Fran Heiser v. Islamic Republic of Iran

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 24, 2013 Decided November 19, 2013

No. 12-7101

FRAN HEISER, INDIVIDUALLY AND AS CO-ADMINISTRATOR OF

THE ESTATE OF MICHAEL HEISER, ET AL.,

APPELLANTS

v.

ISLAMIC REPUBLIC OF IRAN, ET AL.,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 1:00-cv-02329)

Dale K. Cathell argued the cause for appellants. With him

on the briefs was Richard M. Kremen.

James L. Kerr argued the cause for appellees Wells Fargo

Bank, N.A., et al. With him on the brief was Karen E. Wagner.

Benjamin M. Shultz, Attorney, U.S. Department of Justice,

argued the cause for amicus curiae United States of America.

With him on the brief were Stuart F. Delery, Principal Deputy

Assistant Attorney General, Ronald C. Machen, U.S. Attorney,

and Mark B. Stern and Sharon Swingle, Attorneys.

2

Before: BROWN, Circuit Judge, and EDWARDS and

RANDOLPH, Senior Circuit Judges.

Opinion for the court filed by Senior Circuit Judge

RANDOLPH.

RANDOLPH, Senior Circuit Judge: In 1996, an explosion

tore apart the Khobar Towers apartment complex in Dhahran,

Saudi Arabia. Nineteen American military personnel died and

hundreds of others were wounded. Investigations revealed that

the terrorist organization Hezbollah had attacked the Towers

with Iran’s assistance. The opinion in Estate of Heiser v. Islamic

Republic of Iran (Heiser I), 466 F. Supp. 2d 229, 252-54, 260-65

(D.D.C. 2006), describes Iran’s intimate involvement in

planning, supporting, and approving the attack.

The estate of Michael Heiser, one of the victims, and other

victims’ families and estates, sued Iran and several of its

agencies and instrumentalities alleging their liability for the

attacks. Plaintiffs obtained a default judgment, id. at 356, later

modified under the 2008 National Defense Authorization Act,

Estate of Heiser v. Islamic Republic of Iran (Heiser II), 659 F.

Supp. 2d 20, 22-23, 30-31 (D.D.C. 2009). The judgment now

totals approximately $591 million in punitive and compensatory

damages. Estate of Heiser v. Islamic Republic of Iran (Heiser

III), 885 F. Supp. 2d 429, 450 (D.D.C. 2012). The propriety of

that judgment is not before us.

Plaintiffs, attempting to collect on this judgment, had writs

of attachment issued to Bank of America, N.A., and Wells

Fargo, N.A., seeking any assets held by the banks in which Iran

had an interest. The banks responded with lists of accounts

having some connection to Iran, after which plaintiffs moved for

the banks to turn over the funds in these accounts. In response,

the banks conceded that some accounts were potentially subject

3

to attachment. Id. at 447 n.6. These “uncontested accounts” are

the subject of an interpleader action in the district court. Id. at

434, 449.

The remaining “contested accounts” are the subject of this

appeal. Id. at 432. The accounts contain the proceeds of

electronic funds transfers that were blocked under various

sanctions programs the Treasury Department’s Office of Foreign

Assets Control implemented. Id. at 432-33, 446. These concepts

need to be explained.

An electronic funds transfer is a series of transactions by

which one party, called the “originator,” transfers money

through the banking system to another party, called the

“beneficiary.” See U.C.C. § 4A-104(a).1 Suppose O wants to

transfer $100 to B. If O and B have an account at Bank X, then

the transaction is simple. O can instruct Bank X, which will

debit O’s account and credit B’s account with $100. But suppose

O has an account at Bank X, and B has an account at Bank Y.

Unless Banks X and Y are members of the same lending

consortium, they must involve a third “intermediary” bank with

which Banks X and Y both have accounts. The transaction

would proceed as follows: (1) O instructs Bank X to pay B; (2)

Bank X debits O’s account and forwards instructions to the

intermediary bank; (3) the intermediary bank debits Bank X’s

account, credits Bank Y’s account, and forwards instructions to

Bank Y; and (4) Bank Y credits B’s account. The entire process

1

The following explanation is drawn from Shipping Corp. of

India, Ltd. v. Jaldhi Overseas Pte Ltd., 585 F.3d 58, 60 n.1 (2d Cir.

