Adler v. Federal Republic of Nigeria

219 F.3d 869, 2000 Daily Journal DAR 5165, 2000 Cal. Daily Op. Serv. 3847, 2000 U.S. App. LEXIS 10702, 2000 WL 631016

• Court: Court of Appeals for the Ninth Circuit
• Decided: May 17, 2000
• Docket: Nos. 98-55456, 98-55460
• Status: Published

Opinions

Opinion by Judge PREGERSON; Dissent by Judge NOONAN.

PREGERSON, Circuit Judge:

At the center of this case is an illegal contract between plaintiff James Adler and various Nigerian individuals, including at least one government official, to convert Nigerian government funds for their personal use. The individual Nigerian defendants proposed the agreement to Adler, but did not perform their side of the bargain. Adler did perform, and now seeks to recover over five million dollars he paid to further the illegal contract and to bribe Nigerian government officials. The issue before this court is whether this criminal activity falls within the “commercial activity” exception to the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. § 1330 et seq. The district court held that the defendants were not immune from suit, but applied the unclean hands doctrine to bar Adler from recovering. Defendants appeal and plaintiffs cross-appeal. We have jurisdiction under 28 U.S.C. § 1291, and we affirm. We hold that an illegal contract constitutes commercial activity under the FSIA. We also affirm the district court’s factual findings, and its application of the clean hands defense to bar Adler’s recovery.

I

Plaintiffs in this case are James E. Adler and El Surtidor del Hogar, S.A. de C.V. (“El Surtidor”). Adler is a United States citizen who resides in California and is president and controlling shareholder of El Surtidor. El Surtidor is a Mexican corporation with its principal place of business in Tijuana, Mexico. Defendants are the Federal Republic of Nigeria, the Central Bank of Nigeria (“CBN”), and seventeen Nigerian officials.

The events in this case began in August 1992 when Adler received a letter signed by Chief Abba Ganna. The letter proposed a “business transaction” between Adler, Ganna and the Chief Accountant of the Nigerian National Petroleum Corporation (“NNPC”). Ganna explained the transaction as follows:

[Djuring the last civilian regime here in Nigeria, the elected members of the ruling party used their positions and formulated companies and awarded themselves contracts which were fantastically over-invoiced in various government ministries.

On the overthrow of the regime by the present military government, an enquiry was set to this. Findings and recommendations were made to the government who has given its blessing for the payment of these contracts half/fully executed. You can now see that there is a good deal for these government officials presently in office hence the ousted notable party stalwarts can not come forward for some of the claims.

Ganna requested that Adler send (1) four signed and stamped copies of El Surtidor letterhead and pro forma invoices; and (2) the number to a foreign bank account where 130 million dollars could be deposited. In addition, Adler would be responsible for purchasing first-class airplane tickets for Nigerian officials to travel to Mexico to collect their share of the money. In exchange for providing these services, Adler would earn a forty percent commission. The remaining sixty percent of the stolen funds would be divided between “miscellaneous expenses” (ten percent) and “the government officials” (fifty percent). As requested, Adler sent the letterhead, invoices, and the number of a bank account in the Grand Cayman Islands.

In September 1992, Adler traveled to Nigeria and was permitted to enter the country with a document from the Federal Ministry of Internal Affairs in lieu of a visa. He visited the home of the Minister of Finance and an office of the CBN where he met with various individuals who identified themselves as Nigerian government officials. Among these “officials” was John Olisa, Deputy Governor of the CBN. Olisa showed Adler a bank draft for sixty million dollars made out to El Surtidor and Jaime Adler, and presented Adler with a contract which Adler signed without reading. Olisa told Adler that he would give him a copy of the contract after Adler deposited funds to cover the difference in the exchange rate between the U.S. dollar and the Nigerian nira (“shortfall deposit funds”). Adler was led to believe that the Nigerian government had assigned to El Surtidor rights under a contract between the NNPC and Strabarg Company, another foreign company, for the computerization of Nigerian oil fields.

Beginning with Olisa’s request for the shortfall deposit funds, individuals, whom Adler believed to be officials of the Nigerian government, repeatedly requested payments from Adler. They described these payments variously as shortfall deposit funds, taxes, processing fees, confirmation fees, surcharges, legal fees, travel expenses, and gratification. Almost every time that someone requested a payment from Adler, that individual told Adler that as soon as he made that payment, the sixty million dollars would be deposited into his account. Adler continued making payments to Nigerian officials even after he filed this lawsuit. These payments totaled $5,180,000.

