United States v. 2005-06-14 | 02-16019 | JBASSIDJI VGOE | precedential | opinion |

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
 MASSOUD BASSIDJI, No. 02-16019
Plaintiff-Appellee, D.C. No.
v.  CV-01-04149-MJJ
SIMON SOUL SUN GOE, OPINION
Defendant-Appellant. 
Appeal from the United States District Court
for the Northern District of California
Martin J. Jenkins, District Judge, Presiding
Argued March 13, 2003
Stanford Law School
Stanford, California
Submitted February 23, 2004
Filed June 15, 2005
Before: Alex Kozinski, Susan P. Graber, and
Marsha S. Berzon, Circuit Judges.
Opinion by Judge Berzon
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COUNSEL
Lori A. Lutzker and W. George Wailes, Carr, McClellan,
Ingersoll, Thompson & Horn, Burlingame, California, for the
defendant-appellant.
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Douglas A. Applegate and Mark W. Epstein, Seiler Epstein
Ziegler & Applegate LLP, San Francisco, California, for the
plaintiff-appellee.
OPINION
BERZON, Circuit Judge:
Executive Order 13,059 (the “Executive Order” or
“Order”), 62 Fed. Reg. 44,531 (Aug. 21, 1997), prohibits
United States citizens from investing in and trading with Iran.1
The question we face is whether an American citizen’s guar-
antees of payments that furthered a trade agreement with an
Iranian company are covered by the Executive Order and, if
so, whether the guarantees are unenforceable as a result. We
conclude that the guarantees were illegal under the Executive
Order and, under the circumstances of this case, unenforce-
able.
BACKGROUND
The First Amended Complaint
This appeal arises from the district court’s denial of the
defendant’s motion to dismiss pursuant to Federal Rule of
Civil Procedure 12(b)(6). We therefore assume true the fol-
lowing facts, alleged in the First Amended Complaint.2 See
Libas Ltd. v. Carillo, 329 F.3d 1128, 1130 (9th Cir. 2003).
“In or around” November 1999, an Iranian company, Seyd
Sayyad Ltd. (“SSL”), and a Hong Kong company, Kingdom
Enterprises Ltd. (“KEL”), entered into a business arrangement
for the purpose of harvesting Artemia cysts (brine shrimp
1Executive Order 13,059 is appended to this opinion in its entirety.
2All quotations in this account are from the complaint or the guarantees.
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eggs) from a lake in Iran.3 The Iranian government required
sizeable payments for licenses and other fees to authorize the
shrimp egg harvesting project, and SSL undertook related “fi-
nancial commitments.” Karim Arshian, an Iranian citizen
affiliated with SSL, “was required to execute several guaran-
tee checks related to the proposed operations.”
Simon Goe, a U.S. citizen affiliated with KEL, guaranteed
repayment of Arshian’s costs by executing two personal guar-
antees, one on November 12, 1999, and another on January
20, 2000. Each time, Goe promised to reimburse Arshian for
any expenditures made in securing the “harvest license, cus-
toms clearance, office and living arrangement,” up to
$1,875,603.4 “Without the promised guarantees, [Arshian]
would have been unwilling to execute the referenced guaran-
tee checks.”
Arshian subsequently paid more than $1,875,603 toward
these expenses and requested repayment from Goe. Goe
refused to honor the guarantees. He paid Arshian nothing.
Because Goe did not reimburse Arshian as promised, Arshian
could not make the required payments. Arshian was unable to
pursue legal action on his own because he was imprisoned,
and sold his rights under the guarantees to Massoud Bassidji,
3In the United States, Artemia cysts are found mostly in Great Salt
Lake, although San Francisco Bay also contains them. The cysts are pri-
marily used as aquaculture food for fish and shellfish. See generally Gil-
bert Van Stappen, Introduction, Biology and Ecology of Artemia, in
MANUAL ON THE PRODUCTION AND USE OF LIVE FOOD FOR AQUACUL-
TURE, FAO Fisheries Technical Paper No. 361 (Patrick Lavens & Patrick
Sorgeloos eds., 1996), http://www.fao.org/DOCREP/003/W3732E/
w3732e0m.htm.
4We are not told by the parties why there were two seemingly redundant
guarantees, nor is it clear in the complaint that the second superseded the
first. The place of execution of the first guarantee does not appear on its
face, but the complaint alleges that one of the guarantees was signed in
California. The second guarantee agreement is printed on the letterhead of
KEL, displaying a Hong Kong company address.
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who is identified in the complaint as “an individual residing
in Toronto, Canada.”5 The record does not show the terms of
the assignment, including whether Arshian will receive any of
the proceeds if the guarantees are enforced.
Proceedings in District Court
Bassidji filed a breach of contract claim in district court in
California. Goe asked the court to dismiss the complaint, on
the ground that the guarantees were illegal under Executive
Order 12,959 (now superseded by Executive Order 13,059)
and therefore unenforceable.6
Executive Order 13,059, like its predecessor, Executive
Order 12,959, bans certain economic transactions by “United
States person[s]”7 with Iran. The Order was promulgated
5Bassidji was referred to as a Canadian citizen by counsel in the district
court and in this court. The representations concerning why Arshian sold
the guarantees to Bassidji were also made by Bassidji’s counsel but do not
appear in the complaint. As nothing in the record contradicts these asser-
tions of counsel, and they are consistent with the complaint, we assume
their accuracy for purposes of this opinion.