2009) and 3 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM

COMMERCIAL CODE § 22-1 (5th ed. 2008). See also Heiser III, 885 F.

Supp. 2d at 446-47; 7 LARY LAWRENCE, ANDERSON ON THE UNIFORM

COMMERCIAL CODE §§ 4A-101:1, 4A-101:6, 4A-103:4, 4A-104:4 to

104:11 (rev. ed. 2007).

4

occurs rapidly through a sequence of electronic debits and

credits.

In this case, electronic funds transfers were never completed

because of blocking regulations.2 The intermediary

banks—affiliated with either Wells Fargo or Bank of

America—electronically screened each funds transfer they

received. The screening found references to one of several

designated Iranian banks. Because of those references, the banks

froze the transfers and deposited the proceeds in separate

accounts. The money never reached the beneficiaries or their

banks, but instead became the subject of litigation.

The blocking regulations cast a wide net. The regulations

froze and prohibited the “transfer[]” of “property and interests

in property” of designated entities. See 31 C.F.R. §§ 544.201(a),

594.201(a). These terms were defined broadly. See id.

§§ 544.308, 544.309, 594.309, 594.312. Assets could be blocked

even though Iran had no “traditional legal interests” in them.

Holy Land Found. for Relief & Dev. v. Ashcroft, 333 F.3d 156,

2

Blocking regulations are promulgated under the International

Emergency Economic Powers Act, Pub. L. No. 95–223, tit. II, 91 Stat.

1625, 1625-26 (1977) (codified at 50 U.S.C. §§ 1701-1706), which

gives the President “broad powers” to impose economic sanctions on

actors who threaten American interests. Consarc Corp. v. U.S.

Treasury Dep’t, 71 F.3d 909, 914 (D.C. Cir. 1995). Although Iran-

specific blocking regulations exist, see 31 C.F.R. pts. 535 (Iranian

Assets Control Regulations), 560 (Iranian Transactions and Sanctions

Regulations), 561 (Iranian Financial Sanctions Regulations), 562

(Iranian Human Rights Abuses Sanctions Regulations), the transfers

in this case were blocked under two different programs: Weapons of

Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. pt.

544; see Exec. Order No. 13,382, 70 Fed. Reg. 38,567 (June 28,

2005), and Global Terrorism Sanctions Regulations, 31 C.F.R. pt. 594;

see Exec. Order No. 13,224, 66 Fed. Reg. 49,079 (Sept. 23, 2001).

5

162-63 (D.C. Cir. 2003) (internal quotation marks omitted).

Blocking was not based on legal ownership.

The breadth of the blocking regulations is evident here.

Iranian entities were not the originators of the funds transfers.3

Nor were they the ultimate beneficiaries. The transfers were

blocked because the beneficiaries’ banks were Iranian. They

were blocked, in other words, because Iranian banks would have

had a contingent future possessory interest in the funds.

These are the funds that plaintiffs seek in satisfaction of

their judgment against Iran. Plaintiffs argue that the Iranian

banks’ contingent possessory interests are sufficient for them to

attach the contested accounts under two statutes. The first, 28

U.S.C. § 1610(g), “subject[s] to attachment” “the property of a

foreign state . . . and the property of an agency or

instrumentality of such a state” against which a plaintiff holds

a judgment under 28 U.S.C. § 1605A. The second, § 201(a) of

the Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297,

116 Stat. 2322, 2337 (codified at 28 U.S.C. § 1610 Note

“Satisfaction of Judgments from Blocked Assets of Terrorists,

Terrorist Organizations, and State Sponsors of Terrorism”),

“subject[s] to execution or attachment” “the blocked assets of

[a] terrorist party (including the blocked assets of any agency or

3

One of the uncontested accounts holds the proceeds of a funds

transfer for which an Iranian entity was an originator’s bank, and

another holds proceeds of a transfer with which an Iranian entity had

an unknown relationship. The question whether a judgment creditor

can attach assets that bear those relationships to Iran is not before the

court.

