EIG ENERGY FUND XIV, L.P., ET AL. v. PETROLEO BRASILEIRO, S.A.
No. 17-7067
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Decided July 3, 2018
Argued January 19, 2018
Appeal from the United States District Court for the District of Columbia (No. 1:16-cv-00333)
Catherine E. Stetson argued the cause for appellant. With her on the briefs were Adam K. Levin and Sean Marotta.
Daniel B. Goldman argued the cause for appellees. With him on the brief were Barry Coburn and Kerri Ann Law.
Before: HENDERSON and WILKINS, Circuit Judges, and SENTELLE, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge HENDERSON.
Dissenting opinion filed by Senior Circuit Judge SENTELLE.
Behind the project—and at least some of the corruption—was Petroleo Brasileiro, S.A. (Petrobras), Brazil‘s state-owned oil company. The jurisdiction of U.S. courts
I. Background
In 2006 Petrobras discovered an estimated 50 billion barrels of undersea oil off the coast of Brazil.1 Although costly
to extract, the sheer size of the deposit was tantalizing not only to the Brazilian state—which had a direct economic interest in the find through Petrobras, the state-owned oil company—but to investors around the world. Petrobras soon formed a foreign-investment venture to build 28 specialized “drill ships” at a cost of more than $700 million apiece. The business plan for the venture, named Sete Brasil Participações, S.A. (Sete), called for equity investment of around 7.9 billion Brazilian Reais ($2.19 billion at today‘s exchange rates), with approximately 4.6 per cent of that coming from Petrobras itself. The remainder of the ships’ cost was to be debt-financed through third-party lenders.
To attract foreign investment, Brazilian law provides tax incentives through special partnerships known as Fundos de Investimento em Participações, or FIPs. Petrobras created FIP Sondas to facilitate foreign investment in the Sete project. Petrobras specifically targeted U.S. investors for Sete, Joint Appendix (JA) 25, including EIG Management Company, LLC (EIG), a Washington, D.C.-based private equity fund. Petrobras disseminated in the United States, including to EIG, a presentation called “The Drilling Rigs Project: Petrobras‘[s] Strategy for its Successful Implementation.” JA26. The presentation contained a “Cautionary Statement for US Investors,” referencing U.S. Securities and Exchange Commission rules governing oil and gas investment. JA26–27. Another document disseminated by Petrobras in the United States, titled “Pre-Salt Oil Rigs Project,” “discussed the Sete investment premise and touted that Sete would have ‘management with extensive experience in the market.‘” JA27–28. A third document “promoting investment in Sete” was sent to EIG by a putative Petrobras agent nearly a year after the first two documents circulated. JA28.
Petrobras and Sete executives also met with EIG executives in the United States at least twice. At one meeting, in Houston, Texas, Sete CEO João Carlos de Medeiro Ferraz (Ferraz) “offered rosy descriptions of Sete and its business prospects.” JA29. At another, in Washington, D.C., Ferraz addressed a conference of EIG employees and investors and “informed [them] that Sete expected drillship charter revenue ‘of almost $90 billion [in] the next 20 years.‘” JA30 (second alteration in original). EIG employees twice traveled to Brazil to meet with Petrobras representatives, and Petrobras or Sete corresponded extensively with EIG leading up to EIG‘s investment, through written memoranda, presentations, telephone calls and emails.
EIG ultimately invested $221 million in FIP Sondas between August 2012 and May 2013, on behalf of eight funds under
Brazilian prosecutors’ “Operation Car Wash” became public in 2014. The multi-year investigation uncovered extensive corruption in the Brazilian government, including Petrobras, and in the private-sector oil industry, including Sete. To date, prosecutors have obtained 93 convictions against officials engaged in a bribery and kickback scheme going back to at least 1997. Among the guilty were senior executives at
Sete, including Ferraz, EIG‘s primary contact at Petrobras and Sete. A 30-year employee of Petrobras, Ferraz became the chief executive of Sete sometime before the spring of 2013, when he met with EIG in Houston. Ferraz was EIG‘s primary contact regarding its Sete investment, first, while he was at Petrobras and, later, when he was Sete CEO. In testimony given to an investigative panel of the Brazilian Congress in 2015, Ferraz explained that “[t]he capital market in the United States, in particular, loves [Sete‘s] type of business. They very much like the prospects of financing drilling rigs, despite the risks involved.” JA233. And so, Ferraz testified, “[t]here was great market interest [in Sete], particularly among US private equity groups” such as EIG. JA218. Another Sete executive, chief operating officer Pedro José Barusco, testified to the Brazilian Congress that he and Ferraz had taken “the initiative to create Sete Brasil” and that “the establishment of bribe amounts . . . was a continuity [sic] of what happened in Petrobras.” JA23, JA31 (compl.).