6Goe initially argued that the guarantees were covered by Executive
Order 12,959. See 60 Fed. Reg. 24,757 (May 9, 1995). Goe has since rec-
ognized, however, that Executive Order 12,959 was superseded by Execu-
tive Order 13,059, and that the guarantees must therefore be analyzed
under Executive Order 13,059. See 62 Fed. Reg. at 44,531 (stating that
Executive Order 13,059 was being issued “in order to clarify the steps
taken in Executive Orders 12957 of March 15, 1995, and 12959 of May
6, 1995, to deal with the unusual and extraordinary threat to the national
security, foreign policy, and economy of the United States declared in
Executive Order 12957 in response to the actions and policies of the Gov-
ernment of Iran”). The district court analyzed this case under Executive
Order 12,959. Because we review the district court’s ruling on the motion
to dismiss de novo, see Wong v. INS, 373 F.3d 952, 966 n.18 (9th Cir.
2004), we need not remand before applying the appropriate Executive
Order.
7The Executive Order’s section 4(c) defines the term “United States per-
son” as “any United States citizen, permanent resident alien, entity orga-
nized under the laws of the United States (including foreign branches), or
any person in the United States.”
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under the authority of the International Emergency Economic
Powers Act (“IEEPA”), 50 U.S.C. §§ 1701-1706. Its purpose
is “ ‘to deal with [Iran’s] unusual and extraordinary threat to
the national security, foreign policy, and economy of the
United States,’ ” see Order pmbl., by “ ‘isolat[ing] Iran from
trade with the United States.’ ” Kalantari v. NITV, Inc., 352
F.3d 1202, 1206 (9th Cir. 2003) (quoting United States v.
Ehsan, 163 F.3d 855, 859 (4th Cir. 1998) (quoting Executive
Order 12,959)) (internal quotation marks omitted); 6 U.S.
Dep’t of State Dispatch No. 19 (May 8, 1995) (quoting Secre-
tary of State Warren Christopher as stating that Executive
Order 12,959 “will ban all U.S. trade and investment with
Iran”).
The district court denied Goe’s motion to dismiss. The
court reasoned that the Executive Order and its implementing
regulations ban only “specified conduct, for example, the
importing of goods or services of Iranian origin or owned or
controlled by the Government of Iran into the United States,
and whatever transactions were implemented to further such
conduct” (emphasis added). Because the underlying conduct,
the exchange of goods between Hong Kong and Iran, is legal,
the district court reasoned, agreements by a United States citi-
zen in furtherance of such a transaction are not prohibited.
The district court did not rule, at that time, on Bassidji’s alter-
native argument supporting enforcement of the guarantees:
that Bassidji was not in pari delicto (equally at fault) with
Goe, so the contracts should be enforced despite their illegal-
ity to avoid providing Goe a windfall from his illegal actions.
The district court subsequently certified its order for inter-
locutory appeal pursuant to 28 U.S.C. § 1292(b), finding, as
§ 1292(b) requires, that the order involves a controlling ques-
tion of law. In so concluding, the district court addressed and
rejected Bassidji’s in pari delicto theory, recognizing that if
the agreement were enforceable even if illegal, the illegality
question would not control the result. The general rule that
illegal contracts are not enforceable, the court stated, is quali-
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fied if, “after looking at the kind of illegality and the particu-
lar facts involved, enforcement would in fact best achieve the
aims of the policy or law the contract violates.” Taking the
alleged facts as true, the district court concluded that Goe was
at greater moral fault, and that conduct similar to Goe’s —
making guarantee promises and then not honoring them —
“would be encouraged by invalidating the guarantees or
assignment.” The court found, however, that counterbalancing
factors of national security, economics, and foreign policy
outweighed the moral fault and deterrence considerations.
We granted Bassidji’s request for an interlocutory appeal.
After oral argument, the parties attempted for some time to
mediate their dispute with the aid of the court’s mediators.
After mediation failed, the case was submitted for decision.
DISCUSSION
I. Choice of Law
To determine whether the Executive Order barred Goe
from issuing the guarantees, we must decide whether the
Order applies to them. Bassidji maintains that it does not, as
Hong Kong law applies. We disagree.
[1] Federal subject-matter jurisdiction in this case is based
on the parties’ diversity of citizenship. We therefore apply the
choice-of-law principles of the forum state, here California.
See Stud v. Trans Int’l Airlines, 727 F.2d 880, 881 (9th Cir.
1984). “To determine the law governing a contract, California
courts look to the relevant statute and, for further guidance, to
the choice-of-law principles outlined in the Restatement.”
Shannon-Vail Five Inc. v. Bunch, 270 F.3d 1207, 1210 (9th
Cir. 2001).
[2] California’s codified choice-of-law rules provide that
“[a] contract is to be interpreted according to the law and
usage of the place where it is to be performed; or, if it does
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not indicate a place of performance, according to the law and
usage of the place where it is made.” Cal. Civ. Code § 1646.
If Bassidji’s assertions are correct and the second guarantee
was executed in Hong Kong, the California rule suggests that
Hong Kong law applies, at least as to that guarantee, as no
place of performance is indicated.
