A federal appeals panel has found that it cannot enforce a $6.8 million criminal judgment in favor of the Brazilian government in a Brazilian court because the so-called penal law rule prevents it from enforcing other nations’ criminal laws.
The unanimous panel of the U.S. Court of Appeals for the Second Circuit ruled Monday in United States v. Federative Republic of Brazil, 12-4601-cv, that Brazil can seek to recover the money under 28 U.S.C. §2467, which allows a foreign judgment creditor to ask the U.S. Attorney General to enforce it on its behalf under certain circumstances.
Judge Reena Raggi (See Profile) wrote the opinion, joined by Judge Christopher Droney (See Profile) and Southern District Judge John Keenan (See Profile), sitting by designation. It reversed an October 2012 order by Southern District Judge Thomas Griesa (See Profile), who awarded Brazil summary judgment.
The complex underlying dispute stretches back to 1999, when U.S. federal agents seized $6.8 million from a U.S. bank account in the name of a British Virgin Islands-based company called Kesten Development Corp., which investigators believed to be a drug money laundering operation. This account was known as the Venus Account. The U.S. initiated a forfeiture action in the District of New Jersey seeking to claim the money. The district court initially granted forfeiture, but was reversed by the Third Circuit, which held that there wasn’t enough evidence that the money came from drug traffic.
Meanwhile, Brazilian authorities were also investigating Kesten’s Brazilian principal, Antonio Pires de Almeida. In 2004, a Brazilian court issued a warrant for Brazil to seize the Venus Account, and Brazil asked the U.S. for help doing so under the two countries’ mutual assistance treaty.
The U.S. attorney general moved to freeze the account under 28 U.S.C. §2467 in the District of Columbia’s district court, which granted the motion. In 2010, however, that freeze was vacated when the D.C. Circuit held in In re: Any and All Funds or Other Assets, in Brown Bros. Harriman & Co. Account #8870792 in the Name of Tiger Eye Invs. Ltd., 613 F.3d 1122, that such an order required a final judgment in a foreign court. Congress has since amended the statute to undo the effect of that ruling.
Also in 2010, liquidators for the defunct Cayman Islands-based Trade and Commerce Bank filed their own suit against Kesten in the British Virgin Islands, alleging that the bank’s directors had laundered money they misappropriated through Kesten. Kesten did not appear, and the British Virgin Islands court entered a $15 million default judgment against it in favor of Trade and Commerce Bank.
In light of these competing claims on Kesten’s seized assets, the U.S. filed an interpleader action asking the Southern District to decide which party should get the money.
In February 2012, a Brazilian court convicted Pires de Almeida of fraud and ruled that the money in the Venus Account was proceeds from his scheme and should be forfeited to Brazil.
According to John Moscow, a partner at Baker & Hostetler who represents the Brazilian government, Brazil considered seeking the money through another 28 U.S.C. §2467 application, but decided that, given the U.S. government’s apparent intention to resolve the matter in the interpleader action, that would be “a little bit offensive to the dignity of the court, and in Brazil that’s a very big deal indeed.”
Griesa ruled in October 2012 that Brazil’s claim took precedence over that of the liquidators for Trade and Commerce Bank, and awarded Brazil summary judgment.
On appeal, however, the Second Circuit found that Griesa’s order must be vacated because it goes against the penal law rule. That rule, which goes back to the U.S. Supreme Court’s 1825 decision The Antelope, 23 U.S. (10 Wheat.) 66, holds that U.S. courts will not enforce other sovereign nations’ criminal laws. The rule is an outgrowth of the courts’ traditional recognition of other nations’ sovereignty.
The Second Circuit rejected Brazil’s argument that the judgment in its criminal court case was akin to civil in rem judgment, which is a judgment against disputed property itself rather than against any particular party.
Raggi wrote that even if it were akin to an in rem judgment, U.S. courts recognize other nations’ in rem judgments but do not actively help enforce them.
“In this interpleader action, Brazil does not ask the district court simply to recognize the existence of its forfeiture judgment; rather, Brazil seeks the district court’s assistance in enforcing that judgment by transferring funds presently within the United States to Brazil,” Raggi wrote. “In short, Brazil asks the United States to surrender its own in rem jurisdiction over the Venus Account to Brazil, an essential step in the enforcement of that country’s forfeiture judgment and the penal laws that inform it.”
The panel also rejected Brazil’s argument that the penal law rule should not apply to a claim in an interpleader action brought by a country that has a mutual legal assistance treaty with the United States. The treaty, Raggi wrote, does not automatically mean that the court must award the money to Brazil.
“An interpleader suit, by its very nature, identifies various possible claimants to the funds at issue, but leaves it to the court to decide which, if any, have a valid claim,” she wrote.
The panel remanded the case with instructions that Brazil be allowed a “reasonable period of time” to make an application under 28 U.S.C. §2467 to recover the funds. Moscow, Brazil’s attorney, said it would do so promptly.
William Reid, IV, a partner at Reid Collins & Tsai, who represents the Trade and Commerce Bank liquidators, could not be reached for comment.