The D.C. Circuit Court of Appeals in the matter of Fran Heiser v. Islamic Republic of Iran has recently ruled that Iranian funds held by major banks pursuant to U.S. sanctions against cannot serve to satisfy a $591 million judgment won by the family of a master sergeant killed in a 1996 attack by Hezbollah, a group reportedly supported by Iran. In an effort to collect on this judgment, the estate issued writs of attachment to Bank of America and Wells Fargo, seeking blocked funds collected at those banks pursuant to U.S. economic sanctions. Heiser’s estate seeks release of these funds to satisfy the judgment because Iranian banks would have a future interest in the funds. A lower court previously agreed, howver, as noted above the D.C. Circuit reversed.

Perhaps surprisingly to some, the U.S. Government appeared as amicus curiae for the banks in the case, supporting the argument that plaintiffs have no claim because the money does not belong to Iran itself, only to beneficiaries that use Iranian banks. The D.C. Circuit Court agreed finding that a judgment against a terrorist party cannot be satisfied by attaching property that the terrorist party does not own. In reaching its holding the D.C. Circuit found that siding with the plantiffs’ may cause innocent persons to unjustly bear the costs of the debtor’s wrong. This in turned, the Court reasoned, would fail to serve the punitive purpose of the blocking as the liability of the terrorist state would be reduced by payments made from the property of innocent parties.

The Circuit Court’s ruling here is important as there are numerous judgments seeking to be collected upon by funds blocked pursuant to sanctions promulgated by the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). These plaintiffs have sought to equate funds blocked due to a future contingent possessory interest held by an Iranian owned bank, as opposed to an interest of Iran itself.

The U.S. banks and the U.S. Government took no position as to whether or not Iran owned the contested accounts, but merely stated that a judgment against a terrorist party cannot be satisfied by property that the terrorist party does not own. Thus, while the plaintiffs sought an interpretation of “blocked assets of Iran” to include any Iranian relationship with the contested accounts, the Circuit Court found such an interpretation inappropriate. In short, creditors cannot attach property held by a debtor serving as only an intermediary.

The Circuit Court also relied upon the House Report from the Terrorism Risk Insurance Act, the underlying legal authority invoked by the Appellants, stating that the relevant section, 1610(g) was intended to let debtors attach assets in which foreign states have “beneficial ownership.” As such, this shows Congress’ intent to use Iran’s assets to pay victims of certain terrorist activities, however, it does not show that Iran’s victims should be paid from assets Iran does not own.

Finally, and most importantly, the Circuit Court, applying Article 4A of the Uniform Commercial Code, found that legal title to the payment does not transfer to the beneficiary bank until it accepts a payment order from the intermediary bank. Since the funds in this case were blocked prior to the payment order, no legal title was passed, and Iran did not obtain an interest in the funds.

The debate around what constitutes blocked assets “of” Iran is likely to continue for some timeas There are a lot of plaintiffs holding default judgments against Iran who are seeking to obtain ever dime blocked pursuant to U.S. sanctions targeting Iran or implicating Iranian financial institutions or parties. However, the D.C. Circuit’s decision here puts up a significant roadblock for these parties because it is often the case that the blocking is not due to an actual Government of Iran ownership interest in the assets, but rather because an Iranian owned financial institution will ultimately be receiving the funds. In addition, since such transfers must be blocked, legal title does not pass, and therefore, even if the argument can be made that Iran maintains an interest in the assets due to its ownership of a beneficiary bank, it will be difficult to overcome the fact that legal title never actually passes due to the blocking. In sum, this decision could have a significant impact on those plaintiffs believing that its open season on accounts blocked pursuant to sanctions targeting Iran, but where the funds don’t actually belong to the Government of Iran.