6

instrumentality of that terrorist party)” against which a plaintiff

holds a judgment under 28 U.S.C. § 1605(a)(7).4

The United States submitted a statement of interest to the

district court, and has filed a brief amicus curiae in this appeal.

The government took “no position” on the question whether Iran

owns the contested accounts. United States Amicus Br. at 1. It

addressed only the proper construction of § 201 and § 1610(g).

The government argued that the statutes “do not . . . permit a

plaintiff to satisfy a judgment against a terrorist party by

attaching property that the terrorist party does not own.” United

States Amicus Br. at 2. The government’s interpretation of § 201

and § 1610(g) is the same as the banks’.

The district court held that the contested accounts were not

attachable under either statute. It first held that the word “of” in

§ 201 and § 1610(g) denotes ownership and that Iran must

therefore own any accounts plaintiffs may seek to attach. Heiser

III, 885 F. Supp. 2d at 437-43. It then determined that ownership

of the contested accounts should be governed by a federal rule

of decision because the Foreign Sovereign Immunities Act,

which includes both § 201 and § 1610(g), preempts state law. Id.

at 443-45. The court adopted Uniform Commercial Code Article

4A as a federal rule of decision. Id. at 445-47. Applying Article

4A principles, the district court found that Iran did not own the

4

The National Defense Authorization Act of 2008 repealed 28

U.S.C. § 1605(a)(7) and replaced it with 28 U.S.C. § 1605A. Heiser

II, 659 F. Supp. 2d at 23. Plaintiffs’ original judgment was awarded

under the former provision. Heiser I, 466 F. Supp. 2d at 248, 265-66,

356-59. The modified judgment, including punitive damages, was

awarded under the latter. Heiser II, 659 F. Supp. 2d at 23-24.

7

contested accounts. The court therefore denied plaintiffs’ motion

for a turnover of the funds. Id. at 447-49.5

The parties agree that most of the requirements of § 201 and

§ 1610(g) are satisfied. Iran is obviously a “foreign state.”

Section 201 defines a “terrorist party” as “a foreign state

designated as a state sponsor of terrorism,” 28 U.S.C. § 1610

Note (d)(4), and Iran has been so designated, Valore v. Islamic

Republic of Iran, 700 F. Supp. 2d 52, 67-68 (D.D.C. 2010). The

funds are also property and blocked assets. Heiser III, 885 F.

Supp. 2d at 433, 437, 442. As discussed above, plaintiffs hold a

judgment under 28 U.S.C. § 1605(a)(7), which was modified

under 28 U.S.C. § 1605A. See supra note 4.

Whether plaintiffs can attach the contested accounts thus

depends on whether those accounts are the “property” or

“blocked assets” of Iran. Plaintiffs ask us to treat the word “of”

as encompassing any Iranian relationship with the contested

accounts. Although the word “of” may signify ownership,

plaintiffs claim that an ownership definition is inappropriate

here. Instead, they say the word “of” should draw its meaning

from the surrounding language. In § 201 Congress used “of” to

modify “blocked assets,” and assets may be blocked on the basis

of Iranian interests far less significant than ownership. This

5

The district court’s holding that § 201 and § 1610(g) require

Iran to own the contested accounts accords with Calderon-Cardona

v. JPMorgan Chase Bank, N.A., 867 F. Supp. 2d 389, 403-07

(S.D.N.Y. 2011). Three other opinions from the same district have

disagreed and held that § 201 does not require an ownership interest

for attachment. Hausler v. JPMorgan Chase Bank, N.A., 845 F. Supp.

2d 553, 562-68 (S.D.N.Y. 2012); Levin v. Bank of N.Y., No. 09-CV-

5900, 2011 WL 812032, at *13-19 (S.D.N.Y. Mar. 4, 2011); Hausler

v. JP Morgan Chase Bank, N.A., 740 F. Supp. 2d 525, 533-39

(S.D.N.Y. 2010).