As the scandal of Operation Car Wash enveloped Sete and Petrobras, skittish lenders withdrew their support from the drill ships project. Because the project was highly leveraged by design, the loss of debt financing made it impossible to proceed with construction. Facing insolvency, Sete declared bankruptcy. Investors, including EIG, were left with nothing but worthless shares.
EIG sued Petrobras and the other defendants in district court, alleging counts of fraud, aiding and abetting fraud and civil conspiracy to commit fraud.2 Petrobras moved to dismiss
for lack of subject matter jurisdiction under
The district court denied Petrobras‘s motion to dismiss, concluding that EIG‘s claims fall within the FSIA‘s commercial activity exception to foreign-state immunity. EIG Energy Fund XIV, L.P. v. Petroleo Brasileiro S.A., 246 F. Supp. 3d 52, 72 (D.D.C. 2017); see
The district court reasoned that EIG‘s injury “occurred at the time Petrobras successfully induced [it] to invest in the Petrobras-Sete project,” which injury “occurred, at least in part, in the United States.” 246 F. Supp. 3d at 72. Because the court concluded that EIG‘s injury occurred in the United States, it rejected Petrobras‘s argument that EIG‘s structuring its investment through its Luxembourg subsidiaries—that is, EIG Sete Parent and EIG Sete Holding—constituted an
under FSIA). Sete‘s bankruptcy, however, would likely have made it futile for the plaintiffs to include Sete as a defendant.
“intervening event[]” that made EIG‘s U.S. injuries “indirect.” Id.
Moreover, the district court found that “Petrobras did not merely establish Sete” but “installed its own former employees‘—including the architects of Sete and the bribe scheme, Ferraz and Barusco—for the purpose of continuing the corrupt enterprise.” Id. (quoting Pl.‘s am. compl. 12). Therefore, it was irrelevant to the court‘s analysis that Sete, not Petrobras, made the misrepresentations that immediately preceded EIG‘s decision to invest: “Sete‘s deceptive conduct, occurring only after it grabbed the baton from Petrobras, is not the kind of ‘independent’ third-party action that breaks the causal chain between Petrobras‘[s] own misrepresentations and [EIG‘s] injury.” Id.
Petrobras timely appealed the denial of its motion under
II. Analysis
A. Standard of review and burden of proof
“The Foreign Sovereign Immunities Act ‘provides the sole basis for obtaining jurisdiction over a foreign state in the courts of this country.‘” Saudi Arabia v. Nelson, 507 U.S. 349, 355 (1993) (quoting Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 443 (1989)). “Under the Act, a foreign state is presumptively immune from the jurisdiction of United
States courts; unless a specified exception applies, a federal court lacks subject-matter jurisdiction over a claim against a foreign state.” Nelson, 507 U.S. at 355.
“Once the defendant has asserted the jurisdictional defense of immunity under the FSIA, the court‘s focus shifts to the exceptions to immunity” provided in the Act. Phx. Consulting Inc. v. Republic of Angola, 216 F.3d 36, 40 (D.C. Cir. 2000). “‘In accordance with the restrictive view of sovereign immunity reflected in the FSIA,’ the defendant bears the burden of proving that the plaintiff‘s allegations do not bring its case within a statutory exception to immunity.” Id. (quoting Transamerican S.S. Corp. v. Somali Democratic Republic, 767 F.2d 998, 1002 (D.C. Cir. 1985)). Although the plaintiff bears the ultimate burden of proving its substantive claims, the foreign-state defendant bears the burden of establishing the affirmative defense of immunity. See Kilburn v. Socialist People‘s Libyan Arab Jamahiriya, 376 F.3d 1123, 1131 (D.C. Cir. 2004); Princz v. Fed. Republic of Germany, 26 F.3d 1166, 1171 (D.C. Cir. 1994).