[3] There is an exception to the California rule, however,
when courts are called upon to enforce a contract that impli-
cates strong public policy concerns. “California’s narrow,
public policy exception to the resolution of conflicts through
a neutral comparison of government interests . . . applies only
when foreign law is ‘so offensive to [California] public policy
as to be “ ‘prejudicial to . . . recognized standards of morality
and to the general interest of the citizens. . . .’ ” ’ ” McGhee
v. Arabian Am. Oil Co., 871 F.2d 1412, 1423 n.8 (9th Cir.
1989) (quoting Wong v. Tenneco, Inc., 702 P.2d 570, 576
(Cal. 1985) (quoting Knodel v. Knodel, 537 P.2d 353, 361
n.15 (Cal. 1975) (quoting Biewend v. Biewend, 109 P.2d 701,
705 (Cal. 1941)))) (alteration and second omission in origi-
nal)). Illegal trade with Iran, a country whose government
poses an “unusual and extraordinary threat to the national
security, foreign policy, and economy of the United States,”
see Order pmbl., represents just this sort of policy concern.
California law, which incorporates Executive Order 13,059
through the Supremacy Clause, therefore applies to both the
California guarantee and the similar Hong Kong guarantee.8
See Kashani v. Tsann Kuen China Enter. Co., 13 Cal. Rptr.
3d 174, 181 (Ct. App. 2004) (recognizing that “California law
includes federal law” for purposes of choice-of-law analysis,
so that “a violation of federal law is a violation of law for pur-
poses of determining whether or not a contract is unenforce-
able as contrary to the public policy of California”).
8A similar result would obtain if we applied federal choice-of-law prin-
ciples. Federal common law follows the Restatement (Second) of Conflict
of Laws, which also provides for a public policy exception. See Schoen-
berg v. Exportadora de Sal, S.A. de C.V., 930 F.2d 777, 782 (9th Cir.
1991); see also RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187(2)(b).
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II. The Executive Order
[4] Executive Order 13,059 prohibits, among other things:
any transaction or dealing by a United States per-
son, wherever located, including purchasing, selling,
transporting, swapping, brokering, approving,
financing, facilitating, or guaranteeing, in or related
to: (i) goods or services of Iranian origin or owned
or controlled by the Government of Iran[.]
Order, § 2(d) & d(i).
[5] The interpretation of section 2(d) is an issue of first
impression in the federal courts. As is true of interpretation of
statutes, the interpretation of an Executive Order begins with
its text. See United States v. Hassanzadeh, 271 F.3d 574, 580
(4th Cir. 2001). The text must be construed consistently with
the Order’s “object and policy.” Northwest Forest Res. Coun-
cil v. Glickman, 82 F.3d 825, 830 (9th Cir. 1996) (quoting
Alarcon v. Keller Indus., Inc., 27 F.3d 386, 389 (9th Cir.
1994)) (internal quotation marks omitted).
[6] The text of section 2(d) plainly prohibits Goe’s conduct.
The Artemia cysts were “goods . . . of Iranian origin,” and the
guarantee covered costs incurred in harvesting them. The
transaction between Arshian and Goe was certainly “related
to” the brine shrimp eggs; the only reason for the transaction
was to facilitate their harvesting.9 Goe’s “guaranteeing” of
financial repayment is explicitly included as a type of “trans-
action or dealing” prohibited by section 2(d).
9In addition, the provision of harvesting licenses and customs clearances
could well be viewed as “services owned or controlled by the government
of Iran.” We need not so decide, however, as section 2(d) applies whether
or not one accepts the characterization of governmental licenses and clear-
ances as “services.”
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In response to this textual analysis, Bassidji argues that the
Executive Order is simply too broad to permit a literal inter-
pretation. Bassidji contends, for example, that if an American
in Hong Kong purchased soup containing Iranian shrimp, that
conduct would fall within section 2(d). Bassidji is incorrect.
The Iranian Transactions Regulations, 31 C.F.R. pt. 560, pro-
mulgated under the authority of the Executive Order,10 carve
out exceptions for personal expenses related to travel within
a foreign country, “including payment of living expenses and
acquisition of goods or services for personal use.” 31 C.F.R.
§ 560.210(d). Similarly, the suggestion at oral argument that
a broad reading of the Order would forbid transportation com-
panies to carry a carpet of Iranian origin from one place to
another within the United States is inconsistent with the
implementing regulations. See id. § 560.518(a) (“Except for
transactions involving the Government of Iran, all domestic
transactions with respect to Iranian-origin goods located in the
United States are authorized . . . .” (exception not here perti-
nent omitted)).
Apparently unaware of the limitations incorporated in the
implementing regulations, the district court followed a limit-
ing principle of its own. The court concluded that the Execu-
tive Order bans only transactions facilitating conduct, such as
the importing of goods or services, otherwise banned by the
Order.
The district court’s interpretation is not only unnecessary
for addressing concerns about de minimis application of the
Order, given the regulations, but also in tension with the over-
arching purpose of the Executive Order. Limitation of “im-
ports” and “exports” under sections 1 and 2(a) is but a means
toward the larger end of exerting economic pressure on Iran.
10Sections 1 and 2 of the Executive Order both qualify their prohibitions
with: “Except to the extent provided . . . in regulations, orders, directives,
or licenses issued pursuant to this order.” Section 5 authorizes the Secre-
tary of the Treasury to promulgate regulations implementing the Order.