8

language choice, according to plaintiffs, conveys Congress’s

intent to compensate victims of terrorism with blocked assets.

Thus, plaintiffs conclude, the contested accounts may be

attached for the same reason they were blocked: because an

Iranian bank would have served as a bank to the ultimate

beneficiary.

The banks and the United States both reject this

interpretation, citing Supreme Court cases defining “of” in

various statutes as requiring ownership. See Bd. of Trs. of the

Leland Stanford Junior Univ. v. Roche Molecular Sys., Inc., 131

S. Ct. 2188, 2195-96 (2011); Poe v. Seaborn, 282 U.S. 101, 109

(1930). The district court relied, in part, on these and other

Supreme Court decisions. Heiser III, 885 F. Supp. 2d at 438.

While the decisions establish that “of” denotes ownership in

some statutes, the word may carry a different meaning in others.

See, e.g., Prot. & Advocacy for Persons with Disabilities v.

Mental Health & Addiction Servs., 448 F.3d 119, 125-26 (2d

Cir. 2006). None of the Supreme Court decisions the parties or

the district court cited purport to define “of” conclusively and

for all purposes. Its meaning depends on context.

With respect to § 201 and § 1610(g), plaintiffs’

interpretation conflicts with the established principle that “a

judgment creditor cannot acquire more property rights in a

property than those already held by the judgment debtor.” 50

C.J.S. Judgments § 787 (2013); see United States v. Winnett, 165

F.2d 149, 151 (9th Cir. 1947); Zink v. Black Star Line, Inc., 18

F.2d 156, 157 (D.C. Cir. 1927); Lewis v. Smith, 15 F. Cas. 498,

498-99 (C.C.D.C. 1825) (No. 8,332). If a debtor merely holds

property as an intermediary for a third party, but does not own

the property, then a creditor cannot attach it. See Carpenter v.

Nat’l City Bank of Chi., 48 App. D.C. 133, 134-35, 136 (D.C.

Cir. 1918). These principles carry significant weight because

“statutes should be interpreted consistently with the common

9

law.” Manoharan v. Rajapaksa, 711 F.3d 178, 179 (D.C. Cir.

2013) (per curiam) (quoting Samantar v. Yousuf, 560 U.S. 305,

130 S. Ct. 2278, 2289 (2010)). Congress can “abrogate” the

traditional common-law principles governing execution of

judgments, but to do so it must “speak directly to the question

addressed by the common law.” Id. at 179-80 (quoting United

States v. Texas, 507 U.S. 529, 534 (1993) (internal quotation

marks omitted)).

Congress has not done so here. The statutory text is silent

on this issue. Nothing in the legislative histories of § 201 or

§ 1610(g) suggests that Congress intended judgment creditors of

foreign states to be able to attach property those states do not

own. Indeed, a House Report addressing § 1610(g) states that

the section was intended to let debtors attach assets in which

foreign states have “beneficial ownership.” H.R. REP. NO. 110-

477, at 1001 (2007) (Conf. Rep.). The House Report on the

Terrorism Risk Insurance Act does state that § 201’s purpose “is

to deal comprehensively with the problem of enforcement of

judgments rendered on behalf of victims of terrorism . . . by

enabling them to satisfy such judgments through the attachment

of blocked assets of terrorist parties.” H.R. REP. NO. 107-779, at

27 (2002) (Conf. Rep.). But this merely repeats the language of

the statute. It does not show that Congress’s “comprehensive[]”

solution was to abrogate the common law.

Plaintiffs cite the floor debate over § 201 to argue that

Congress wanted to compensate terrorism victims with blocked

assets. But plaintiffs misinterpret the debate. Congress had a

narrower concern. Even before the Terrorism Risk Insurance

Act was passed, 28 U.S.C. § 1610(f)(1) purportedly allowed

creditors holding judgments under § 1605(a)(7) (and, later,

under § 1605A) to attach blocked property. But the President

was authorized to “waive any provision” of § 1610(f)(1) “in the

interest of national security.” 28 U.S.C. § 1610(f)(3). The

10

President waived § 1610(f)(1) in almost all cases after finding

that attachment of blocked property would “impede the ability

of the President to conduct foreign policy” and “impede the

effectiveness of . . . prohibitions and regulations upon financial

transactions.” Determination to Waive Requirements Relating

to Blocked Property of Terrorist-List States, 63 Fed. Reg.

