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* Bill could unfreeze $1.75 billion for 1983 bomb victims
* Washington suspects Iran role in US Marine barracks attack
* Iran says sovereign immunity doctrine protects from payout
By Basil Katz
NEW YORK, Aug 24 (Reuters) - One way to win a court case is to get the United States Congress to change the rules of the game midstream.
A little-noticed provision tucked into the latest Iran sanctions bill may have done just that for American victims of a 1983 bombing of the U.S. Marine Corps barracks in Beirut.
The sanctions bill, signed by President Barack Obama on Aug. 10, set out additional penalties against Tehran to curb the country's nuclear ambitions.
The bill also specifically disarms claims the Central Bank of Iran has made in a legal battle in federal court in Manhattan over $1.75 billion in securities frozen in a New York bank account that the central bank says it owns.
The plaintiffs in that case are trying to get Tehran, through the Central Bank of Iran, to pay damages for Iran's suspected role in helping Hezbollah carry out the barracks attack during the civil war in Lebanon.
The $1.75 billion was uncovered by the U.S. Treasury Department in 2008 and sits in a New York branch of Citibank, part of Citigroup. Treasury says the money is effectively Iranian funds.
The Beirut plaintiffs' lawsuit, filed in 2010, argues that the funds should go toward paying a $2.65 billion damages award they obtained against Iran in 2007 and have so far been unable to collect.
In court papers, the Central Bank of Iran has argued that the funds are off limits from seizure under the doctrine of sovereign immunity, which holds that foreign states or their agents are not subject to another nation's laws.
But Section 502 of the sanctions law, officially known as the Iran Threat Reduction and Syria Human Rights Act of 2012, takes direct aim at that defense.
The section specifically declares that the Central Bank of Iran "is not immune" under the Foreign Sovereign Immunities Act of 1976, the U.S. law that Iran's central bank claims protects its funds from seizure.
It also states that the "financial assets that are identified" in the Manhattan case "shall be subject to execution or attachment ... to satisfy any judgment to the extent of any compensatory damages awarded against Iran."
Over the years, there have been billions of dollars in default judgments against Iran levied by U.S. courts in favor of Americans, but never collected. Language in the latest sanctions bill, which could be subject to legal challenge, appears to have brought the plaintiffs in the Manhattan case closer to seizing actual funds than in any other case.
David Lindsey, a New York-based lawyer for the Central Bank of Iran, also known as Bank Markazi, acknowledged that the new sanctions law could affect the Manhattan case.
"The purpose of this 10th inning change in the law was to do away with our defenses," Lindsey said. "No allegations have ever been made that the Central Bank of Iran was involved in the 1983 attack," he said.
Steven Perles, a lawyer for the Beirut plaintiffs, declined comment. The case was brought on behalf of Deborah Peterson, the personal representative of one of the deceased servicemen, and encompasses hundreds of individual plaintiffs.
"If this section stands, it does seem to overcome any defenses Iran might have," said Julian Ku, a professor at Hofstra University's School of Law.
Ku, who called the statute modification "unusual," said that "if the payment is made, I think it would be the first such payment, and certainly the largest ever paid out in a U.S. court against Iran."
To be sure, the plaintiffs must file supplemental briefs in light of the new legislation, and the judge must eventually decide whether to order that the funds be turned over - a process that could still take years.
While Congress has previously intervened to help terrorism victims obtain compensation from foreign states, it is rare for a law to directly address an active case, legal experts said.
"There is precedent for massive payouts, but this is a little bit unusual because it changes a law about Iranian sovereign immunity in just one case," said Roger Alford, a professor at the University of Notre Dame Law School. "How did the lawyers get Congress to do that?"
The amendment was introduced last winter by Senator Robert Menendez, a New Jersey Democrat. A senior aide to Menendez said the lawmaker's efforts were spurred on by a visit from a victim's family from his home state.
The aide, who spoke on condition of anonymity, said the purpose of the legislation was to ensure that claims against Iran were in fact actionable.
"The amendment sends a message not just to Iran but to the other states that support terrorism that the U.S. will allow the seizure and attachment of assets to satisfy judgments against those countries," the aide said.
Experts and lawyers involved in such cases said the defendants in the Manhattan case may seek to challenge the constitutionality of Congress changing the statute, but that this would likely be a losing battle. One way would be to argue that the legislative branch had improperly interfered with judicial matters.
Lindsey, the lawyer for the Iran bank, would say only that "Iran is studying the new legislation to decide its next steps in the litigation."
There is another wrinkle in the claims over the $1.75 billion held in a Citibank account. The money was deposited there by Luxembourg-based bank Clearstream, which holds Iranian funds in accounts in Luxembourg.
Clearstream said in court papers in July that if it is forced to turn over the $1.75 billion in New York, it may be barred from docking an equivalent sum from a Bank Markazi account in Europe because of European sanctions against Iran.
Clearstream has argued that since the Iranian assets were booked in Europe, they could not be considered to be in the United States.
The sanctions law, however, said that a sum held in the United States that was "equal in value" to Iranian assets held abroad could be attached.
A spokesman for Clearstream's law firm, White & Case, declined comment.
Ever since the Menendez amendment was introduced, other groups of plaintiffs who have won judgments against Iran have expressed interest in getting a piece of any possible payout.
Lawyers close to the case in New York say the $1.75 billion would currently be shared among about 1,350 people, which includes families of victims of a 1996 truck bomb attack at a U.S. military complex in Khobar near the Saudi Arabian oil city of Dhahran. The attack killed 19 soldiers and injured nearly 400.
The aide to Menendez said lawyers for the 1,350 people had brokered a sharing agreement for the funds should they be turned over.
Five days after Obama signed the sanctions bill, the Peterson plaintiffs sued London-based bank Standard Chartered seeking compensation over its concealment of Iran-linked transactions, citing the Beirut bombing, which killed 241 U.S. servicemen.
Iran denies that it wants to develop nuclear weapon technology. But its refusal to limit and be more transparent about its nuclear activity has led to increasingly tough sanctions.
Experts say the U.S. State Department has been reluctant to push for enforcement of existing money judgments against Iran because they could serve as a potential lever in negotiations with Tehran, while levying the $1.75 billion would have only a minimal impact.
"While the assets involved are substantial," said Suzanne Maloney, a former State Department adviser who now works at the Brookings Institution's Saban Center for Middle East Policy, "I don't believe they are perceived as a meaningful bargaining chip with Tehran on the nuclear issue or other elements of concern with respect to Iranian policy."
The case is Peterson v. Islamic Republic of Iran, U.S. District Court for the Southern District of New York, No. 10-cv-04518.