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Overall, these sanctions aim to induce Iran’s government to
reduce the threat that, according to the Executive Order, Iran
poses to United States interests. Cf. Hassanzadeh, 271 F.3d at
579 (violating the Order’s import restrictions on Iranian goods
is harmful because of the “[c]ontribution of financial support
to terrorism”).
With this purpose in mind, sections 2(b)-(f) cannot be con-
strued as merely implementing sections 1 and 2(a). Section
2(c), for example, which limits “investment” in Iran, does not
exist merely to effectuate the prohibition on trade. Rather, the
prohibition against investment goes to the heart of the eco-
nomic sanctions regime. Investment in Iran directly aids the
Iranian economy whether or not it ultimately leads to an
exchange of goods between Iran and the United States. See
generally Letter to Congressional Leaders on Prohibiting Cer-
tain Transactions with Respect to Iran, 1997 PUB. PAPERS
1113, 1114 (Aug. 19, 1997) (stating that the embargo prohib-
its “any trade- or investment-related activities with Iran” and
“mak[ing] clear that this means all direct or indirect involve-
ment in such activities wherever those activities occur”
(emphasis added)).
Similarly, although the transaction that Goe guaranteed was
not directly related either to the import or to the export of
goods between Iran and the United States, it furthered a result
inconsistent with the purposes of the Executive Order. The
transaction promoted the transfer of wealth to Iran, including,
it appears, the payment of fees to the Iranian government.
That the licenses pertained to a business deal, the export of
brine shrimp eggs from Iran to Hong Kong, that is not illegal
under the Executive Order, is irrelevant. While the Executive
Order does not, and could not, ban all trade between Hong
Kong and Iran, see 50 U.S.C. § 1702(a)(1) (granting the Presi-
dent the authority under IEEPA to regulate trade only of per-
sons “subject to the jurisdiction of the United States”), United
States citizens are expressly prohibited from facilitating such
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trade by guaranteeing the payment of costs incurred by parties
to the sale. See Order § 2(d).
[7] We therefore reject the district court’s limiting interpre-
tation of the Executive Order. The guarantees, we conclude,
violated both the text and the animating purpose of the Execu-
tive Order. On the facts before us, they were illegal.
III. Enforcement of Illegal Guarantees
Goe contends that, as illegal contracts, the guarantees are
unenforceable. We can reach this issue even though the dis-
trict court certified for interlocutory appeal only the question
of whether the guarantees violated the Executive Order. When
reviewing a district court order certified under 28 U.S.C.
§ 1292(b), our jurisdiction “is not limited to deciding the pre-
cise question the district court certified to [us]. . . . [We] may
address any issue fairly included within [the] order [we are
reviewing].” Lee v. Am. Nat’l Ins. Co., 260 F.3d 997, 1000
(9th Cir. 2001).
Here, the relevant district court order is the denial of Goe’s
motion to dismiss. The motion contended that the guarantees
were illegal and therefore unenforceable; the district court
denied the motion because it concluded that the guarantees
did not violate the Executive Order. Any issue material to the
effect of the illegality defense on the propriety of dismissing
the action is “fairly included” within the certified order. The
question of enforceability is critical to determining the valid-
ity of the district court’s denial of the motion to dismiss, as
the district court recognized when it decided that question in
its order certifying the interlocutory appeal.
A threshold question is whether California or federal law
should apply to the enforceability question. This suit is a
breach of contract action, with our jurisdiction premised
solely on diversity of citizenship under 28 U.S.C. § 1332. The
question whether a particular agreement is enforceable is one
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of substance, not procedure. Under Erie R.R. Co. v. Tompkins,
304 U.S. 64 (1938), the law of the forum state, California,
would normally apply.
In this case, however, Goe raises a federal law claim as a
defense. While we recognize that federal law governs whether
the transaction between Goe and Arshian was illegal, the
enforceability of the illegal guarantees under general princi-
ples of contract law is a separate question. Courts have
reached divergent conclusions concerning which law should
be applied to determine enforceability in these circumstances.
Kelly v. Kosuga, 358 U.S. 516 (1959), stated, flatly, that the
“effect of illegality under a federal statute is a matter of fed-
eral law, even in diversity actions in the federal courts after
Erie.” Id. at 519 (citation omitted); see also Sola Elec. Co. v.
Jefferson Elec. Co., 317 U.S. 173, 176 (1942) (“When a fed-
eral statute condemns an act as unlawful[,] the extent and
nature of the legal consequences of the condemnation, though
left by the statute to judicial determination, are nevertheless
federal questions, the answers to which are to be derived from
the statute and the federal policy which it has adopted.”). The
Seventh Circuit has held, relying on Kelly, that “[w]hen the
statute is federal, federal law determines not only whether the
statute was violated but also, if so, and assuming the statute
itself is silent on the matter, the effect of the violation on the
enforceability of the contract.” N. Ind. Pub. Serv. Co. v. Car-
bon County Coal Co., 799 F.2d 265, 273 (7th Cir. 1986).