59,201 (Oct. 21, 1998).6 Congress responded to this perceived

“flaunting [flouting of?] the law,” 148 CONG. REC. 23,121 (Nov.

19, 2002) (statement of Sen. Harkin), by passing § 201, which

“builds upon and extends the principles in section 1610(f)(1) . . .

and eliminates the effects of any Presidential waiver issued prior

to the date of enactment.” H.R. REP. NO. 107-779, at 27; see also

Ministry of Def. v. Elahi, 556 U.S. 366, 386 (2009). The floor

debate clearly demonstrates that at least some members of

Congress wanted to use Iran’s assets to pay its victims, whether

or not the executive agreed. But that purpose is a far cry from

paying Iran’s victims with assets Iran does not own.

Adopting plaintiffs’ interpretation of § 201 and § 1610(g)

risks punishing innocent third parties. Plaintiffs’ position is that

these sections allow a creditor to satisfy a judgment with

property the debtor does not own. But if the debtor does not own

6

Section 1610(f) was passed as part of the Omnibus Consolidated

and Emergency Supplemental Appropriations Act, 1999, Pub. L. No.

105-277, Treasury Department Appropriations Act, tit. I, § 117(d),

112 Stat. 2681-480, 2681-491 to -492. The original language allowing

the President to waive the “requirements of this section,” was codified

as a note to 28 U.S.C. § 1610(g). See id. That language was repealed

by the Victims of Trafficking and Violence Protection Act of 2000,

Pub. L. No. 106-386, div. C, § 2002, 114 Stat. 1464, 1543, which

added the current language allowing the President to waive “any

provision of paragraph (1).” The President then executed a

superseding waiver pursuant to this new language. Determination to

Waive Attachment Provisions Relating to Blocked Property of

Terrorist-List States, 65 Fed. Reg. 66,483 (Oct. 28, 2000).

11

that property, then someone else must. And that someone could,

and very well might, be an innocent person who then unjustly

bears the costs of the debtor’s wrong. This court has construed

“strictly against the garnisher” a statute “in derogation of the

common law,” because it risked penalizing “a garnishee who

owed the principal defendant nothing.” Austin v. Smith, 312 F.2d

337, 340-43 (D.C. Cir. 1962); see also Rieffer v. Home Indem.

Co., 61 A.2d 26, 27 (D.C. 1948) (“The weight of authority

clearly favors a strict construction of attachment statutes.”),

modified on other grounds, 62 A.2d 371 (D.C. 1948). And the

need to protect innocent parties is particularly acute with

blocked assets. In a statement of interest submitted in a different

case, the government explained that the Sudan Sanctions

Regulations—which have similar breadth to the sanctions in this

case, see 31 C.F.R. §§ 538.201, 538.301, 538.310,

538.313—could block “personal remittances by persons not

subject to sanctions” merely because the remittances were sent

through a Sudan-owned bank. Statement of Interest of the

United States of America at 6-7, Rux v. ABN Amro Bank N.V.,

No. 08-CV-6588 (S.D.N.Y. Apr. 14, 2009), ECF No. 132. These

personal remittances could include tuition payments for health

care training or money paid by a Sudanese embassy employee

to purchase a personal vehicle. Id. Exhibit 1 at ¶¶ 14-15 (Decl.

of John E. Smith).

The record does not disclose whether the originators or

beneficiaries in this case are entirely innocent. But they may be.

And that prospect would be contrary to Congress’s intent. If

potentially innocent parties pay plaintiffs’ judgment, then the

punitive purpose of these provisions is not served. Quite the

opposite. To the extent innocent parties pay some part of a

terrorist state’s judgment debt, the terrorist state’s liability is

ultimately reduced. Congress could not have intended such a

result.

