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United Bank Limited v. Cosmic International Inc.

decided: September 30, 1976.


Consolidated appeals and cross-appeals from a judgment of the United States District Court for the Southern District of New York, Brieant, J. holding that the act of state doctrine does not apply to extraterritorial seizures and limiting in part the recovery of prejudgment interest.

Moore and Timbers, Circuit Judges, and Coffrin,*fn* District Judge.

Author: Coffrin

Coffrin, District Judge:

This action involves a dispute between Bangladesh and Pakistani plaintiffs*fn1 concerning the right to receive payment for jute products which were exported from the former territory of East Pakistan and resold in the United States prior to December 16, 1971, the day that Bangladesh won its independence from Pakistan. The complicated factual circumstances surrounding this matter have already been well summarized by the District Court and are set out in the footnote below.*fn2 In essence, defendant Cosmic International, Inc. ("Cosmic"), a Delaware corporation that at all times relevant to this action had its principal place of business in New York City, presently holds two funds amounting to $97,043.50 and $433,365.96 which represent the proceeds from the sale of the jute products in question. The jute was originally supplied in separate transactions by two of the Pakistani plaintiffs, Nishat Jute Mills, Ltd. ("Nishat") and Amin Jute Mills, Ltd. ("Amin"), both of whom are Pakistani corporations whose East Pakistani interests were expropriated without compensation by the Bangladesh government after the termination of hostilities. The National Bank of Pakistan ("National Bank") and the United Bank Limited ("United Bank"), whose assets in Bangladesh were similarly confiscated, financed the respective Nishat and Amin transactions. Since Nishat admits its liability to National Bank and Amin has already assigned its interest in this litigation to United Bank, the two financial institutions assert that they are entitled to the funds held by Cosmic. All of these claims are controverted by the Bangladesh plaintiffs who argue by virtue of two nationalization orders that they are successors in interest to all property formerly owned by the Pakistani plaintiffs. Although the Bangladesh plaintiffs acknowledge that no compensation was paid for any of the Pakistani property purportedly seized, they maintain that the act of state doctrine precludes American courts from examining the propriety of any taking effected by Bangladesh law.

The act of state doctrine, of course, is derived from the principle that " every sovereign State is bound to respect the independence of every other sovereign State," and on this basis the Supreme Court has declared that "the courts of one country will not sit in judgment on the acts of the government of another done within its own territory." Underhill v. Hernandez, 168 U.S. 250, 252, 42 L. Ed. 456, 18 S. Ct. 83 (1897) (emphasis added); see Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 416 428,*fn3, 11 L. Ed. 2d 804, 84 S. Ct. 923 (1964). The district court below, however, relying upon this Court's decision in Menendez v. Saks and Company, 485 F.2d 1355 (2d Cir. 1973), rev'd on other ground sub nom., Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 96 S. Ct. 1854, 48 L. Ed. 2d 301, 44 U.S.L.W. 4665 (1976), and Republic of Iraq v. First National City Bank, 353 F.2d 47 (2d Cir. 1965), cert. denied, 382 U.S. 1027, 15 L. Ed. 2d 540, 86 S. Ct. 648 (1966), held that the act of state doctrine does not govern this case because at the time the Bangladesh government attempted to seize these debts their situs was in New York. 392 F. Supp. at 265. Once this doctrinal obstacle was removed, the district court refused to give effect to the purported confiscations because they were contrary to American public policy. Id., at 266-67. Accordingly, judgment was entered in favor of the Pakistani plaintiffs. National Bank and United Bank were allowed to recover $97,043.50 and $433,365.96 respectively plus interest at six percent from the earliest dates their particular suits were filed.*fn4 On appeal, the Bangladesh plaintiffs argue inter alia that the situs of these debts is actually within Bangladesh, and that, in any event, the confiscations were consistent with American practice in the context of a wartime situation. In addition, National Bank and United Bank appeal that portion of the district court's order which failed to award them prejudgment interest from the date the debts became due. For the reasons stated, we affirm the district court's analysis of the act of state doctrine, but remand for modification of its order pertaining to prejudgment interest in accordance with this opinion.