This principle, however, has either been honored in the
breach, or has come to encompass a corollary permitting the
incorporation of the law of the forum state in some circum-
stances. In Torrez v. Torrez (In re Torrez), 827 F.2d 1299 (9th
Cir. 1987), for example, without discussing the possibility of
applying federal law, we applied California law to the ques-
tion whether to enforce a contract that violated federal statu-
tory dictates concerning subsidized irrigation water.11
11Torrez presented the enforceability question in the bankruptcy context
and involved real property located in California. See 827 F.2d at 1299.
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Similarly, a recent California Court of Appeal decision
applied California law in determining the scope of the illegal-
ity defense as it relates to the same Executive Order here at
issue, also without alluding to Kelly or Sola. See Kashani, 13
Cal. Rptr. 3d at 179-81.
In this case, the result does not turn on whether we apply
federal or state law, so we need not decide whether Kelly and
Sola govern. Both federal law and California law begin from
the core proposition that whatever flexibility may otherwise
exist with regard to the enforcement of “illegal” contracts,
courts will not order a party to a contract to perform an act
that is in direct violation of a positive law directive, even if
that party has agreed, for consideration, to perform that act.
The Supreme Court in Kaiser Steel Corp. v. Mullins, 455
U.S. 72 (1982), stated this bedrock principle emphatically,
stressing the difference between cases in which the courts are
asked to order an illegal act and cases in which the relief
sought does not seek directly to order illegal activity. Id. at
79-80. The Court recognized that there is considerable room
for the balancing of equitable considerations in pursuit of the
“ ‘overriding general policy . . . “of preventing people from
getting other people’s property for nothing when they purport
to be buying it.’ ’ ”’ Id. at 80 (quoting Kelly, 358 U.S. at 520-
21 (quoting Cont’l Wall Paper Co. v. Louis Voight & Sons
Co., 212 U.S. 227, 271 (1909) (Holmes, J., dissenting))). Kai-
ser Steel made clear, however, that the realm of nuanced judi-
cial determinations concerning enforcement when an illegality
defense is asserted only begins “[p]ast the point where the
judgment of the Court would itself be enforcing the precise
conduct made unlawful by the Act.” Id. (quoting Kelly, 358
U.S. at 520) (internal quotation marks omitted) (alteration in
original) (emphasis added). Where the relief sought does not
pass that point — that is, where a promise can only “be
enforced [by] commanding unlawful conduct,” id. at 79 —
then the principle that “illegal promises will not be enforced
in cases controlled by the federal law,” id. at 77, takes center
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stage and does not admit of exceptions. See also id. at 81-82
(emphasizing that federal courts’ authority to enforce agree-
ments against public policy is “subject to the limitation that
the illegality defense should be entertained in those circum-
stances where its rejection would be to enforce conduct that
the . . . laws forbid”).
Applying that core principle, Kaiser Steel first assumed the
invalidity under the antitrust laws and § 8(e) of the National
Labor Relations Act, 29 U.S.C. § 158(e), of a collective bar-
gaining agreement between Kaiser Steel and a union repre-
senting its employees. The agreement required Kaiser Steel to
pay a penalty into the union trust funds for any coal purchased
from employers who were not making contributions to the
funds on their employees’ behalf. The Court then held that the
purchased coal clause was unenforceable even after the col-
lective bargaining agreement had expired and all work under
it had been done, even though the agreement contained a
clause providing for renegotiation at the behest of the union
in the event the purchased coal clause was deemed illegal. Id.
at 74-82. The reason for abjuring reliance on equitable consid-
erations and permitting what was arguably a windfall to Kai-
ser Steel, the Court made clear, was that:
If Kaiser’s undertaking is illegal under the antitrust
or the labor laws, it is because of the financial bur-
den which the agreement attached to purchases of
coal from non-UMW producers, even though they
may have contributed to other employee welfare
funds. It is plain enough that to order Kaiser to pay
would command conduct that assertedly renders the
promise an illegal undertaking under the federal
statutes.
Id. at 79 (emphasis added).
That Kaiser Steel establishes a limiting principle, not a gen-
eral pronouncement about the enforceability through damages
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awards or otherwise of agreements in some respects illegal,
has sometimes been overlooked. See, e.g., Nagel v. ADM
Investor Servs., Inc., 217 F.3d 436, 440 (7th Cir. 2000) (stat-
ing that despite Kaiser Steel’s “ringing declaration, many
cases continue to treat the defense of illegality to the enforce-
ment of a contract as presumptive rather than absolute, forgiv-
ing minor violations and not allowing the defense to be used
to confer windfalls” (citing cases)); Paul Arpin Van Lines,
Inc. v. Universal Transp. Servs., Inc., 988 F.2d 288, 290 (1st
Cir. 1993) (“This general rule [of not enforcing illegal con-
tracts] . . . is almost as much honored in the breach as in the
observance.”). Nuanced approaches to the illegal contract
defense, taking into account such considerations as the avoid-
ance of windfalls or forfeitures, deterrence of illegal conduct,
and relative moral culpability, remain viable in federal court
and represent no departure from Kaiser Steel, but only as long
as the relief ordered does not mandate illegal conduct. See N.