If an FSIA defendant contests only the legal sufficiency of the plaintiff‘s jurisdictional claims, our standard of review is akin to that applied under
B. Petrobras‘s alleged fraud caused a direct effect in the United States
Petrobras is subject to the jurisdiction of U.S. courts if it “caused a direct effect in the United States.”
A “direct” effect is one that “follows ‘as an immediate consequence of the defendant‘s . . . activity.‘” Id. at 618 (quoting Weltover, Inc. v. Republic of Argentina, 941 F.2d 145, 152 (2d Cir. 1991)). Although “jurisdiction may not be predicated on purely trivial effects in the United States,” there is no “unexpressed requirement of ‘substantiality’ or ‘foreseeability.‘” Id.
We believe EIG has made out a prima facie case for jurisdiction by alleging that Petrobras specifically targeted U.S. investors for Sete, JA25; that Petrobras intentionally concealed the ongoing fraud at Petrobras and at Sete, JA26–27; and that money invested in Sete was used to pay bribes and kickbacks, JA32–34. See Atlantica Holdings, Inc. v. Sovereign Wealth Fund Samruk-Kazyna JSC, 813 F.3d 98, 110 (2d Cir. 2016) (defendant‘s misrepresentations about investment cause direct effect in United States when defendant “contemplated investment by United States persons” and “at least some investors . . . suffered an economic loss in this country as a result of those misrepresentations.“). The burden is therefore on Petrobras to establish an affirmative defense to jurisdiction. Princz, 26 F.3d at 1171.
Petrobras raises two defenses to jurisdiction: that it did not cause EIG‘s injuries because intervening acts—third-party lenders’ decisions not to lend to Sete—“broke the chain of causation,” Appellant‘s Br. 31–35; and that Petrobras‘s alleged fraud did not cause a direct effect in the United States because EIG‘s injury occurred, again, not in the United States, its investment having been funneled through corporate subsidiaries in Luxembourg, id. at 20–31. Both arguments fail.
1. No intervening act “broke the chain of causation”
Petrobras‘s “chain of causation” argument fails for two reasons. First, EIG
We rejected a similar argument in Kilburn, 376 F.3d at 1129. The Lebanese terrorist group Hezbollah abducted Peter Kilburn, a U.S. citizen, in Beirut in 1984 and subsequently sold him to the Arab Revolutionary Cells (ARC), a terrorist group based in Libya. ARC tortured and killed Kilburn, whose brother brought suit against Hezbollah‘s and ARC‘s state sponsors, Iran and Libya, respectively. Id. at 1125. The Kilburn plaintiff invoked the “terrorism exception” to foreign-state immunity, which applies to a lawsuit against a foreign state “for personal injury or death that was caused by an act of torture, extrajudicial killing, aircraft sabotage, hostage taking,
or the provision of material support or resources [for such an act].”
Libya argued that it was not the “but-for” cause of Kilburn‘s kidnapping, torture and killing. Kilburn, 376 F.3d at 1127. In other words, Libya argued that Kilburn would have suffered the same fate regardless of Libya‘s involvement because ARC got involved only after Hezbollah had already kidnapped Kilburn. We disagreed, interpreting the terrorism exception‘s “caused by” language to impose “the base-line standard of proximate cause” and rejecting Libya‘s argument that multiple but-for causes break the chain of causation for any one of them. Id. at 1129 (“Such a case, in which application of a ‘but for’ standard to joint tortfeasors could absolve them all, is precisely the one for which courts generally regard ‘but for’ causation as inappropriate.“). Although Kilburn‘s death at the hands of ARC might not have occurred had he not been kidnapped by Hezbollah, that fact did not mean that Libya, ARC‘s state sponsor, was immune from suit for wrongful death. Id. at 1129. Similarly, Petrobras cannot oust the court of jurisdiction in a lawsuit resulting from its alleged fraud simply because Sete‘s third-party lenders might also have injured EIG by cutting off funds.