12

Plaintiffs claim that even if Iranian ownership is required,

they should still prevail because Iran actually owns the contested

accounts. They argue that ownership interests include any

interest in the property bundle, including the Iranian banks’

contingent future possessory interests in the accounts, an

interpretation that harmonizes with the broad definitions of

“property” and “interests in property” contained in the blocking

regulations. Plaintiffs urge us not to adopt U.C.C. Article 4A as

a rule of decision, reasoning that federal law preempts this

Uniform Commercial Code provision.

We agree with plaintiffs that Article 4A does not apply of

its own force. But it is not correct to treat this as an issue of

preemption. Federal law, specifically § 201 and § 1610(g), is

controlling. The question is the content of this federal law.

Congress has not provided a rule for determining ownership

under § 201 or § 1610(g). Nor has Congress directed the federal

courts to adopt state ownership rules under this statutory

scheme. See RICHARD H. FALLON, JR. ET AL., HART &

WECHSLER’S THE FEDERAL COURTS AND THE FEDERAL SYSTEM

632-33 (6th ed. 2009); Paul J. Mishkin, The Variousness of

“Federal Law”: Competence and Discretion in the Choice of

National and State Rules for Decision, 105 U. PA. L. REV. 797,

797 n.1, 811 (1957). Our task is thus the “normal judicial filling

of statutory interstices.” Henry J. Friendly, In Praise of

Erie—and of the New Federal Common Law, 39 N.Y.U. L. REV.

383, 421 (1964). We must fashion a “rule of decision” for

applying § 201’s and § 1610(g)’s ownership requirement, and

that rule, though federal, may sometimes “follow state law.” Id.

at 410; see Clearfield Trust Co. v. United States, 318 U.S. 363,

366-68 (1943).

Article 4A provides an appropriate rule of decision. Article

4A is a particularly convenient and appropriate measure of

13

ownership because it has been adopted by all fifty states and the

District of Columbia, and addresses ownership of electronic

funds transfers, the issue presented in this case. See Heiser III,

885 F. Supp. 2d at 447. The Uniform Commercial Code is often

used as the basis of federal common-law rules. See Caleb

Nelson, The Persistence of General Law, 106 COLUM. L. REV.

503, 510-11 & n.33 (2006). To be clear, we do not hold that the

District’s or any state’s version of Article 4A applies of its own

force. Rather, we hold that Article 4A is a proper federal rule of

decision for applying the ownership requirements of § 201 and

§ 1610(g).

Applying the principles of Article 4A, we agree with the

district court that Iran does not own the contested accounts.

Heiser III, 885 F. Supp. 2d at 447-49. Iran was not the

beneficiary or originator, but the owner of the beneficiary’s bank

for each funds transfer, and “[l]egal title does not pass to the

beneficiary’s bank until it accepts the payment order from the

intermediary bank.” Id. at 448; see Shipping Corp. of India Ltd.

v. Jaldhi Overseas Pte Ltd., 585 F.3d 58, 71 (2d Cir. 2009);

Regions Bank v. Provident Bank, Inc., 345 F.3d 1267, 1277

(11th Cir. 2003). The Iranian beneficiary banks never received

a payment order because the funds transfers were blocked at the

intermediary banks, and they never held legal title to the money

in the contested accounts. Heiser III, 885 F. Supp. 2d at 448.

Article 4A’s subrogation provisions further support this view. If

the intermediary bank is prohibited from completing a transfer,

then the originator is subrogated to its bank’s right to a refund.

U.C.C. § 4A-402(d)-(e). As the district court explained, this

provision means that claims on an interrupted funds transfer

ultimately belong to the originator, not the beneficiary or its

bank. Heiser III, 885 F. Supp. 2d at 448.

14

Because plaintiffs could not attach the contested accounts

under either § 201 or § 1610(g) without an Iranian ownership

interest in the accounts, and because Iran lacked an ownership

interest in the accounts, the order of the district court is

Affirmed.