Ind. Pub. Serv. Co., 799 F.2d at 272-73 (applying an equita-
ble, balancing approach, while recognizing that “where the
contract itself is illegal — as it would be if it were . . . a viola-
tion of section 1 of the Sherman Act, or a contract to commit
a bank robbery” — it would be “governed by Kaiser Steel”);
Nat’l Souvenir Ctr. v. Historic Figures, Inc., 728 F.2d 503,
515 (D.C. Cir. 1984) (explaining that Kaiser Steel prevents
courts from enforcing contracts where doing so would make
them “effectively become a party to the allegedly illegal
scheme”); Transfair Int’l, Inc. v. United States, 54 Fed. Cl.
78, 84-85 (2002) (relying on the Restatement (Second) of
Contracts, Chapter 8); cf. United Food & Commercial Work-
ers Int’l Union, Local 588 v. Foster Poultry Farms, 74 F.3d
169, 174 (9th Cir. 1996) (noting that courts will not enforce
an arbitration award when it violates a public policy that is
explicit, well-defined, dominant, and “one that specifically
militates against the relief ordered by the arbitrator” (internal
quotation marks and citations omitted)).
California law is similar. Under California law, “the gen-
eral rule [is] that the courts will deny relief to either party who
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has entered into an illegal contract or bargain which is against
public policy.” Tri-Q, Inc. v. Sta-Hi Corp., 404 P.2d 486, 496
(Cal. 1965). Thus, while “[i]n situations in which no strong
objections of public policy are present, a party to the illegal
agreement may be permitted to enforce it,” 1 B.E. WITKIN, SUM-
MARY OF CALIFORNIA LAW § 451, at 401-02 (9th ed. 1987 &
Supp. 2004), and the California courts will therefore give con-
tractual remedies where an agreement is asserted to be illegal
in a wide variety of circumstances, see, e.g., M. Arthur Gens-
ler, Jr., & Assocs. v. Larry Barrett, Inc., 499 P.2d 503, 508
(Cal. 1972), California courts will not “fashion an equitable
remedy” where doing so involves “enforcing the precise con-
duct made unlawful . . . in contravention of the legislative
purpose,” Joe A. Freitas & Sons v. Food Packers, Processors
& Warehousemen Local 865, 211 Cal. Rptr. 157, 162 (Ct.
App. 1985) (citing Kaiser Steel, 455 U.S. at 84); see also
Wong, 702 P.2d at 576 (“As this court emphasized in [Lee On
v. Long, 234 P.2d 9, 11 (Cal. 1951)], a case in which a group
of gamblers unsuccessfully sought to recover the spoils of
their illicit activities: ‘No principle of law is better settled than
that a party to an illegal contract cannot come into a court of
law and ask to have his illegal objects carried out . . . .’ ” (fur-
ther internal quotation marks omitted)).
Illustrative is Kashani, a recent California Court of Appeal
case concerning an illegality defense under the same Execu-
tive Order here at issue. Kashani recognized a wide variety of
circumstances in which California courts will indeed give
force to contracts that are in some respect illegal, listing,
among other “exceptions to the statutory and judicial lan-
guage that illegal contracts are void and unenforceable,” such
considerations as unjust enrichment, imposition of a harsh
penalty, interpretation of statutory penalties to exclude the
illegality defense, lack of serious moral turpitude, termination
of the agreement, and whether the underlying policy would be
better served by enforcement. See Kashani, 13 Cal. Rptr. 3d
at 180. At the same time, Kashani recognized the core princi-
ple that courts may not themselves order violations of the law,
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citing to and quoting from Wong v. Tenneco. Id. at 179.
Kashani concluded that none of the available equitable con-
siderations was sufficient to justify enforcement, given the
strength of the public interest underlying the Executive Order
and the “patently illegal contracts” at issue. Id. at 193.
We therefore proceed to examine whether, given the facts
alleged in the complaint, a plausible remedy exists for Bas-
sidji that would not require a court to order a legal violation.
IV. The Legality of a Damages Remedy
[8] Federal and California law, as explicated above, would
bar an American court from ordering Goe to pay Arshian pur-
suant to the illegal guarantees. Such a payment would violate
the precise terms of the Executive Order, which prohibit “any
transaction or dealing by a United States person . . . related
to . . . goods or services of Iranian origin” and “any new
investment by a United States person in Iran.” Order § 2(d) &
d(i), (c). A payment from Goe to Arshian would provide
funds to the Iranian economy, paying for goods in Iran. As
such, it would violate both the letter of the Executive Order
and its fundamental purposes.
That a court-ordered payment from Goe to Arshian would
violate the Executive Order is supported by the inclusion in
31 C.F.R. § 560.510 of special authorization for licensing of
certain damages awards by courts and other tribunals that
would otherwise violate the Executive Order. The regulation
allows “specific licenses [to] be issued on a case-by-case
basis” for “transactions in connection with . . . awards, orders,
or decisions of an administrative, judicial or arbitral proceed-
ing in the United States or abroad, where the proceeding
involves the enforcement of awards, decisions or orders of
[the Iran-United States Claims Tribunal in The Hague, the
International Court of Justice, or other international tribu-
nals].” 31 C.F.R. § 560.510(a); see also id. § 560.510(d) &
(d)(1) (“The following are authorized: All transactions related
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to payment of awards of the Iran-United States Claims Tribu-
nal in The Hague against Iran.”). It also permits “[a]ll transac-
tions necessary to the payment and implementation of awards
. . . in a legal proceeding to which the United States Govern-
ment is a party, or to payments pursuant to settlement agree-
ments entered into by the United States Government in such
a legal proceeding.” Id. § 560.510(d)(2). By authorizing
courts to enforce some litigation remedies that would other-
wise violate the Executive Order, this regulation suggests that,
but for the exceptions listed, United States courts may not
order, as remedies, payments of the type requested in this
case, where the ensuing transaction would violate the Execu-
tive Order.