Second and crucially the lenders withdrew for the same reason that EIG‘s investment became worthless: Petrobras‘s alleged fraud plainly made Sete unsuitable for
investment. The lenders’ withdrawal and EIG‘s tanking investment are, in other words, two “effects” with the same cause. The lenders’ withdrawal was not an intervening cause in any legally significant way because that action itself was caused by the same alleged fraud that caused EIG‘s injury.
EIG‘s allegation that Petrobras committed fraud distinguishes this case from a Second Circuit case Petrobras relies on. In Virtual Countries, Inc. v. Republic of South Africa, 300 F.3d 230, 232–33 (2d Cir. 2002), South Africa issued a press release asserting its ownership of the domain name “southafrica.com.” Virtual Countries, a U.S. company, sought a declaratory judgment that it owned the domain name and an injunction preventing South Africa
Here, by contrast, EIG‘s alleged injury—being fraudulently induced to invest in Sete—occurred well before Operation Car Wash came to light, and certainly before the lenders reacted to the revelation of Petrobras‘s alleged fraud. At this preliminary stage of the litigation, EIG need not precisely measure the amount of its damages. It is enough that Petrobras‘s alleged fraud necessarily made EIG‘s investment less valuable, even if only to the extent that EIG‘s money was used to pay bribes and kickbacks rather than to pay
shipbuilders.5 The lenders’ withdrawal did not cause EIG‘s alleged damages, it simply confirmed them.
2. The path of EIG‘s losses through Luxembourg is irrelevant
Petrobras‘s remaining argument is that any effect its actions had in the United States was mediated through Luxembourg—where EIG created corporate subsidiaries through which it funneled its Sete investment—and therefore was not “direct.” Petrobras, EIG and the district court have all cast this as a debate over the locus of Petrobras‘s alleged tort, which we have previously identified as one factor in determining whether a tort causes a direct effect in the United States. See Bell Helicopter Textron, Inc. v. Islamic Republic of Iran, 734 F.3d 1175, 1184 (D.C. Cir. 2013). But the third clause of the commercial activity exception turns on the requisite site of the direct effects of the defendant‘s alleged tort, not its “locus” as a matter of tort law. It may well be—although we need not decide today—that a U.S. locus is sufficient (but not necessary) to establish jurisdiction under the FSIA. The
inverse, however, is not true: a foreign locus does not always mean that a tort causes no “direct effect” in the United States.
To our knowledge no court has held otherwise. In Atlantica, 813 F.3d at 109 n.5, the Second Circuit observed that “for FSIA purposes, we have found a direct effect (at least) at ‘the locus of the tort,‘” and noted, id. at 113 n.7, that an earlier Second Circuit case, Antares Aircraft, L.P. v. Federal Republic of Nigeria, 999 F.2d 33, 36 (2d Cir. 1993), expressly reserved the question whether a foreign tort can cause a direct effect in the United States. Petrobras repeatedly quotes the Second Circuit‘s statement in Antares Aircraft
Odhiambo v. Republic of Kenya, 764 F.3d 31, 42–43 (D.C. Cir. 2014), is also inapposite because, as a contract case, “the analogy is not precise” to a tort case like this one. In Odhiambo we rested our rejection of FSIA jurisdiction on the lack of a place-of-performance clause in the contract between the plaintiff and the sovereign defendant. We reasoned that if a “pay wherever you are” contract can support jurisdiction of a foreign state, a plaintiff could then unilaterally create jurisdiction simply by traveling to the United States. Id. at 40–41. The investment agreement between EIG and Sete does not designate a U.S. place of performance, but EIG‘s argument is—in part—that it would never have signed the investment agreement (which it did in Washington, D.C.) if Petrobras and Sete had not fraudulently induced it to do so. JA14. More to the point, EIG alleges that its United States presence was not mere
happenstance to Petrobras and Sete, but that Petrobras and Sete “specifically targeted” U.S. investors. JA25. Accepting these allegations as true, Odhiambo‘s concern over plaintiffs unilaterally creating U.S. jurisdiction is misplaced here.