Extraterritorial Seizures and the Act of State Doctrine

In Republic of Iraq, this Court noted that the act of state doctrine has territorial limitations:

Under the traditional application of the act of state doctrine, the principle of judicial refusal of examination applies only to a taking by a foreign sovereign of property within its own territory, see Ehrenzweig, Conflict of Laws § 48 at 172 (1962); cf. Banco Nacional de Cuba v. Sabbatino, supra, 376 U.S. at 401, 428, 432, 84 S. Ct. 923; when property confiscated is within the United States at the time of the attempted confiscation, our courts will give effect to acts of state "only if they are consistent with the policy and law of the United States." Restatement [Foreign Relations Law of the United States (Proposed Official Draft, 1962)] § 46.

353 F.2d at 51. This principle was applied in Menendez to a factual situation remarkably similar to the one at hand. There, the former owners of Cuban cigar manufacturing enterprises were embroiled in a controversy with Cuban "interventors" *fn5 over the right to receive payment for preintervention (i.e. preseizure) debts owed by importers situated in the United States. Rather than allow the Cuban seizures to be shielded from judicial review by applying the act of state doctrine, this Court acted consistently with its decision in Republic of Iraq :

Application of the principles of . . . [ Republic of Iraq ] here satisfies us that since the owners' accounts receivable had their situs in the United States rather than in Cuba at the time of intervention and since the Cuban government's purported seizure of them without compensation is contrary to our own domestic policy, the act of state doctrine does not apply, the confiscation was ineffective, and the interventors' claim must be rejected. The owners rather than the interventors therefore remain entitled to collect these accounts.

Menendez v. Saks and Company, supra, 485 F.2d at 1364.*fn6 This position is supported by other authority, see Banco Nacional de Cuba v. Sabbatino, supra, 376 U.S. at 428 (by implication); Maltina Corp. v. Cawy Bottling Co., 462 F.2d 1021, 1025 (5th Cir. 1972), cert. denied, 409 U.S. 1060, 34 L. Ed. 2d 512, 93 S. Ct. 555 (1972); Carl Zeiss Stiftung v. V.E.B. Carl Zeiss, Jena, 293 F. Supp. 892, 910-11 (S.D.N.Y. 1968), modified on other grounds, 433 F.2d 686, 703 (2d Cir. 1970), cert. denied, 403 U.S. 905, 91 S. Ct. 2205, 29 L. Ed. 2d 680 (1971), and is ultimately dispositive of the issues in this case. Since the district court was not obliged to apply the act of state doctrine to extraterritorial seizures, the Bangladesh decrees were properly denied effect because American public policy "does not recognize the validity of governmental takings without compensation." 392 F. Supp. at 267; see Banco Nacional de Cuba v. Sabbatino, supra, 376 U.S. at 436-37; Republic of Iraq v. First National City Bank, supra, 353 F.2d at 51-52.*fn7

The Bangladesh plaintiffs, however, maintain that the act of state doctrine should govern this controversy because the decrees in question, while admittedly confiscatory, were not of an extraterritorial nature. Three arguments are offered in support of the position that these debts had their situs within Bangladesh: (1) Cosmic's creditors are said to be located there; (2) the Bangladesh courts are alleged to have jurisdiction over the debtor; and (3) the Cosmic debt secured the indebtedness of the jute mills to the banks, and since these latter debts were located in Bangladesh at the time of the seizure, Cosmic's obligation passed as an incident of that taking. All of these contentions are plainly lacking in merit.

The first proposition advanced by the Bangladesh plaintiffs was directly refuted by this Court in Menendez. There it was indicated that "[for] purposes of the act of state doctrine, a debt is not 'located' within a foreign state unless the state has the power to enforce or collect it." Menendez v. Saks and Company, supra, 485 F.2d at 1364. On this basis, the Menendez opinion proceeded to distinguish two Supreme Court decisions which treated the debt as situated in the creditor's domicile for tax and escheat purposes:

Those cases, however, had nothing to do with the power to enforce payment of a debt, which was the basis of our decision in Republic of Iraq and which generally depends on jurisdiction over the person of the debtor. See Harris v. Balk, 198 U.S. 215, 25 S. Ct. 625, 49 L. Ed. 1023 (1904). Rather the Supreme Court's concern in those cases was to establish principles of comity which would avoid the odious possibility of double taxation or double liability. In both cases the Court recognized the difficulty of applying to intangible obligations, which "have no actual territorial situs," the general rule permitting states to tax or escheat only that property found within its territory and concluded that for such purposes intangible obligations would be "treated" as if localized at the creditor's domicile. ...

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