Sete itself.
Petrobras argued that assuming the truth of the allegations, its fraudulent statements had not caused an injury in the United States, but rather in Luxembourg. The court, in a 2-1 opinion by Judge Henderson, rejected the argument. It noted that the relevance of the corporate form here is unclear:
To determine whether a foreign-state defendant is immune from suit, the Congress indeed elected to hew to ‘the general rules regarding corporate formalities, including the principle that the corporation and its shareholders are distinct entities. Thus, the Supreme Court concluded that a corporation is an instrumentality of a foreign state under the FSIA only if the foreign state itself owns a majority of the corporation’s shares.” But Petrobras asks us to fashion the Dole Food principle of corporate formalism—which narrowed the scope of foreign-state immunity—into a limitation on what entity can be an FSIA plaintiff, with the effect of broadening the scope of foreign-state immunity. We decline the invitation.
And it noted that although the Luxembourg entity would have shown a loss on its books, the US entities would also have shown losses on their books in light of the rules of mark-to-market accounting.
Judge Sentelle, in a very short but cogent dissent, noted that nothing the majority had said showed that the US entities had suffered a direct loss, as the statute requires.
I find Judge Sentelle’s point persuasive. Isn’t the US entities’ loss just an indirect consequence of the direct loss suffered by the Luxembourg entity? I think this point is worth thinking hard about in light of, for instance, the Ontario Court of Appeal’s decision in the Chevron/Ecuador case, which held that judgment creditors of a US parent corporation could not reach the assets of a Canadian indirect subsidiary in light of the doctrine of corporate separateness. I’ve suggested that the Canadian court’s conclusion was clearly correct. If I can put this very crassly and inexactly, I don’t think the law can be that we respect the corporate form when deciding whether one entity can be liable for the debts of an affiliate, but not when deciding whether an injury to one entity is an injury to an affiliate. In other words, I don’t think we should respect the corporate form when corporations are defendants but not when they are plaintiffs. Now, the two cases are not similar, and it’s possible that both are correctly decided, but there’s a tension here that needs exploring.