[9] Arshian’s assignment of the guarantee to Bassidji does
not change this straightforward application of Kaiser Steel. In
general, an assignee does not sue in its own right, but rather
stands in the shoes of its assignor. See, e.g., Misic v. Bldg.
Serv. Employees Health & Welfare Trust, 789 F.2d 1374,
1378 (9th Cir. 1986) (per curiam) (applying the principle
under federal law); see also Nat’l Steel Corp. v. Golden Eagle
Ins. Co., 121 F.3d 496, 502 (9th Cir. 1997) (applying Califor-
nia law). Bassidji explicitly accepts this general rule, stating
in his brief:
Mr. Goe believes that an Iranian citizen could not
secure justice in the United States courts without
violating President Clinton’s Executive Order; thus,
he posits, an assignee cannot secure justice either.
To the extent that Mr. Goe is simply reciting the
general rule that an assignee stands in the shoes of
his assignor, we wholly agree. But . . . the law does
not in any way bar Mr. Arshian from appearing and
seeking justice in the United States courts. It natu-
rally follows that Mr. Arshian’s assignee may also
appear and seek justice.
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[10] Thus, no damages remedy can be provided to Bassidji
by an American court. The “shoes” in which he stands make
his claim repugnant to the Executive Order. Goe could not be
ordered to pay Arshian; therefore, a payment to Arshian’s
assignee is also prohibited.
V. Further Proceedings
As this is an interlocutory appeal pursuant to the district
court’s certification under 28 U.S.C. § 1292(b), there has been
no final judgment in the district court. We return the matter
to the district court for further proceedings including, if neces-
sary, consideration of whether Bassidji should be granted
leave to amend. See FED. R. CIV. P. 15(a).
Conclusion
For the reasons stated, we reverse the district court’s deter-
mination that, on the facts pled, the guarantees were not cov-
ered by the Executive Order. Moreover, Bassidji’s complaint
does not state a claim for which recovery can legally be
ordered.
REVERSED.
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APPENDIX
Executive Order 13059 of August 19, 1997
By the authority vested in me as President by the Constitution
and the laws of the United States of America, including the
International Emergency Economic Powers Act (50 U.S.C.
§§ 1701 et seq.) (“IEEPA”), the National Emergencies Act
(50 U.S.C. §§ 1601 et seq.), section 505 of the International
Security and Development Cooperation Act of 1985 (22
U.S.C. § 2349aa-9) (“ISDCA”), and section 301 of title 3,
United States Code,
I, WILLIAM J. CLINTON, President of the United States of
America, in order to clarify the steps taken in Executive
Orders 12957 of March 15, 1995, and 12959 of May 6, 1995,
to deal with the unusual and extraordinary threat to the
national security, foreign policy, and economy of the United
States declared in Executive Order 12957 in response to the
actions and policies of the Government of Iran, hereby order:
Sec. 1. Except to the extent provided in section 3 of this order
or in regulations, orders, directives, or licenses issued pursu-
ant to this order, and notwithstanding any contract entered
into or any license or permit granted prior to the effective date
of this order, the importation into the United States of any
goods or services of Iranian origin or owned or controlled by
the Government of Iran, other than information or informa-
tional materials within the meaning of section 203(b)(3) of
IEEPA (50 U.S.C. § 1702(b)(3)), is hereby prohibited.
Sec. 2. Except to the extent provided in section 3 of this order,
in section 203(b) of IEEPA (50 U.S.C. § 1702(b)), or in regu-
lations, orders, directives, or licenses issued pursuant to this
order, and notwithstanding any contract entered into or any
license or permit granted prior to the effective date of this
order, the following are prohibited:
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(a) the exportation, reexportation, sale, or supply, directly or
indirectly, from the United States, or by a United States per-
son, wherever located, of any goods, technology, or services
to Iran or the Government of Iran, including the exportation,
reexportation, sale, or supply of any goods, technology, or
services to a person in a third country undertaken with knowl-
edge or reason to know that:
(i) such goods, technology, or services are intended specifi-
cally for supply, transshipment, or reexportation, directly or
indirectly, to Iran or the Government of Iran; or
(ii) such goods, technology, or services are intended specifi-
cally for use in the production of, for commingling with, or
for incorporation into goods, technology, or services to be
directly or indirectly supplied, transshipped, or reexported
exclusively or predominantly to Iran or the Government of
Iran;
(b) the reexportation from a third country, directly or indi-
rectly, by a person other than a United States person of any
goods, technology, or services that have been exported from
the United States, if:
(i) undertaken with knowledge or reason to know that the
reexportation is intended specifically for Iran or the Govern-
ment of Iran, and
(ii) the exportation of such goods, technology, or services to
Iran from the United States was subject to export license
application requirements under any United States regulations
in effect on May 6, 1995, or thereafter is made subject to such
requirements imposed independently of the actions taken pur-
suant to the national emergency declared in Executive Order
12957; provided, however, that this prohibition shall not
apply to those goods or that technology subject to export
license application requirements if such goods or technology
have been:
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(A) substantially transformed into a foreign-made product
outside the United States; or
(B) incorporated into a foreign-made product outside the
United States if the aggregate value of such controlled United
States goods and technology constitutes less than 10 percent
of the total value of the foreign-made product to be exported
from a third country;
(c) any new investment by a United States person in Iran or
in property, including entities, owned or controlled by the
Government of Iran;
(d) any transaction or dealing by a United States person,
wherever located, including purchasing, selling, transporting,
swapping, brokering, approving, financing, facilitating, or
guaranteeing, in or related to:
(i) goods or services of Iranian origin or owned or controlled
by the Government of Iran; or
(ii) goods, technology, or services for exportation, reexporta-
tion, sale, or supply, directly or indirectly, to Iran or the Gov-
ernment of Iran;
(e) any approval, financing, facilitation, or guarantee by a
United States person, wherever located, of a transaction by a
foreign person where the transaction by that foreign person
would be prohibited by this order if performed by a United
States person or within the United States; and
(f) any transaction by a United States person or within the
United States that evades or avoids, or has the purpose of
evading or avoiding, or attempts to violate, any of the prohibi-
tions set forth in this order.
