Germany: Failure To Follow German Validation Procedure Dooms Claims For Payment On Pre-War German Bearer; FSIA Precludes Balance Of Claims

We have previously posted on the signficance of the international practice decisions by the Second and Eleventh Circuits' decisions relating to validation procedures preventing Foreign Sovereign Immunities Act immunity. Mortimer Off Shore Services, Ltd. v. Federal Republic of Germany, Nos. 08-1783-cv, 08-2358-cv (2d Cir. 7/26/10); and World Holdings v. The Federal Republic of Germany, No. 09-14359 (11th Cir. 8/9/10). In both cases the Circuits rejected the argument that the existence of the validation procedure precluded subject matter jurisdiction, on the theory that there was no inconsistency between a 1953 Treaty providing for the validation and the FSIA. Said the Circuits, the Treaty was adopted long before the Foreign Sovereign Immunities Act was enacted in the U.S. in 1976, and there was no irreconcilable conflict between compliance with the Treaty and the FSIA.

The plaintiffs in both cases, however, had not complied with the allegedly requisite process, so whether they stated a claim was yet to be decided by the Circuits.

Comes now the District Court decision in Sovereign Bonds Exchange LLC v. Federal Republic of Germany, et al., Case No. 10-21944-CIV-ALTONAGA/Simonton (S.D. Fla. July 2011). The case addresses whether the plaintiff is entitled to collect on bearer bonds called German Provincial and Communal Banks Consolidated Agricultural Loan (Provincial Bonds). Listed and sold on the New York Stock Exchange, the Provincial Bonds defaulted when pre-war Germany stopped paying on the bonds in 1933. On the other hand, post-war Germany's "obligations did not arise until reunification in 1990″ given that West Germany, "to help establish 'normal commercial relations'", committed to paying its prewar liabilities — this pursuant to a London Debt Agreement, or LDA. However, to obtain payment pursuant the LDA, a bondholder needed to assent to the other provisions of the LDA, which apparently included compliance with the Validation Law at issue in the Circuit decisions referred to above. The plaintiffs in this case did not follow the Validation Law.

The District Court determined that bonds originating in East Germany did not give the Court subject matter jurisdiction, whereas the Court did have subject matter jurisdiction over West German bonds. For purposes of the East German bonds, the District Court relied on the Second Circuit's decision in Mortimer. With respect to the West German bonds, the District Court found that failure to follow the Validation Law precluded a claim of recovery, stating "Sovereign's Provincial Bonds must first be validated in order for Plaintiff to state a claim under Rule 12(b)(6)".

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