In May 1993, Adler hired a Nigerian lawyer to prepare an affidavit declaring that El Surtidor and Strabarg were sister companies. Adler was told that it was necessary to submit the false affidavit to a Nigerian court in order to obtain the promised funds.

Between August 1992 and July 1994, Adler corresponded, by mail and by telephone, with a variety of individuals who represented themselves as officials of the Nigerian government. In addition, Adler made two more trips to Nigeria prior to filing this lawsuit. In December 1992, he visited Olisa’s residence. On the April 1994 trip, Adler met with Paul Ogwuma, Governor of the CBN.

In November 1993, Adler borrowed $450,000 from Banca Serafín to pay a stamp duty tax. As a condition of the loan, Banca Serafín conducted due diligence and required Adler to change the routing instructions for the sixty million dollars from his Grand Cayman Islands’ bank account to Banca Serafin’s New York bank account. On Adler’s authorization, a Banca Serafín official directed Dr. Clement Odozi, another Deputy Governor of the CBN, to send the sixty million dollars to New York.

In February 1994, Adler hired former Congressmen Mervyn Dymally and Jim Bates to assist him in collecting the sixty million dollars. Dymally traveled to Nigeria, investigated the situation, and reported to Adler that the agreement was a “scam.” Even after receiving this report, Adler continued to make payments requested by the Nigerian officials.

In May 1994, Adler filed this suit in district court, naming as defendants the Federal Republic of Nigeria, the CBN, the NNPC,¹ and seventeen Nigerian officials.² Adler alleged claims for fraud, conspiracy to commit fraud, and negligence, among others. Defendants moved to dismiss on the basis of the FSIA, but the district court denied their motion. This court affirmed, holding that the commercial activity exception to the FSIA applied because the contract between the NNPC and Stra-barg, along with the assignment to El Surtidor, constituted commercial activity, and that Nigeria’s contractual obligation to make payment to Adler in New York was a direct effect in the United States. See Adler v. Federal Republic of Nigeria, 107 F.3d 720 (9th Cir.1997).

The case proceeded to trial. After an eight day bench trial, the district court found, among other things, that (1) no contract existed between the NNPC and Strabarg and therefore, the NNPC could not have assigned Strabarg’s rights to El Surtidor; (2) the Ganna letter involved criminal activity on its face and Adler knowingly and intentionally participated in that activity; (3) Adler believed that he was dealing with Nigerian government officials and that the scheme was sanctioned by the Nigerian government; (4) Adler paid bribes totaling 2.11 million dollars to Nigerian officials in violation of California bribery law, Cal.Penal Code § 7(6), and the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-2; (5) Adler, through Ban-ca Serafín, instructed the Nigerian officials to deposit the funds in New York; (6) at least one official of the Nigerian government, CBN Governor Paul Ogwuma, participated as a co-conspirator in the fraud against Adler; and (7) the Nigerian government permitted other co-conspirators to use the CBN offices to further the fraud. On these facts, the district court decided that the unclean hands doctrine barred Adler from recovering the money he paid to Nigerian government officials.³ The district court also revisited the sovereign immunity question and reaffirmed that the commercial activity exception applied.

II

We begin with the question of jurisdiction which is a question of law that we review de novo. See In re Estate of Ferdinand Marcos Human Rights Litigation, 94 F.3d 539, 543 (9th Cir.1996). The FSIA “provides the sole basis for obtaining jurisdiction over a foreign state in the courts of this country.” Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 443, 109 S.Ct. 683, 102 L.Ed.2d 818 (1989). Under the FSIA, a foreign state is presumptively immune from suit in federal court unless one of the exceptions to the statute applies. See 28 U.S.C. § 1604. There is no dispute here that the Federal Republic of Nigeria, the CBN, and Ogwuma fall within the FSIA’s definition of a foreign state. See 28 U.S.C. § 1603(a) (“A ‘foreign state’ ... includes ... an agency or instrumentality of a foreign state.”); Chuidian v. Philippine Nat’l Bank, 912 F.2d 1095, 1106-06 (9th Cir.1990) (holding that government officials fall within the definition of an “agency or instrumentality” of a foreign state). The only issue in dispute is whether the FSIA’s commercial activity exception applies to the facts of this case.⁴

The commercial activity exception to the FSIA denies foreign states immunity from suit in three circumstances:

A foreign state shall not be immune from the jurisdiction of courts of the United States ... in any case ... in which the action is based [1] upon a commercial activity carried on in the United States by the foreign state; or [2] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [3] upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.

