Recent developments in foreign sovereign immunity and Texas garnishment law: a new threat facing U.S. oil and gas companies.

I. BACKGROUND II. THE CONGO CASES

A. Af-Cap Inc. v. Republic of Congo

B. FG Hemisphere Associates, LLC v. The Republique

du Congo

C. Summary of the Fifth Circuit Congo Decisions III. IMPACTS OF THE CONGO CASES ON U.S. OIL AND GAS COMPANIES

In two related cases, the United States Court of Appeals for the Fifth Circuit issued a series of opinions regarding sovereign immunity under the Foreign Sovereign Immunities Act (1) and Texas garnishment law that will significantly impact how U.S. companies do business overseas. This Article provides a brief review of some of the lawsuits brought by the Congo's debt collectors, which include attempts to satisfy the debt by seizing nonmonetary obligations owed to the Congo by oil and gas companies operating in the Congo. The Article concludes with a commentary on the how these lawsuits will impact U.S. oil and gas companies operating abroad.

I. BACKGROUND

CMS Nomeco, a U.S. oil company, is the operator of a joint venture and owns twenty-five percent of an offshore oil concession (the Yombo field) in the Republic of the Congo. (2) Affiliates of CMS Nomeco own another twenty-five percent of the offshore oil concession. (3) The remaining fifty percent of the concession is owned by Societe Nationale des Petroles du Congo ("SNPC"), the Congolese state-owned petroleum company. (4) As participating interest owners in the oilfield, CMS Nomeco and SNPC each receive a share of the oil production. (5) SNPC receives its entitlement share of the production inside the Congo. (6)

The concession permits the joint venture to extract oil in exchange for royalties and periodic tax payments to the Congo. (7) Under the terms of the concession agreement, the Congo can elect to receive either a cash royalty or its share of the production in-kind within the Congo. (8) The Congo has elected to receive its royalty in-kind. (9) As the operator, CMS Nomeco is legally and contractually required to deliver to the Congo and SNPC their royalty oil and entitlement share, respectively. (10) The Congo has assigned the right to take (or lift) the royalty oil to SNPC, and SNPC independently markets both the Congo royalty and SNPC's entitlement share of the oil. (11)

The Congo defaulted on loans it made to develop its infrastructure, several resulting in judgments against the Congo. (12) To satisfy the debt and judgments, creditors sought to garnish CMS Nomeco's obligation to deliver to the Congo its in-kind royalties and to SNPC its entitlement share of the oil production. (13) CMS Nomeco and the Congo maintained that the nonmonetary obligations (royalties, entitlement share, and tax payments) are not property subject to garnishment and are protected by the F.S.I.A. (14) CMS Nomeco also argued that neither CMS Nomeco nor the property sought by the Congo's creditors is located in the United States and, therefore, is not subject to garnishment. (15)

Meanwhile, the Congo obtained multiple Congolese court orders that refuse to recognize the U.S. court orders and insisted that CMS Nomeco perform its legal and contractual obligations and allow the Congo and SNPC to lift their oil. (16) Additionally, the Congo threatened to detain senior-level officers of oil companies and use public force to ensure that the Congo and the SNPC receive their share of the oil production. (17) Against this backdrop, a series of recent opinions by the United States Fifth Circuit in two related Texas cases are examined to show how the court applied the F.S.I.A. and Texas law, through novel interpretations, to resolve the dispute among CMS Nomeco, the Congo, and its creditors.

II. THE CONGO CASES

A. Af-Cap Inc. v. Republic of Congo

The first case involving CMS Nomeco is currently in the United States District Court for the Western District of Texas in Austin. (18) For over four years, the lawsuit has passed between the district court and the Fifth Circuit, analyzing whether the Congo's royalty and the tax payments were property that could be garnished under section 1610(a) of the F.S.I.A. (19) During this period, the Fifth Circuit rendered several important opinions regarding the garnishment of royalties and tax obligations owed to foreign nations.

