Iraq Middle Market Development v. Mohammad Harmoosh , 848 F.3d 235 ( 2017 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 16-1403
IRAQ MIDDLE MARKET DEVELOPMENT FOUNDATION,
Plaintiff - Appellant,
v.
MOHAMMAD ALI MOHAMMAD HARMOOSH, a/k/a Mohammed Alharmoosh;
JAWAD ALHARMOOSH,
Defendants - Appellees.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. George L. Russell III, District Judge.
(1:15-cv-01124-GLR)
Argued: December 7, 2016 Decided: February 2, 2017
Before WILKINSON, MOTZ, and FLOYD, Circuit Judges.
Vacated and remanded by published opinion. Judge Motz wrote the
opinion, in which Judge Wilkinson and Judge Floyd joined.
ARGUED: D. Michelle Douglas, KALBIAN & HAGERTY, LLP, Washington,
D.C., for Appellant. Mukti N. Patel, FISHERBROYLES LLP,
Princeton, New Jersey, for Appellees. ON BRIEF: Haig V.
Kalbian, KALBIAN & HAGERTY, LLP, Washington, D.C., for
Appellant.
DIANA GRIBBON MOTZ, Circuit Judge:
After securing a judgment in Iraq for non-payment of a
promissory note, a creditor sought to have the judgment
recognized in the federal district court for the District of
Maryland. The debtor contended that the judgment was not
entitled to recognition given that the parties had agreed to
arbitrate their disputes. The district court agreed and granted
summary judgment to the debtor. Because genuine issues of
material fact remain as to whether the debtor lost his right to
arbitrate by utilizing the Iraqi judicial process, we must
vacate and remand for further proceedings.
I.
The Iraq Middle Market Development Foundation, a non-profit
corporation, makes and services loans to local businesses in
Iraq. On November 10, 2006, the Foundation agreed to lend $2
million to Al-Harmoosh for General Trade, Travel, and Tourism
(“AGTTT”), a company headquartered in Najaf, Iraq. The loan
agreement includes an arbitration clause specifying that “[a]ll
disputes, controversies and claims between the parties which may
arise out of or in connection with the Agreement . . . shall be
finally and exclusively settled by arbitration.” The clause
identifies Amman, Jordan as the venue for arbitration. As part
of the deal, Mohammad Harmoosh, a managing partner of AGTTT and
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a dual citizen of Iraq and the United States, who resides in
Maryland, executed a promissory note guaranteeing repayment of
the loan.
In 2010, after Harmoosh had refused to repay the loan, the
Foundation tried to collect by suing him for breach of contract
in federal court in Maryland. Harmoosh moved to dismiss,
arguing that his alleged breach was an arbitrable dispute
“aris[ing] out of or in connection with” the loan agreement.
The district court agreed and dismissed the Foundation’s
complaint. Iraq Middle Mkt. Dev. Found. v. Al Harmoosh, 769 F.
Supp. 2d 838, 842 (D. Md. 2011). Harmoosh, however, did not
move to compel arbitration, as he was entitled to do under the
Federal Arbitration Act. 9 U.S.C. § 3 (2012).
In February 2014, the Foundation filed another civil action
against Harmoosh to collect on the promissory note, this time in
the Court of First Instance for Commercial Disputes in Baghdad.
Harmoosh appeared in that court through counsel and asserted at
least two affirmative defenses. He contended that the court
lacked personal jurisdiction and that he was not personally
liable because he guaranteed the loan only in his capacity as a
shareholder. The parties disagree as to whether Harmoosh raised
the arbitration clause as a third defense. It is undisputed
that, under Iraqi law, although a valid arbitration clause
deprives a court of jurisdiction over arbitrable disputes, a
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party waives his right to arbitrate if he fails to assert it
before the trial court. Article 253, Amended Civil Procedure
Code No. 83 of 1969.
In any event, the Foundation and Harmoosh litigated their
dispute to final judgment in Iraq. In April 2014, the Court of
First Instance found in favor of the Foundation and awarded it
$2 million in damages and $424.91 in costs and legal fees.