28 U.S.C. § 1605(a)(2) (emphasis added). The third clause is at issue here because this suit is based on the defendants’ acts of fraud, conspiracy, and negligence which occurred outside of the United States. Defendants contend that the FSIA’s commercial activity exception does not apply because (1) their acts were not “in connection with a commercial activity”; and (2) their acts did not have a direct effect in the United States.⁵ We disagree.

A

The FSIA defines “commercial activity” as “a regular course of commercial conduct or a particular commercial transaction or act.” 28 U.S.C. § 1603(e). It also instructs that “[t]he commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose.” Id. The agreement between Adler and the Nigerian officials was a commercial trans-action. The Nigerian officials contracted for Adler’s services: they offered Adler a commission if he would provide them with stamped letterhead, invoices and a bank account to which they could transfer money. Adler accepted their offer. A contract for services is plainly commercial in nature. The fact that the contract was for an illegal purpose, and therefore was unenforceable, does nothing to destroy its commercial nature. See Saudi Arabia v. Nelson, 507 U.S. 349, 366, 113 S.Ct. 1471, 123 L.Ed.2d 47 (1993) (White, J., concurring) (stating that torture of plaintiff by police was not commercial activity, but torture of plaintiff by government hired thugs would be commercial activity); Braka v. Multibanco Comermex, S.A., 589 F.Supp. 802, 805 (S.D.N.Y.1984) (holding that the sale of unregistered securities is commercial activity under the FSIA).⁶

Not all criminal activity falls within the FSIA’s commercial activity exception. That proposition is well-established by decisions of this court and others. See Berkovitz v. Islamic Republic of Iran, 735 F.2d 329, 331 (9th Cir.1984) (finding that murder is not commercial in nature); see also MCI Telecommunications Corp. v. Alhadhood, 82 F.3d 658, 664 (5th Cir.1996) (finding that making unauthorized telephone calls is not commercial activity); Cicippio v. Islamic Republic of Iran, 30 F.3d 164, 167-68 (D.C.Cir.1994) (holding that kidnaping is not commercial activity); Letelier v. Republic of Chile, 748 F.2d 790, 797 (2d Cir.1984) (holding that assassination is not commercial activity). Our decision today does not conflict with that case law. Each of those cases involved illegal activity devoid of any commercial component. What this case involves, and what drives our decision in this case, is the district court’s finding that Adler and the Nigerian officials made a contract for illegal activity.⁷

The Supreme Court’s decision Republic of Argentina v. Weltover, 504 U.S. 607, 612, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992), also supports our conclusion that an illegal contract is commercial activity. That case involved the question whether the Argentine government acted “in connection with commercial activity” when it refinanced bonds in order to stabilize the national currency. The Court held that “when a foreign government acts, not as a regulator of a market, but in the manner of a private player within it, the foreign sovereign’s actions are ‘commercial’ within the meaning of the FSIA.” Id. at 614, 112 S.Ct. 2160. It further explained that “the question is not whether the foreign government is acting with a profit motive or instead with the aim of fulfilling uniquely sovereign objectives. Rather, the issue is whether the particular actions that the foreign state performs (whatever the motive behind them) are the type of actions by which a private party engages in ‘trade and traffic or commerce.’ ” Id. (quoting Black’s Law DictionaRY 270 (6th ed.1990)).

The agreement to convert Nigerian government funds satisfies the Weltover definition of commercial activity. When the Nigerian officials offered Adler a cash commission for participating in an enterprise for mutual advantage, they did essentially what every private party does in the open market (notwithstanding the fact that their precise undertakings were illegal).

B

Having concluded that this suit is based on acts “in connection with a commercial activity,” we turn to the second question: whether the defendants’ acts caused a direct effect in the United States. “[A]n effect is ‘direct’ if it follows as an immediate consequence of the defendant’s activity.” Weltover, 504 U.S. at 618, 112 S.Ct. 2160 (internal quotation marks omitted). In adopting the “immediate consequences” rule, the Supreme Court rejected the more onerous “substantial and foreseeable” test employed by many circuits. See id. Following Weltover, this court reaffirmed the rule that a direct effect requires that “ ‘legally significant acts giving rise to the claim occurred’ ” in the United States. Adler, 107 F.3d at 727 (quoting United World Trade v. Mangyshlakneft Oil Production Ass’n, 33 F.3d 1232, 1239 (10th Cir.1994)).

