This story was originally published by New York Law Journal, an American Lawyer affiliate.

Survivors of former Philippine dictator Ferdinand Marcos’ “reign of terror” and heirs of people “horribly brutalized” cannot reach the $42 million in assets that the tyrant shifted to a New York investment account–at least not yet, New York’s highest court ruled Tuesday.

In a unanimous opinion, the New York Court of Appeals said that in the interests of sovereign immunity and international comity, the matter cannot continue without the Republic of the Philippines, as a necessary but so far unwilling party.

“The Republic’s declaration of sovereign immunity in this case is entitled to recognition because it has a significant interest in allowing its courts to adjudicate the dispute over property that may have been stolen from its public treasury and transferred to New York through no fault of the Republic,” Judge Victoria Graffeo wrote for the court.

The case, Swezey v. Merrill Lynch, is rooted in a federal class action against Marcos, who suspended human rights and subjected his citizenry to 14 years of warrantless arrests, torture and summary executions before being deposed in 1986 and fleeing to Hawaii.

After Marcos fled, the Philippine government set up the Presidential Commission on Good Government to retrieve national assets he and his administration had stolen. Additionally, some 10,000 victims and their survivors sued Marcos’ estate in federal court in Hawaii and obtained a $2 billion judgment.

That resulted in a situation in which the republic, the class and the Presidential Commission on Good Government were seeking essentially the same assets, including funds that Marcos had transferred to a Panamanian company he set up, Arelma Inc., for deposit with the New York office of Merrill Lynch, Pierce, Fenner & Smith.

Eventually, the Arelma assets were awarded to the class, but the U.S. Supreme Court reversed the district court as well as the U.S. Court of Appeals for the Ninth Circuit in 2008. The Arelma assets, which had been placed in escrow by the Philippine National Bank, were then returned to Merrill Lynch in 2009.

Around that time, Osqugama Swezey, a member of the class now living in New York, brought a turnover proceeding against Merrill Lynch in state Supreme Court to have the funds transferred to a settlement account administered by the federal court in Hawaii.

The Philippine National Bank and Arelma requested dismissal of the action under New York’s joinder statute, because two key parties–the Republic of the Philippines, which has a competing claim on the funds, and the Presidential Commission on Good Government, which is tasked with recovering the funds for the people of the Philippines–refused to come into court.

Manhattan Supreme Court Justice Charles Ramos concluded in November 2009 that neither the republic nor the commission could be forced to participate in the New York case, but allowed the case to proceed. The Appellate Division, First Department, reversed 4-1 last June, certifying to the Court of Appeals the question of whether it had properly concluded that the assertion of sovereign immunity required dismissal.

Yesterday, the Court of Appeals agreed with the First Department majority and said the case cannot proceed without the republic as a party, noting that the republic has not consented to the jurisdiction of a New York court.

Graffeo said “allowing the federal court judgment against the estate of Marcos to be executed on property that may rightfully belong to the citizens of the Philippines could irreparably undermine the Republic’s claim” to the assets.

“The only ruling by a New York court that can simultaneously safeguard the interests of the [class] and the Republic is one that prevents either from accessing the…assets so that neither claim to the property is irreparably prejudiced,” Graffeo wrote. “The dismissal of the turnover action would accomplish that result at this point in time.”

Graffeo said that final disposition of the assets “will have to await the Republic’s voluntary submission to our jurisdiction,” but “for now, New York courts should not intercede in a matter that remains within the province of Philippine self-governance and national sovereignty.”

The court said that in the unlikely event that the republic does not seek to enforce a decision of its highest court that the assets belong to the people of the Philippines, the class “could again ask a New York court to reconsider enforcement of its judgment.”

Robert Swift of Kohn, Swift & Graf in Philadelphia, lead counsel for the class, said the ruling leaves the assets in limbo since the republic cannot obtain the funds without going through the New York courts and the class cannot go forward with the litigation. Swift said that under a stipulation with Merrill Lynch, the funds are now in the possession of the New York City commissioner of finance.

“This is property that has been in the United States since 1972 and New York courts have not only the right but the duty to adjudicate title,” Swift said. “From the standpoint of New York jurisprudence this is a step back because it holds promise for autocratic and corrupt regimes to stymie litigation over property that is in New York.”

Daniel McLaughlin of Sidley Austin, counsel for Merrill Lynch, declined comment. Charles Rothfeld of Mayer Brown in Washington represents Arelma and the Philippine National Bank as intervenors.