Harmoosh appealed the judgment to the Baghdad/Al-Rasafa Federal
Court of Appeals, which affirmed the judgment. Harmoosh then
appealed to the Federal Court of Cassation of Iraq -- the court
of last resort for commercial disputes -- which also affirmed.
In April 2015, the Foundation returned to the District of
Maryland and filed the two-count complaint at issue here. Count
One seeks recognition of the Iraqi judgment under the Maryland
Uniform Foreign Money-Judgments Recognition Act, Md. Code Ann.,
Cts. & Jud. Proc. §§ 10-701 et seq. (West 2016) (“Maryland
Recognition Act”). Count Two alleges that Harmoosh fraudulently
conveyed some of his assets both before and after the Iraqi
judgment was rendered.
Under the Maryland Recognition Act, a foreign judgment
regarding a sum of money is generally conclusive between the
parties so long as it is “final, conclusive, and enforceable
where rendered.” Id. §§ 10-702, -703. However, the Act
recognizes several exceptions to this general rule. Relevant
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here, the Act provides that a court need not recognize a foreign
judgment if “[t]he proceeding in the foreign court was contrary
to an agreement between the parties under which the dispute was
to be settled out of court.” Id. § 10-704(b)(4). Harmoosh
moved to dismiss, invoking this exception and arguing that the
district court should not recognize the Iraqi judgment because
the Iraqi proceedings were contrary to the parties’ agreement to
arbitrate. The Foundation responded that Harmoosh failed to
assert his arbitration rights before the Iraqi trial court and
therefore had waived his right to arbitrate.
Before the parties had an opportunity to conduct discovery,
the district court granted summary judgment to Harmoosh on the
Maryland Recognition Act claim, declining to recognize the Iraqi
judgment because the Iraqi proceedings were “contrary to an
arbitration provision.” The court then granted Harmoosh’s
motion to compel arbitration of the fraudulent conveyance claim.
The Foundation timely noted this appeal.
We review the district court’s grant of summary judgment de
novo. Henry v. Purnell, 652 F.3d 524, 531 (4th Cir. 2011) (en
banc). A court can grant summary judgment only if, viewing the
evidence in the light most favorable to the non-moving party,
the case presents no genuine issues of material fact and the
moving party demonstrates entitlement to judgment as a matter of
law. Id.
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II.
We must first determine whether the arbitration clause
exception in § 10-704(b)(4) of the Maryland Recognition Act
applies if a party forgoes his right to arbitrate by deciding to
participate in judicial proceedings in a foreign court. This is
a question of Maryland law, one that Maryland’s highest court
has not addressed. Because we sit in diversity, our task is to
anticipate how it would rule on this question. See, e.g.,
Liberty Univ., Inc. v. Citizens Ins. Co. of America, 792 F.3d
520, 528 (4th Cir. 2015).
The text of § 10-704(b)(4) provides that a Maryland court
need not recognize a foreign judgment if the proceedings were
“contrary to” an agreement to settle the dispute out of court.
Harmoosh contends that § 10-704(b)(4) permits a Maryland court
to decline recognition of a foreign judgment if -- under the
terms of an arbitration clause -- the dispute should not have
been litigated in the first place. On this reading, any and all
foreign judicial proceedings are “contrary to” an arbitration
clause regardless of whether the parties forego their
arbitration rights.
We cannot agree. We do not believe the General Assembly of
Maryland intended to give courts discretion to enforce
contractual rights the parties themselves decided to waive. By
the same token, we do not believe the legislature gave courts
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discretion to ignore the judgment of a foreign court when the
parties voluntarily resolved their dispute before that court.
This court has not addressed this issue, and few other
courts have interpreted exceptions similar to § 10-704(b)(4).
