On June 29, dual trial verdicts in the Southern District of New York paved the way for the government to seize 650 Fifth Avenue, a 36-story building in Manhattan valued at up to $1 billion (“the Property”). The defendants, representing New York entities that trace their roots to Iran, were convicted of violating U.S. sanctions and money laundering. With this decision, the government can lay claim to the largest terrorism-related civil forfeiture in U.S. history and, as promised, provide the sale’s proceeds to terror victims who had previously won $5 billion in judgments against Iran for terror-related activity.
The Defendants
The Alavi Foundation was founded in 1973 by the Shah of Iran, Mohammad Reza Pahlavi, as a New York not‐for‐profit corporation that would support and assist the promotion of the arts and sciences, together with other charitable endeavors. In 1974, the organization acquired space at the Property and in 1975, at the direction of the Shah, Bank Melli—Iran’s first national bank—loaned Alavi $42 million to construct a 36‐story office tower on the Property. Bank Melli would become the holder of two related mortgages.
Following the 1979 Revolution, Iran’s new Supreme Leader, Ayatollah Khomeini, ordered the formation of an entity to manage property expropriated by the revolutionary government, which included the Property. Upon a series of subsequent entity formations, ostensibly for tax-related purposes, the eponymous 650 Fifth Ave. Company (“the Company”) became the owner of the Property. Owners of the Company were Alavi, which held a 60% stake, and Assa Corporation (“Assa”), which held a 40% stake. As a matter of course, rental income derived from the management of the Property was transferred to Bank Melli via the Company.
Applicable Law
(i) The International Emergency Economic Powers Act
In 1995, pursuant to the International Emergency Economic Powers Act (IEEPA), President Clinton issued a series of Executive Orders that, inter alia, formally declared the Government of Iran to be a threat to national security and imposed sweeping financial sanctions. The Office of Foreign Assets Control (“OFAC”), pursuant to its authority to promulgate rules and regulations to implement these sanctions, determined that Bank Melli was owned or controlled by the Government of Iran, thus subjecting the bank to, inter alia, limitations on the receipt of services from U.S. financial institutions. OFAC subsequently promulgated a series of Iranian Transactions Regulations (“ITRs”) which, generally speaking, prohibit U.S. entities from conducting business with or providing services to the country, defined in the ITRs as “[t]he state and the Government of Iran, as well as any political subdivision, agency, or instrumentality thereof,” “[a]ny person owned or controlled, directly or indirectly, by the foregoing,” and “[a]ny person . . . acting or purporting to act, directly or indirectly, for or on behalf of the foregoing.” Under the IEEPA, property that “constitutes or is derived from proceeds traceable to” violations of executive orders and ITRs promulgated pursuant to the IEEPA is subject to forfeiture by the U.S. government. See 18 U.S.C. §§ 981(a)(1)(C), 1956(c)(7)(D); 50 U.S.C. § 1705.
(ii) The Foreign Sovereign Immunities Act and the Terrorism Risk Insurance Act
The Foreign Sovereign Immunities Act (“FSIA”), enacted in 1976, provides foreign states with immunity from suits. In the same vein, foreign government property generally is immune from attachment and execution in U.S. courts. The FSIA has exceptions, however, for states labeled by the U.S. State Department as state-sponsors of terrorism. In particular, § 1610(g) provides that
the property of a foreign state against which a judgment is entered under [the state sponsor of terrorism exception to immunity from suit], and the property of an agency or instrumentality of such a state, including property that is a separate juridical entity . . . is subject to attachment.
Historically such claims did not extend beyond state-owned property—the U.S. Supreme Court held in 1983 that a sovereign’s “instrumentalities” were presumptively not liable for the debts of their sovereigns. However, in an effort to assist plaintiffs harmed by terrorist activities enforce judgments against Iran, Congress enacted the Terrorism Risk Insurance Act (“TRIA”), which provides a basis, in tandem with § 1610 of the FSIA, for attachment of blocked assets of any agency or instrumentality of a terrorist party for the satisfaction of compensatory damages for which the terrorist party has been held liable.
Procedural History
In December 2008, the government filed a civil forfeiture complaint against the forty-percent interest held by Assa in the Company. Here, the government alleged that Assa served as a front for the Iranian government and a vehicle for sanctions avoidance and thus its interest in the Company was forfeitable under the IEEPA. Various plaintiff groups soon after began to file actions against Assa, Alavi, and the Company, seeking attachment and turnover of, inter alia, the Property, in order to satisfy judgments obtained against Iran under the FSIA. In November 2009, the government filed an amended complaint that added Alavi and sought to forfeit all interest in the Company. The government’s civil forfeiture action and the private plaintiffs’ attachment action were consolidated for pre-trial motions, though ultimately the actions were tried separately.
In 2013, Judge Katherine B. Forrest granted summary judgment in favor of the government, finding that no question of fact existed as to whether the Company’s primary owners acted in violation of applicable laws.
The Second Circuit reversed. Writing for the panel, Judge Wesley identified several material issues of fact that foreclosed ruling as a matter of law with respect to whether Alavi and Assa acted with the requisite knowledge. In a related appeal, the court concluded that Alavi and Assa were neither foreign sovereigns nor agencies or instrumentalities thereof under § 1603(b)(3) of the FSIA. In regard to the TRIA, Judge Wesley similarly rejected the district court’s finding for the same reasons as decided in the court’s FSIA analysis, but did not make a ruling as to whether the entities were Iran’s agencies or instrumentalities under the TRIA. In this regard, the definition of “agency or instrumentality” in the TRIA could not be determined by the FSIA’s definition of that same phrase, despite the fact that the TRIA is codified within the FSIA. The court reasoned that the TRIA’s definition was broader because, while the FSIA covers only agencies and instrumentalities of foreign states, the TRIA reaches the agencies and instrumentalities of “terrorist[s]” and “terrorist organization[s].” Upon a finding that Iran did control the entities, the Second Circuit returned the matter to the district court to hear argument and collect facts as to whether the entities possessed the requisite knowledge.
On remand to the district court, Judge Forrest oversaw the civil forfeiture trial in tandem with plaintiffs’ turnover action. While there were at times significant overlap between the trials, e.g., in the presentation of evidence, the distinctions bear some discussion.
In regard to the forfeiture proceeding, the matter was tried by a jury and was limited to whether the defendants committed a forfeitable offense under IEEPA or the federal money-laundering statutes. By contrast, the private turnover action proceeded as a bench trial, wherein the plaintiffs were required to show, inter alia, that defendants were an “agency or instrumentality” of the Government of Iran as required under the FSIA. Here, despite the Second Circuit’s ruling that the defendants were not agents or instrumentalities of Iran as defined under §§ 1610(a)(7) and 1610(g), the district court determined that the Second Circuit’s vacatur “left untouched” plaintiffs’ FSIA claims pursuant to § 1610(b)(3), as they had not moved for summary judgment specifically under that section. The court also concluded that the plaintiffs satisfied their claims under the TRIA.
Impact
As part of a settlement agreement between the government and the plaintiffs, the government plans to sell the Property and pass all forfeiture proceeds to the plaintiffs. In broader terms, the verdicts against the Company and its owners represent a monumental effort to attach property held by entities deemed to be an agent or instrument of a terrorist party, despite the fact that the entities were absent from any judgment in plaintiffs’ favor. Looking ahead, the court and jury’s findings may serve to encourage subsequent attachment proceedings against other alleged agencies and/or instrumentalities of state-sponsored terror.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.