We have little trouble identifying a direct effect in the United States caused by the defendants’ acts. Adler used the United States mails and telephones to commit bribery in violation of the FCPA as an “immediate consequence” of the defendants’ acts. The defendants asked Adler for bribe payments, and persuaded Adler to pay them by telling him that sixty million dollars would be deposited in his bank account if he did so. Therefore, Adler’s payment of bribes was an immediate consequence of the defendants’ fraudulent acts. Adler’s acts of bribery are legally significant with respect to the tort claims because Adler seeks to recover the money he paid in bribes.⁸

III

On appeal, defendants ask us to reverse several of the district court’s factual findings. Specifically, defendants challenge the following findings of fact: (1) Adler met CBN Governor Paul Ogwuma and Og-wuma was a co-conspirator in the conspiracy to defraud Adler; (2) Ogwuma sent Adler letters requesting payments; (3) Adler paid Ogwuma $50,000; (4) Adler met the Nigerian Minister of Finance at the Minister’s home; (5) Adler met John Olisa and Olisa is a Deputy Governor of the CBN; (6) Adler received a Revenue Collector’s Receipt showing payment of $300,-000; (7) the Nigerian government required a shortfall payment of $570,000; (8) Adler paid various fees and taxes to the Nigerian government; (9) Brigadier Ball Peters was Unit Commander for the Presidential Task Force on Trade Malpractices of CBN; and (10) Dr. Clement Odozi was the Deputy Governor of the CBN.

We review a district court’s factual findings for clear error. See Fed.R.Civ.P. 52(a); Adler, 107 F.3d at 729. ‘We accept the lower court’s findings of fact unless upon review we are left with the definite and firm conviction that a mistake has been committed.” United States v. Doe, 155 F.3d 1070, 1074 (9th Cir.1998) (en banc). We may not reject the district court’s “account of the evidence [if it] is plausible in light of the record viewed in its entirety.” Id. Here, the district court’s factual findings present a plausible account of the evidence, and therefore defendants’ challenge fails to satisfy the clear error standard.

IV

On cross-appeal, Adler argues that the district court erred in applying the unclean hands doctrine. The unclean hands doctrine “closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief, however improper may have been the behavior of the defendant.” Precision Instr. Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 814, 65 S.Ct. 993, 89 L.Ed. 1381 (1945). Under this doctrine, plaintiffs seeking equitable relief must have “acted fairly and without fraud or deceit as to the controversy in issue.” Ellenburg v. Brockway, Inc., 763 F.2d 1091, 1097 (9th Cir.1985) (citing Johnson v. Yellow Cab Transit Co., 321 U.S. 383, 387, 64 S.Ct. 622, 88 L.Ed. 814 (1944); Keystone Driller Co. v. General Excavator Co., 290 U.S. 240, 245, 54 S.Ct. 146, 78 L.Ed. 293 (1933)). The district court decided that Adler dirtied his hands by intentionally attempting to aid and abet the Nigerian officials’ scheme to steal from the government treasury and by paying bribes.

Under California law, we review the district courts decision to apply the unclean hands doctrine for an abuse of discretion. See Health Maintenance Network v. Blue Cross of Southern California, 202 Cal.App.3d 1043, 249 Cal.Rptr. 220 (1988). A district court “abuse[s] its discretion if it base[s] its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence.” Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990); see also United States v. Washington, 98 F.3d 1159, 1162 (9th Cir.1996).

In deciding whether Adler’s unclean hands barred relief, the district court applied the correct legal standard. In California, the unclean hands doctrine applies not only to equitable claims, but also to legal ones. See Jacobs v. Universal Development Corp., 53 Cal.App.4th 692, 699, 62 Cal.Rptr.2d 446 (1997). The court examined, as California law requires, the nature of the misconduct at issue and the misconduct’s equitable impact on the relationship between the parties and the injuries claimed. See Unilogic v. Burroughs, 10 Cal.App.4th 612, 619-20, 12 Cal.Rptr.2d 741 (1992) (citing Blain v. Doctor’s Co., 222 Cal.App.3d 1048, 1060, 272 Cal.Rptr. 250 (1990)).

Nevertheless, Adler puts forth a variety of arguments in an attempt to persuade this court that inequity results from the district court’s exercise of discretion. He asserts that he and the Nigerian officials are not equally at fault; that the Nigerian officials will be unjustly enriched if they do not return the funds to Adler; and that this court should grant Adler a remedy because, by doing so, it will discourage Nigerian officials from perpetrating such schemes in the future. Whatever the merits of these arguments, the district court did not abuse its discretion in reaching the opposite conclusion.