Sec. 3. Specific licenses issued pursuant to Executive Orders
12613 (of October 29, 1987), 12957, or 12959 continue in
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effect in accordance with their terms except to the extent
revoked, amended, or modified by the Secretary of the Trea-
sury. General licenses, regulations, orders, and directives
issued pursuant to those orders continue in effect in accor-
dance with their terms except to the extent inconsistent with
this order or to the extent revoked, amended, or modified by
the Secretary of the Treasury.
Sec. 4. For the purposes of this order:
(a) the term “person” means an individual or entity;
(b) the term “entity” means a partnership, association, trust,
joint venture, corporation, or other organization;
(c) the term “United States person” means any United States
citizen, permanent resident alien, entity organized under the
laws of the United States (including foreign branches), or any
person in the United States;
(d) the term “Iran” means the territory of Iran and any other
territory or marine area, including the exclusive economic
zone and continental shelf, over which the Government of
Iran claims sovereignty, sovereign rights, or jurisdiction, pro-
vided that the Government of Iran exercises partial or total de
facto control over the area or derives a benefit from economic
activity in the area pursuant to international arrangements;
(e) the term “Government of Iran” includes the Government
of Iran, any political subdivision, agency, or instrumentality
thereof, and any person owned or controlled by, or acting for
or on behalf of, the Government of Iran;
(f) the term “new investment” means:
(i) a commitment or contribution of funds or other assets; or
(ii) a loan or other extension of credit, made after the effective
date of Executive Order 12957 as to transactions prohibited
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by that order, or otherwise made after the effective date of
Executive Order 12959.
Sec. 5. The Secretary of the Treasury, in consultation with the
Secretary of State and, as appropriate, other agencies, is
hereby authorized to take such actions, including the promul-
gation of rules and regulations, the requirement of reports,
including reports by United States persons on oil and related
transactions engaged in by their foreign affiliates with Iran or
the Government of Iran, and to employ all powers granted to
me by IEEPA and the ISDCA as may be necessary to carry
out the purposes of this order. The Secretary of the Treasury
may redelegate any of these functions to other officers and
agencies of the United States Government. All agencies of the
United States Government are hereby directed to take all
appropriate measures within their authority to carry out the
provisions of this order.
Sec. 6. (a) The Secretary of the Treasury may authorize the
exportation or reexportation to Iran or the Government of Iran
of any goods, technology, or services also subject to export
license application requirements of another agency of the
United States Government only if authorization by that
agency of the exportation or reexportation to Iran would be
permitted by law.
(b) Nothing contained in this order shall be construed to
supersede the requirements established under any other provi-
sion of law or to relieve a person from any requirement to
obtain a license or other authorization from another depart-
ment or agency of the United States Government in compli-
ance with applicable laws and regulations subject to the
jurisdiction of that department or agency.
Sec. 7. The provisions of this order consolidate the provisions
of Executive Orders 12613, 12957, and 12959. Executive
Order 12613 and subsections (a), (b), (c), (d), and (f) of sec-
tion 1 of Executive Order 12959 are hereby revoked with
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respect to transactions occurring after the effective date of this
order. The revocation of those provisions shall not alter their
applicability to any transaction or violation occurring before
the effective date of this order, nor shall it affect the applica-
bility of any rule, regulation, order, license, or other form of
administrative action previously taken pursuant to Executive
Orders 12613 or 12959.
Sec. 8. Nothing contained in this order shall create any right
or benefit, substantive or procedural, enforceable by any party
against the United States, its agencies or instrumentalities, its
officers or employees, or any other person.
Sec. 9. The measures taken pursuant to this order are in
response to actions of the Government of Iran occurring after
the conclusion of the 1981 Algiers Accords, and are intended
solely as a response to those later actions.
Sec. 10. (a) This order is effective at 12:01 a.m. eastern day-
light time on August 20, 1997.
(b) This order shall be transmitted to the Congress and pub-
lished in the Federal Register.
/S/ WILLIAM J. CLINTON
THE WHITE HOUSE,
August 19, 1997.
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