(Sept. 14, 2020) The U.S. Court of Appeals for the Second Circuit recently reversed a lower court’s decision to allow an amended complaint in a derivative lawsuit (one allowing shareholders to sue the managers of their company) brought by plaintiff shareholders of Lebanese Canadian Bank (LCB) to support a cause of action (giving a party the right to bring a lawsuit) under the Alien Tort Act, 28 USC § 1350. (Nahl v. Jaoude, et al., No. 19-1467 (2d Cir. July 30, 2020 (Case).) Defendants Jaoude, Hamdoun, and Safa filed for interlocutory review (an appeal allowing for a review of a specific ruling without halting the rest of the case from proceeding) of the amended complaint, claiming that financing terrorism was not the cause of the harm to plaintiffs and did not give rise to a claim under the act, commonly referred to as the Alien Tort Statute (ATS).
Background to the Case
The LCB was liquidated in 2011 after the United States designated the bank as a money-laundering concern, specifically benefiting Hezbollah, itself designated as a terrorist organization by the United States in 1997. From 2007 to 2011, the defendants were engaged in a money-laundering operation involving the purchase of vehicles in West Africa using funds from narcotic sales throughout Europe and Africa. (Case at 5.) Hezbollah deposited at least $200 million of the money-laundered funds per year, using the cash to fund operations targeting civilians during the Syrian civil war beginning in 2011. (Case at 6.) Upon liquidation of the LCB, the U.S. government seized $102 million via civil forfeiture. Plaintiffs brought their derivative suit in both Lebanese courts and U.S. federal court. The Lebanese court found for the defendants in 2016, but that decision is currently under appellate review in Lebanese courts. (Case at 7.)
The plaintiffs initially brought a claim in the Southern District of New York in 2018 alleging that the money laundering aided and abetted violation of international law through terror attacks on civilians by Hezbollah. The court granted the defendants’ motion to dismiss on grounds that the plaintiffs had not been victims of actions by Hezbollah, and no tort liability existed between the parties. (Case at 8.) The court allowed the plaintiffs to amend their complaint, suggesting that they allege the defendants violated international law by laundering money in support of terrorist acts by Hezbollah. (Case at 9.) The defendants then asked the court to certify the amended complaint for interlocutory review as a question of law.
Alien Tort Statute—Cause of Action
The ATS—U.S. law since 1789—allows foreign nationals to sue for damages in United States federal courts when a tort is committed in violation of international law. (28 USC § 1350.) International law is, in short, customary, existing on the basis of widespread practices and beliefs of individual states. (See Flores v. S. Peru Copper Corp., 343 F.3d 140, 154 (2d Cir. 2003).) A norm is considered actionable under international law when it touches upon states and their interactions with each other, not with matters that states generally deal with domestically. (See Sosa v. Alvarez-Machain 542 U.S. 692, 732–33 (2004).)
Appellate Decision—Interlocutory Review
The appellate court stated that there were two different alleged harms in the second amended complaint: a claim that the defendants violated the law of nations for funding terrorism and violated corporate law through a breach of fiduciary duty. (Case at 20–21.) The court found that any damages to the plaintiffs would be due to the breach of fiduciary duty, as the plaintiffs were not victims of any terrorist activity carried out as a result of the money laundering. (Case at 21.) In reaching that conclusion, the court first explained how an action may arise under the ATS and the reasons a claim may not be brought, even if the claim meets the initial threshold set forth in Sosa making a claim actionable under international law.
The court found that even if a norm satisfies the tests in Flores and Sosa, the requirement of Sosa addressing prudential concerns about allowing an action to move forward must be closely analyzed. (Case at 12.) Specifically, the court explained that the judiciary should be cautious in certifying new actions under the ATS due to foreign policy concerns and the practical consequences of allowing such litigation in federal courts. (Case at 12.) The court further explained that, while care must be taken, it is not impossible to certify an action under the ATS. (Case at 13.)
Significant to the analysis by the appellate court was the framework of the ATS. The ATS does not create a new cause of action, but instead confers jurisdiction over an action. The appellate court did not make conclusions on whether the financing of terrorism meets the threshold of an actionable offense under the ATS or international law; instead, it focused its decision on the remedy sought by the plaintiff—compensation for a financial injury. (Case at 16.) Specifically, the court stated that the damages to the plaintiffs were based on the mismanagement by LCB managers, giving rise to the forfeiture of millions of dollars. (Case at 18–19.) The court further explained that the same financial harm would have occurred for any unlawful activity that resulted in penalties or loss of value, not only from financing terrorism. (Case at 19.)
In conclusion, the appellate court held that the amended complaint by the shareholders would be considered futile. Without answering whether financing terrorism gives rise to jurisdiction under the ATS, the alleged harm suffered by the plaintiffs was not within the scope of that potentially actionable norm. (Case at 24.) The court further held that the financial harm experienced by the plaintiffs was one of a breach of fiduciary duty, and the ATS does not give rise to jurisdiction over corporate actions, which would be considered a domestic rather than an international concern. (Case at 24.)