Those that have done so have recognized that parties may waive
such exceptions. See The Courage Co. v. The Chemshare Corp., 93
S.W.3d 323, 336–38 (Tex. App. 2002); Dart v. Balaam, 953 S.W.2d
478, 480 (Tex. App. 1997); cf. Montebueno Mktg., Inc. v. Del
Monte Corp. USA, 570 F. App’x 675, 677 (9th Cir. 2014)
(unpublished) (rejecting a waiver argument due solely to “lack
of evidence”). And we have not found a single case in which a
court has held, or even suggested, that exceptions similar to
§ 10-704(b)(4) cannot be waived. During oral argument,
Harmoosh’s counsel agreed with our assessment of the case law.
Moreover, we can draw guidance on the question from the
fact that Maryland has largely adopted the Uniform Foreign
Money-Judgments Recognition Act. See Andes v. Versant Corp.,
878 F.2d 147, 149 (4th Cir. 1989). The arbitration clause
exception in § 10-704(b)(4) closely tracks a provision in the
Uniform Act. That portion of the Uniform Act, which provides
that a court need not recognize the judgment of a foreign court
if the proceedings were “contrary to” an agreement that a given
dispute “was to be settled otherwise than by proceedings in that
court,” can be waived either expressly or by implication.
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Uniform Foreign Money-Judgments Recognition Act of 1962
§ 4(b)(5) (Unif. Law Comm’n 1962); Restatement (Third) of the
Foreign Relations Law of the United States § 482, cmt. h (Am.
Law Inst. 1987). 1
Nothing suggests that the Maryland General Assembly
intended a different result. On the contrary, Harmoosh’s
interpretation would put the arbitration clause exception in
§ 10-704(b)(4) at odds with Maryland common law of contracts.
Under Maryland law, a party can waive the right to arbitrate a
dispute just as he can waive any other contractual right.
Charles J. Frank, Inc. v. Associated Jewish Charities of
Baltimore, Inc., 450 A.2d 1304, 1306 (Md. 1982). And once a
party waives his right to arbitrate, that right becomes
unenforceable “and thus treated as though it had never existed.”
Stauffer Constr. Co. v. Bd. of Educ. of Montgomery Cty., 460
A.2d 609, 614 (Md. Ct. Spec. App. 1983).
As in other jurisdictions, exactly when a party waives his
rights through his conduct “turns on the factual circumstances
of each case.” Charles J. Frank, 450 A.2d at 1307. However,
Maryland’s highest court has squarely held that a party who
1 The only notable difference between § 10-704(b)(4) and
§ 4(b)(5) of the Uniform Act is that the latter applies both to
arbitration clauses and to forum-selection clauses. Restatement
(Third) of the Foreign Relations Law of the United States § 482,
cmt. h (Am. Law Inst. 1987). By contrast, § 10-704(b)(4)
applies only to arbitration clauses.
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litigates an arbitrable dispute to final judgment waives his
right to later arbitrate the dispute. Id. This rule respects
the fundamental principles of freedom of contract and the
rationale for enforcing arbitration and forum-selection clauses:
the “belief that where parties can agree to a mutually optimal
method and forum for dispute resolution, it serves the interests
of efficiency and economy to allow them to do so.” Menorah Ins.
Co. v. INX Reinsurance Corp., 72 F.3d 218, 222–23 (1st Cir.
1995) (citing Mitsubishi Motors Corp. v. Soler Chrysler-
Plymouth, Inc., 473 U.S. 614, 633 (1985)).
Against this background, we find it highly unlikely that
the Maryland General Assembly intended the arbitration clause
exception to apply when parties have waived their rights to
arbitrate. Such a rule would mean that conduct which renders an
arbitration clause unenforceable if it occurs in a domestic
court would have no effect at all if it occurs in a foreign
court. It would also mean that the parties’ decision to forego
arbitration and litigate in domestic courts would bind them,
while a similar decision to litigate in a foreign court would
not. Absent some affirmative indication, we will not infer that
the Maryland General Assembly intended to carve out such an
exception to the common law. See Spangler v. McQuitty, 141 A.3d
156, 166 (Md. 2016) (“[S]tatutes in derogation of the common law
are strictly construed, and it is not to be presumed that the
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[General Assembly] . . . intended to make any alteration in the
common law other than what has been specified and plainly
pronounced.” (second alteration in original) (quoting Cosby v.