For the same reason, we are untroubled by the Second Circuit‘s assertion in Antares Aircraft that “some financial loss from a foreign tort cannot, standing alone, suffice to trigger the exception,” 999 F.2d at 36, because EIG‘s financial loss does not “stand[] alone.” Rather, its financial loss is alleged to have resulted from the years-long scheme to part EIG from its money under false pretenses with the goal of enriching corrupt Brazilian executives and officials. See JA25. At least some of the misstatements and omissions in service thereof took place in the United States, where the ultimate consequences of the fraud were later felt. JA15, 17.
Neither the Second Circuit precedent nor—more on point—our own Bell Helicopter and Odhiambo nor any other case on which Petrobras relies holds that a tort‘s foreign locus, without more, means that it causes no direct effect in the United States. Assuming arguendo that Luxembourg was the locus of Petrobras‘s alleged fraud, we must nevertheless determine whether the alleged fraud “cause[d] a direct effect in the United States.” The key to Petrobras‘s theory that EIG was injured (if at all) in Luxembourg is that EIG “booked the loss” from its Sete investment in Luxembourg and only somewhere down the line was that loss felt, indirectly, in the United States. Three flaws doom Petrobras‘s argument.
First, the legal significance of corporate form in an FSIA action is not as settled as Petrobras suggests. On this point Petrobras‘s reliance on Dole Food Co. v. Patrickson, 538 U.S. 468, 474 (2003), is misplaced. To determine whether a foreign-state defendant is immune from suit, the Congress indeed
“elected to hew to ‘the general rules regarding corporate formalities,‘” Reply Br. 8 (quoting Dole Food, 538 U.S. at 476), including the principle that “the corporation and its shareholders are distinct entities.” Dole Food, 538 U.S. at 476. Thus, the Supreme Court concluded that “[a] corporation is an instrumentality of a foreign state under the FSIA only if the foreign state itself
The second flaw in Petrobras‘s focus on the Luxembourg subsidiaries is that it requires an unrecognized identity between corporate citizenship and the locus of an investment loss. In Weltover, the Supreme Court expressly rejected the argument that a plaintiff‘s foreign citizenship necessarily determines FSIA jurisdiction. 504 U.S. at 619 (FSIA jurisdiction established notwithstanding plaintiffs were “all foreign corporations with no other connections to the United States“) (citing Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 489 (1983) (FSIA “allow[s] a foreign plaintiff to sue a foreign sovereign in the courts of the United States, provided the substantive requirements of the Act are satisfied.“)). In Atlantica, 813 F.3d at 111, a case upon which Petrobras heavily relies, most of the plaintiffs were not U.S. citizens. The Second Circuit nevertheless held that FSIA jurisdiction extended to the foreign plaintiffs’ claims even though they did not show—and apparently could not show—any harm to themselves in the United States, but only to their U.S.-citizen co-plaintiffs. 813 F.3d at 112 (“[H]ad all of the Plaintiffs been foreigners, they could have successfully premised FSIA jurisdiction on the effect that [the defendant‘s] alleged misrepresentations had on non-party United States investors, provided that Plaintiffs
could adequately establish the existence of United States investors so affected.“).
The third defect in Petrobras‘s “locus” argument is that, although EIG may have “booked the loss” in Luxembourg—a questionable proposition as there is no record support that EIG Luxembourg maintains any Luxembourg accounts as it has no employees there and receives its mail at a U.S. address—presumably EIG would have booked a loss in the same amount in the United States. See Fin. Accounting Standards Board, Statement of Financial Accounting Standards No. 157: Fair Value Measurements (Sept. 2006) (requiring “mark-to-market” accounting reflecting fair market value of investment assets). Petrobras cannot avoid U.S. jurisdiction because the effects of its fraud ricocheted halfway around the globe before coming to rest in EIG‘s Washington, D.C. office. In Weltover, the Supreme Court upheld FSIA jurisdiction even though the only connection between the defendant‘s actions and the United States was that “[m]oney that was supposed to have been delivered to a New York bank for deposit was not forthcoming.” Weltover, 504 U.S. at 619. There is no basis to treat EIG‘s investment loss differently from the failure to deposit scheduled interest payments in New York bank accounts.