First, it is not clear that Adler is any less blameworthy than the Nigerian officials. The Nigerian officials proposed the criminal scheme, but Adler voluntarily participated it. And while the Nigerian officials successfully defrauded Adler of over five million dollars, Adler attempted to steal sixty million dollars from the Nigerian government. Second, the fact that the defendants will receive a windfall is not an absolute bar to the unclean hands defense. See Wallace v. Opinham, 73 Cal.App.2d 25, 26, 165 P.2d 709 (1946) (applying the unclean hands rule in a fraud action in which the parties engaged in illegal gambling and the defendant used marked cards). Finally, it is not clear that justice would be served by compelling the Nigerian government to return the money to Adler. Making a judicial remedy available when the bribe fails to accomplish the intended result would reduce the risk inherent in paying bribes, and encourage individuals such as Adler. In short, public policy favors discouraging frauds such as the one perpetrated on Adler, but it also favors discouraging individuals such as Adler from voluntarily participating in such schemes and paying bribes to bring them to fruition.

Finally, Adler relies heavily on two cases, neither of which are analogous to the case before us. In the first case, R.D. Reeder Lathing Co. v. Cypress Ins. Co., 3 Cal.App.3d 995, 84 Cal.Rptr. 98 (1970), the California Court of Appeals held that the plaintiff could bring an action for fraud based on an illegal contract. See id. at 999, 84 Cal.Rptr. 98. That case differs in important respects: the plaintiff did not know the underlying contract was illegal when he entered into it, and the defendant had far superior knowledge about the relevant law. See id. Here, the district court found that the deal proposed in Chief Gan-na’s letter was criminal on its face. The second case, CrossTalk Productions, Inc. v. Jacobson, 65 Cal.App.4th 631, 76 Cal.Rptr.2d 615 (1998), involved payments by plaintiffs to safeguard their rights in a legal contract. Rejecting the unclean hands defense, the court held that payments made by the plaintiffs were the result of economic duress and thus were extortionate payments, not bribes. See id. at 640-41, 76 Cal.Rptr.2d 615. In the instant case, the district court specifically found that the Adler knew the contract was illegal, and that Adler paid illegal bribes.

V

We hold that the district court properly exercised jurisdiction over this case; the district court’s factual findings are not clearly erroneous; and the district court did not abuse its discretion in applying the unclean hands defense to bar Adler’s recovery.

AFFIRMED.

1 . The district court dismissed the NNPC after plaintiffs rested their case.

2 . Of the seventeen named officials, only Paul Ogwuma, Governor of the CBN, was served and answered the complaint.

3 .The district court made factual findings pertaining to the defendants’ acts of fraud, but apparently did not decide whether the defendants actually committed any of the torts alleged.

4 . Our decision in Adler is not law of the case because that decision was issued before the district court found that the Strabarg contract and assignment were fictitious.

5 . An additional requirement for the commercial activity exception to apply was set out in Phaneuf v. Rep. of Indonesia, 106 F.3d 302 (9th Cir.1997). In Phaneuf, we held that an agent must act with actual authority in order to bind a sovereign under the commercial activity exception. Id. at 308. Neither party contends that Phaneuf is applicable to this case. Indeed, the thrust of defendants’ argument is that the district court erred in finding that Ogwuma participated in the fraud, not that Ogwuma did so without authorization from the government.

in any event, Phaneuf’s rule does not defeat federal jurisdiction over this case. The district court found, not only that Ogwuma, Governor of the CBN, participated as a co-conspirator in the fraud, but also that the Nigerian government permitted other conspirators to use the CBN offices to further the fraud. "Once the plaintiff offers evidence that an FSIA exception to immunity applies, the party claiming immunity bears the burden of proving by a preponderance of the evidence that the exception does not apply.” Joseph v. Office of Consulate General of Nigeria, 830 F.2d 1018, 1021 (9th Cir.1987). Defendants have not sustained their burden of proving that Ogwuma and others acted without actual authority.

6 . The dissent disagrees with our characterization of the agreement between Adler and the Nigerian officials as a contract for services, and contends that an agreement that is illegal either in nature or in purpose is not a commercial agreement. Neither the plain meaning of the term commercial, nor the sources cited by the dissent provide support for that proposition. See Black’s Law Dictionary 263 (7th ed.1999) (defining "commerce” as "[t]he exchange of goods and services, esp. on a large scale involving transportation between cities, states, and nations”).

7 . Defendants attempt to obfuscate the issue by repeatedly declaring that the district court found that no contract existed. The district court found that there was no contract between the NNPC and Strabarg, but it also found that there was an illegal contract between Adler and the government officials to convert government funds.

8 . The district court identified two other effects in the United States: (1) Adler instructed the CBN to deposit the funds in a New York bank account; and (2) Adler hired former United States congressmen to investigate the Nigerian scheme. Because we find that Adler's violation of the FCPA satisfies the "direct effect” prong, we do not decide whether the second and third effects identified by the district court are also direct effects.