Dep’t of Human Res., 42 A.3d 596, 606 (Md. 2012))).
Finally, construing the arbitration exception as Harmoosh
suggests would frustrate the overarching purpose of the Maryland
Recognition Act. It is well settled that the Act “was intended
to promote principles of international comity by assuring
foreign nations that their judgments would, under certain well-
defined circumstances, be given recognition by [Maryland]
courts.” Wolff v. Wolff, 389 A.2d 413, 417 (Md. Ct. Spec. App.
1978), aff’d 401 A.2d 479 (Md. 1979) (per curiam); see also
Guinness PLC v. Ward, 955 F.2d 875, 884 (4th Cir. 1992) (quoting
Wolff).
By giving foreign nations a measure of certainty that
Maryland courts will respect their judgments, the Maryland
Recognition Act “hopefully facilitate[s] recognition of similar
United States’ judgments abroad.” Wolff, 389 A.2d at 417. As
the drafters of the Uniform Act explained, the need for such
assurances arose because “[i]n a large number of civil law
countries, grant of conclusive effect to money-judgments from
foreign courts is made dependent upon reciprocity.” Uniform
Foreign Money-Judgments Recognition Act of 1962, prefatory note
(Unif. Law Comm’n 1962). By providing these assurances, the
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drafters hoped the Uniform Act would “make it more likely that
judgments rendered” in adopting states would “be recognized
abroad.” Id.
Harmoosh’s interpretation would inject a level of
uncertainty into the process of recognizing foreign judgments
that the Maryland General Assembly clearly intended to avoid.
Under his interpretation, a court in Maryland would have almost
complete discretion to decide whether to recognize a foreign
judgment that both parties had voluntarily sought. This would
show foreign courts none of the “deference and respect” crucial
to comity. Comity: Judicial Comity, Black’s Law Dictionary (4th
ed. 1951). Indeed, it would show those courts no deference or
respect at all. As a result, foreign nations would have no
assurance that Maryland courts would respect their resolution of
disputes involving contracts with arbitration clauses. They
would therefore have little reason to recognize similar
judgments from Maryland courts. The General Assembly sought to
avoid precisely this mischief when it enacted the Maryland
Recognition Act.
Judicial proceedings in a foreign court are not “contrary
to” an arbitration clause for the purposes of the Maryland
Recognition Act if the parties choose to forego their rights to
arbitrate by participating in those proceedings. Section 10-
704(b)(4) simply does not apply in that event.
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III.
We next determine whether the Foundation has raised genuine
issues of material fact as to whether Harmoosh decided to forego
his arbitration rights.
The Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (2012)
(the “Act”), governs resolution of this question. The Act
applies to arbitration clauses in contracts “evidencing a
transaction involving commerce.” 9 U.S.C. § 2. Both the loan
agreement and the promissory note evidence such a transaction.
Both documents pertain to a loan made by the Foundation, a Texas
corporation, to AGTTT, an Iraqi corporation. See Reynolds
Jamaica Mines, Ltd. v. La Societe Navale Caennaise, 239 F.2d
689, 693 (4th Cir. 1956) (“A contract made by an American
corporation with a foreign one . . . involves commerce with a
foreign country.”). Thus, as the parties agree, we look to the
Act when determining if the Foundation offered sufficient
evidence to prevent the grant of summary judgment to Harmoosh.
Under the Act, a party loses his right to arbitrate when he
is “in default in proceeding with such arbitration.” 9 U.S.C.
§ 3. “Default in this context resembles waiver, but, due to the
strong federal policy favoring arbitration, courts have limited
the circumstances that can result in statutory default.”
Forrester v. Penn Lyon Homes, Inc., 553 F.3d 340, 342 (4th Cir.