For the foregoing reasons, we conclude that Petrobras‘s commercial activity in Brazil caused a direct effect in the United States, including a direct effect on EIG. Accordingly, Petrobras is not immune from EIG‘s suit and the district court‘s order denying dismissal is affirmed.
So ordered.
SENTELLE, Senior Circuit Judge, dissenting: While I respect my colleagues’ careful and well-constructed opinion, I nonetheless remain unconvinced that the courts of the United States have jurisdiction over this matter under the Foreign Sovereign Immunities
As the majority correctly reasons, Petrobras, an instrumentality of the government of Brazil, “‘is presumptively immune from the jurisdiction of United States courts; unless a specified exception applies, a federal court lacks subject-matter jurisdiction over a claim against a foreign state.‘” Maj. Op. at 7-8 (quoting Saudi Arabia v. Nelson, 507 U.S. 349, 355 (1993)). The statutory exception relied upon by appellee and the majority arises from a provision of the Foreign Sovereign Immunities Act,
Were those effects direct ones in the United States? It is not apparent that they were.
As the majority notes, the EIG Funds formed EIG Sete Parent SARL as a Luxembourg corporation. The Luxembourg corporation formed EIG Sete Holdings SARL, also a Luxembourg corporation. EIG Sete Holdings invested $221 million in FIP Sondas, a Brazilian partnership, which ultimately invested the funds in Petrobras. Thus, the investments, the loss of which constituted the harmful effects of the failure of Sete, flowed from the EIG Funds to EIG Sete Parent, to EIG Sete Holdings, to FIP Sondas, and only ultimately to Sete itself. The effects in the United States of the alleged tortious conduct in Brazil, therefore, were at least three steps removed. This does not seem to comport with normal understandings of “direct,” which is defined as “stemming immediately from a source.” Direct, MERRIAM-WEBSTER DICTIONARY, http://www.Merriam-Webster.com/dictionary/direct (last visited June 19, 2018).
None of the cases cited by appellee or relied upon by the majority provide a basis for concluding that those effects were “direct” in the United States. Odhiambo v. Republic of Kenya, 764 F.3d 31 (D.C. Cir. 2014), as the majority discusses, concerned a rejection of FSIA jurisdiction on the lack of a place of performance clause in a contract. Maj. Op. at 14. While the majority is correct that this does not mandate the rejection of jurisdiction in the present case, it certainly does nothing to establish the directness of effects warranting the assumption of jurisdiction under
Similarly, as the majority again notes, the Second Circuit‘s assertion that “some financial loss from a foreign tort cannot, standing alone, suffice to trigger the exception,” Antares Aircraft, LP v. Fed. Rep. of Nigeria, 999 F.2d 33, 36 (2d Cir. 1993), may not mandate rejection of jurisdiction
facts. Nonetheless, it is certainly consistent with a conclusion that the exception does not apply in this case.
Neither the cases discussed above, nor any of the other cases relied upon by the majority, mandate a conclusion that a loss suffered by a Luxembourg entity, owned by another Luxembourg entity, in turn owned by United States entities, constitutes a direct effect in the United States. Implications of a holding to that effect seem to me to be inconsistent with Congress‘s express language in the relevant exception. Where do we cut off the chain between an effect and a direct effect to give meaning to the congressional expression? If the plaintiff in this case were not EIG but a shareholder of EIG, would that shareholder‘s loss be direct? I think not. It seems unlikely that Congress would have included as plain a word as “direct” in the creation of an exception to foreign sovereign immunity unless it had more apparent content than the majority‘s interpretation would allow.
In the end, for the reasons set forth above, I respectfully dissent.