The Fifth Circuit first examined when a nonmonetary obligation can be garnished under the F.S.I.A. (20) The court held that the appropriate factor to consider is what the nonmonetary obligation or royalty is "used for." (21) To show that the royalty is property "used for commercial activity" under the F.S.I.A., the court adopted a holistic approach which included a review of a foreign nation's past commercial use of the royalty. (22) With respect to the Congo's royalties, the court found a commercial activity existed when the Congo previously assigned a portion of the royalty to another judgment creditor to fully satisfy a different debt and contemplated a similar settlement on yet another occasion. (23) Although CMS Nomeco argued that the royalty and tax payments were generated from activities in, and paid in the Congo, the court rejected consideration of how the royalty was generated and instead focused on the Congo's past activities to decide that CMS Nomeco's could be garnished. (24)

The Fifth Circuit next analyzed whether the royalty was property "in the United States" according to section 1610(a). (25) The court acknowledged that determining the situs of the obligations was problematic because of their intangible nature. (26) The court compared these obligations to debtor obligations, and despite the fact that all royalty oil was delivered within the Congo, found that a "common sense appraisal of the requirements of justice and convenience" required the location of the oil companies--the United States--to be the situs of the intangible obligations. (27) Because the royalty obligations were "used for a commercial activity" and "in the United States," the Fifth Circuit concluded that the Congo's royalty and tax receipts were not immune from garnishment under the F.S.I.A. (28)

The Fifth Circuit next examined whether Texas garnishment law, the prejudgment method employed by the Congo's creditors, allowed attachment of CMS Nomeco's nonmonetary obligations. (29) The Fifth Circuit noted that Texas statutes and case law did not address whether a nonmonetary obligation can be subject to garnishment. (30) Because Texas' garnishment statute is to be strictly construed, the court found that CMS Nomeco's royalty and tax obligations could not be garnished under Texas law. (31) Although CMS Nomeco's nonmonetary obligations were not protected by the F.S.I.A., the court held that Texas law prevented their garnishment. (32)

B. FG Hemisphere Associates, LLC v. The Republique du Congo

The second case involving CMS Nomeco is currently before the United States District Court for the Southern District of Texas in Houston. (33) Temporally, this lawsuit arose after the Fifth Circuit determined in Af-Cap H that CMS Nomeco's nonmonetary obligations were not protected by the F.S.I.A. because they were used by the Congo for a commercial purpose and were located in the United States. As in the Af-Cap litigation, the Congo's creditor sought to garnish the royalties that CMS Nomeco delivers to the Congo. (34) In this case, the creditor also sought to garnish SNPC's entitlement share of oil production that it receives as part of its joint venture with CMS Nomeco. (35)

At issue was the point in time at which the sovereign's property is subject to attachment under the F.S.I.A. (36) In making its determination, the court adopted a "situs snapshot" rule. (37) The foreign nation's property must be in the United States at the time a district court applies the exception to immunity under the F.S.I.A. (38) Thus, either CMS Nomeco or the property sought to be garnished must be located in the United States to properly garnish CMS Nomeco's in-kind royalties to the Congo and SNPC's entitlement share. (39)

The Fifth Circuit also clarified its previous Af-Cap decisions. The court explained that it did not analyze whether the garnishees and any intangibles in their possession were in the United States because the garnishees' presence in Texas was undisputed. (40) The court also never decided the applicable time period during which the obligations must be in the United States for immunity not to apply. (41) In addition, the Fifth Circuit explained that it only assumed, but did not determine, that the royalty obligations to the Congo were intangible property. (42) The court acknowledged that it relied on this assumption to determine that the situs of an intangible obligation is the situs of the garnishee. (43) Having never properly classified the royalty obligations at issue, the court therefore found that the CMS Nomeco's obligation to pay royalties was in the United States merely because CMS Nomeco was in the United States. (44)

C. Summary of the Fifth Circuit Congo Decisions

In summary, the Fifth Circuit made several important holdings in Af-Cap I, II, III and FG Hemisphere. The Fifth Circuit determined that:

* A totality of the circumstances test, including past use, is applied to determine whether nonmonetary obligations to a foreign nation are "used for commercial activity" in the United States;

* The situs of a garnishee is the situs for determining whether nonmonetary obligations owed to a foreign country are property "in the United States;"

* The situs of the property must be in the United States at the time a district court applies an exception to immunity under the F.S.I.A.;