2009). Thus, a party defaults and so waives his right to
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arbitrate under the Act only if he “so substantially utiliz[es]
the litigation machinery that to subsequently permit arbitration
would prejudice” the other party. Maxum Founds., Inc. v. Salus
Corp., 779 F.2d 974, 981 (4th Cir. 1985); see also Rota-McLarty
v. Santander Consumer USA, Inc., 700 F.3d 690, 702 (4th Cir.
2012).
In this case, not even Harmoosh disputes that his waiver of
the arbitration right, if proven, would prejudice the
Foundation. This is wise. If the Foundation proves what it has
alleged -- that Harmoosh waived his right to arbitrate by
litigating the dispute in Iraqi courts -- allowing him to assert
that right now would deprive the Foundation of its entitlement
to recover on a $2 million judgment. Under any reasonable
definition of “prejudice,” this would be highly prejudicial.
Thus, the controlling question is this: did the Foundation
raise genuine issues of material fact that preclude a summary
judgment holding that Harmoosh preserved his arbitration rights?
We believe it clearly did. Without any discovery, the
Foundation offered evidence that Harmoosh was aware of his right
to arbitrate (having successfully asserted that right once
before) and nonetheless voluntarily litigated his dispute with
the Foundation to final judgment in an Iraqi court. The
Foundation offered evidence that Harmoosh voluntarily appeared
through counsel before the Iraqi trial court, asserted several
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defenses, and litigated those defenses to final judgment. After
the Iraqi trial court awarded the Foundation a $2 million
judgment, Harmoosh appealed all the way to the Iraqi court of
last resort, and he lost.
The Foundation supplemented this undisputed evidence with
the declaration of Salam Zuhair Dhia, its local counsel in the
Iraqi proceedings. Dhia declared that the Foundation pursued
litigation in Iraq to avoid the high costs of arbitration in
Jordan and that Harmoosh never raised the arbitration clause as
a defense at any point during the proceedings before the trial
court.
According to Dhia, “[i]t is common practice in the Iraqi
Courts of First Instance for the court to prepare a short
summary of what occurred and what arguments were raised at each
hearing.” The Foundation submitted purported copies of these
summaries from the Iraqi proceedings, along with certified
English translations. The summaries indicate that Harmoosh
raised two defenses but never asserted his rights under the
arbitration clause. Perhaps most tellingly, Harmoosh’s local
counsel appears to have signed the summaries detailing what
defenses he had raised.
In opposition, Harmoosh offered the unsworn, unverified
declaration of his own local counsel, who asserts that he raised
the arbitration clause to “the court” in Iraq and that “the
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court did not consider the defense in both the [trial] and
appeal stages.” Harmoosh also submitted the appellate brief his
counsel filed with the Baghdad/Al-Rasafa Federal Court of
Appeals, in which his counsel lists the arbitration clause as
one reason for overturning the trial court’s decision but does
not state that the defense was raised before the trial court.
Construing this evidence in the light most favorable to the
Foundation, genuine issues of material fact remain as to whether
Harmoosh defaulted his right to arbitrate. A reasonable
factfinder could determine that Harmoosh chose to waive his
right to arbitrate and instead litigated his dispute in the
Iraqi courts to avoid the time and cost of arbitration. Further
discovery and development of the record will undoubtedly clarify
these issues. But given the present record, Harmoosh was not
entitled to summary judgment on the Maryland Recognition Act
claim.
IV.
For the foregoing reasons, the judgment 2 of the district
court is
2 The district court also held that “[b]ecause” it would
“not recognize the Iraqi Judgment,” the Foundation was a
creditor only by virtue of the loan agreement. As such, the
district court held that the fraudulent conveyance claim arose
from the loan agreement and was arbitrable. This may be the
(Continued)
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VACATED AND REMANDED.
correct result in the final analysis. However, for the reasons
discussed above, we believe it is too soon to say whether
Harmoosh defaulted his arbitration rights. It is therefore too
soon to say the Foundation is a creditor only by virtue of the
loan agreement. Accordingly, we must vacate the entire judgment
of the district court, including its order compelling
arbitration of the fraudulent conveyance claim.
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