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BANCO NACIONAL DE CUBA v. FIRST NATL. CITY BANK OF

July 20, 1967

BANCO NACIONAL de CUBA, Plaintiff,
v.
The FIRST NATIONAL CITY BANK OF NEW YORK, Defendant


Frederick van Pelt Bryan, District Judge.


The opinion of the court was delivered by: BRYAN

FREDERICK van PELT BRYAN, District Judge:

This action by Banco Nacional of Cuba (Banco Nacional), the financial agent of the Government of Cuba, against The First National City Bank of New York (First National City) is one of the numerous cases before me raising issues arising out of confiscations of American-owned property in Cuba by the Castro Government.

 The amended complaint alleges two claims for relief, the first for the excess realized by First National City on the sale of collateral held as security for a loan, and the second for deposits by nationalized Cuban banks in First National City in New York. The answer pleads a series of defenses, set-offs and counterclaims based principally on the confiscation of First National City's Cuban branches. First National City has now moved for summary judgment pursuant to Rule 56(a), F.R.C.P., and Banco Nacional has cross-moved for the same relief on the first claim and for judgment dismissing the counterclaims. Rule 56(b).

 I.

 The facts giving rise to the first claim for relief are not in serious dispute. On July 8, 1958, First National City, a New York banking corporation doing business in New York and throughout the world, made a loan of fifteen million dollars to Banco de Desarrollo Economicoy Social (Bandes), a governmental corporate agency of the Republic of Cuba. The loan was secured by United States Government bonds and obligations of the International Bank of Reconstruction and Development pledged to First National City by Fondo de Estabilizacion de La Moneda (Fondo), another Cuban governmental agency, and Banco Nacional. On January 1, 1959, the Castro Government took control of the Republic of Cuba. The fifteen million dollar loan to Bandes was renewed for another year on July 8, 1959. Thereafter by virtue of Cuban Law No. 730, February 16, 1960, and Law No. 847, June 30, 1960, Bandes was dissolved and Banco Nacional succeeded to the rights and obligations with which we are concerned in this action, including the obligation to repay the loan. The Republic of Cuba guaranteed repayment. On July 7, 1960, the terms of the loan were renegotiated for the last time. Banco Nacional repaid five million dollars, and requested and obtained an agreement from First National City to defer demand for the balance of ten million dollars for one year. A proportionate amount of collateral was then released.

 September 16, 1960, however, marked the date of an irreparable breach of the relationship between these parties. On that day the Cuban militia seized all eleven of First National City's branches located in Cuba. On the following day the issuance of Executive Power Resolution No. 2 left no uncertainty as to the permanent nature of these confiscations; under the terms of the resolution the Cuban State was declared "subrogated" to all of First National City's rights, obligations, and liabilities. *fn1"

 In the light of this turn of events First National City, on September 23, 1960, sold the collateral it held as security for the unpaid portion of the loan and applied the proceeds in payment of the principal obligation and accrued interest. Defendant concedes - and plaintiff for purposes of this motion does not deny - that the amount realized on the sale of collateral exceeded by $1,810,880.51 the ten million dollars of unpaid principal and the $65,000 interest then due. *fn2" The first claim for relief seeks judgment for the amount of the excess.

 The answer of First National City to the first claim alleges in substance that the Republic of Cuba is the real party in interest in this action, that the Cuban government is indebted to the defendant in an amount exceeding the sum demanded in the amended complaint by reason of the confiscation of its Cuban property, and that therefore the defendant is entitled to set off this outstanding obligation as a complete defense to the claims asserted by Banco Nacional. First National City has also interposed an affirmative counterclaim for the amount of the excess, and seeks dismissal of plaintiff's claim with prejudice. Both parties recognize that this court on the present papers cannot determine the value of First National City's Cuban properties which have been confiscated. But apart from this issue of fact the basic questions in this case are posed by the motions before me.

 The ultimate legal issues on the first claim are clearly drawn. Banco Nacional strenuously contends that the affirmative counterclaim and the set-off by way of defense are barred, alternatively, by principles of sovereign immunity and the act of state doctrine. The dispositive question is simply whether defendant is precluded on those grounds from asserting - either affirmatively or by way of set-off as a complete defense - a claim for the value of its confiscated Cuban properties.

 II. Sovereign Immunity

 There is no serious question that the Government of Cuba and Banco Nacional are one and the same for purposes of this litigation. *fn3" And as a general rule a state which initiates proceedings in a court of another sovereignty waives immunity from a counterclaim or set-off to the extent that it does not exceed the amount of the state's claims. ALI, Restatement (Second), Foreign Relations Law of the United States § 70(2)(a) (1965). This waiver extends to defensive counterclaims which do not arise out of the subject matter of the claims of the state which initiated the action. National City Bank of New York v. Republic of China, 348 U.S. 356, 75 S. Ct. 423, 99 L. Ed. 389 (1955); Wacker v. Bisson, 348 F.2d 602, 610 (5th Cir. 1965); American Hawaiian Ventures, Inc. v. M.V.J. Latuharhary, 257 F. Supp. 622, 626-627 (D.N.J.1966); see Dexter & Carpenter, Inc. v. Kunglig Jarnvagsstyrelsen, 43 F.2d 705 (2d Cir. 1930). The ultimate policy reason for this is simply that "fairness has been thought to require that when the sovereign seeks recovery, it be subject to legitimate counterclaims against it." Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 438, 84 S. Ct. 923, 945, 11 L. Ed. 2d 804 (1964); see Pugh & McLaughlin, Jurisdictional Immunities of Foreign States, 41 N.Y.U.L.Rev. 25, 53-54 (1966).

 So viewed, there is no doubt that the assertion of First National City's defensive counterclaim as a set-off is not barred because plaintiff happens to be an instrumentality of the Cuban government. When a foreign government institutes suit in the courts of this country, it can expect nothing more and nothing less than substantial justice between the parties. Since the decision in National City Bank of New York v. Republic of China a suit brought by a foreign government is no longer a one-way street. The doctrine of sovereign immunity cannot be raised in this court as a technical bar to any legitimate defensive counterclaims or set-offs advanced by First National City. *fn4" Whether the defendant has such legitimate defenses - and if so in what amount - are, of course, entirely separate questions. *fn5"

 III. The Act of State Doctrine.

 The basis for defendant's set-off is that the Government of Cuba, in whose shoes Banco Nacional stands, confiscated eleven of First National City's Cuban branches without compensation and in violation of international law. Under Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 84 S. Ct. 923, 11 L. Ed. 2d 804 (1964), inquiry into the legality vel non of the expropriations here involved would be foreclosed by the act of state doctrine which forbids the courts of one country from sitting "in judgment on the acts of the government of another, done within its own territory." 376 U.S. at 416, 84 S. Ct. at 934, quoting Underhill v. Hernandez, 168 U.S. 250, 252, 18 S. Ct. 83, 42 L. Ed. 456 (1897). However, the holding in Sabbatino was for all practical purposes overruled by the Hickenlooper amendment to the Foreign Assistance Act of 1964, 22 U.S.C. § 2370(e)(2), as amended, 79 Stat. 658-659 (Sept. 6, 1965), the constitutionality of which has been upheld. Banco Nacional de Cuba v. Farr, 243 F. Supp. 957 (S.D.N.Y.1965), aff'd, July 31, 1967 (2d Cir.). Congress there declared that the courts of this country should not refrain, on the ground of the act of state doctrine, from determining the merits in cases involving a ...


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