Cubic Corp.: Between Iran and a hard place…

February 8, 2011

Since mid-January, Cubic Corporation (CUB) has signed new contracts worth more than $300 million. The agreements vary, from creating a new “new smart card fare payment and revenue management system” for Vancouver’s regional transit systems, to creating systems that help American and British military personnel obtain tactical training.

Yet for all the exciting new work underway, the company is still trying to resolve a very old legal dispute.

The case – which is actually set for a hearing in Pasadena, Calif. this morning before judges on the Ninth Circuit Court of Appeals – relates to a contract that the Ministry of Defense for the Armed Forces of the Islamic Republic of Iran awarded to Cubic Defense back in 1977. That would be the Shah’s Iran, pre-Revolution, needless to say. According to this report from the Iran-U.S. Claims Tribunal, Iran hired Cubic to supply an air combat system and then furnish the parts needed to keep it going.

You’ll probably recall that the late 70s were a volatile time in Iran: The State Department’s website notes that Iran had a 1978 revolution, followed by the 1979 student-led seizure of the American Embassy (and 52 hostages), and America’s decision in 1980 to break diplomatic relations with Iran.

Iran later sued Cubic and got an arbitration award for $2.8 million, interests, and costs. After that, in 1998, a U. S. federal court judge declared that Iran’s arbitration award was an enforceable judgment. But, as Cubic disclosed in the 10-Q that it filed with the SEC on Feb. 3, neither it nor Iran was satisfied; both parties ended up appealing the court’s judgment to the 9th Circuit Court of Appeals.

Of course, in this case, Cubic can’t just write Iran a check – even if it wanted to. The filing explains:

“Under a 1979 Presidential executive order, all transactions by United States citizens with Iran are prohibited. Therefore, even if Iran were to prevail in the 9th Circuit litigation, it is unlikely that we would be permitted to pay any amount to Iran.”

And that’s not the only complication. It turns out that there are “potential lienors” that want the money that Cubic allegedly owes to Iran. The company states that these lienors have filed liens against Iran’s judgment, but they haven’t obtained “valid court orders enforcing the liens.” The 10-Q continues:

“We are not aware whether any such claimants against Iran’s judgment have received Terrorism Risk Insurance Act funds (which would make their claims unenforceable)…. Payments to valid lienors could potentially be enforced, so in a previous year we recorded a liability for the amount of the judgment and are continuing to accrue interest.”

So after the oral arguments conclude, Cubic and its shareholders must wait for the decision by the 9th Circuit Court of Appeals. If the court reverses the judgment, Iran may seek a review by the U. S. Supreme Court. However, if the court affirms the judgment and Cubic’s liability, then Cubic can appeal the decision, or figure out whether it’s going to 1) pay the lienors if they obtain valid court orders, or 2) defy the executive order and pay Iran, although the odds of that happening seem very remote. We’ll see how the judges rule, and whether – after 34 years – the case finally comes to an end.

Image source: The U. S. Department of State

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