The opinion of the court was delivered by: BRIEANT
The first of these actions was filed November 28, 1960 by Banco Nacional de Cuba (hereinafter "Banco Nacional") against Chase Manhattan Bank (hereinafter "Chase"). The second above entitled action was filed February 1, 1961 by Banco Para el Comercio Exterior de Cuba (hereinafter "Bancec") against First National City Bank (hereinafter "Citibank"). Both cases arise out of events following and connected with the recent Cuban Revolution and the consequent change in the economic, social and political structure of the Republic of Cuba.
These cases are two out of a larger number of similar cases pending in this Court. By separate orders made on August 7, 1961 by Hon. Sylvester J. Ryan, then Chief Judge of this Court, each of these cases were assigned for all purposes to Hon. Frederick vanPelt Bryan, pursuant to Rule 2 of the Civil Rules of this Court as then in effect. The cases were tried before Judge Bryan, who thereafter departed this life on April 17, 1978.
Following the death of Judge Bryan, these cases were reassigned to me, and the parties have stipulated and agreed through their counsel that the issues may be resolved by the Court based upon all the proceedings and papers before the late Judge Bryan, without the necessity of reopening the trial record, taking additional proof or observing the demeanor of any witnesses.
The Court has subject matter jurisdiction of the respective complaints under 28 U.S.C. § 1332(a)(2). The counterclaims pleaded in each case are conceded to be recoverable only as set-offs to the extent that a plaintiff prevails on its respective complaint.
Although these cases have not been consolidated, they present related issues of fact and law, and the post-trial hearings before me were conducted jointly. Accordingly, and to avoid repetition it seems appropriate that the issues presented be determined in a single decision.
Familiarity is assumed with the stipulated and conceded facts in these cases, which will not be recited except to the extent necessary for an understanding of the issues presented. Familiarity is also assumed with the prior litigation tried before the late Judge Bryan, Banco Nacional de Cuba v. First National City Bank, 270 F. Supp. 1004 (S.D.N.Y.1967), rev'd. 442 F.2d 530 (2d Cir. 1971), rev'd. 406 U.S. 759, 92 S. Ct. 1808, 32 L. Ed. 2d 466, reh. denied 409 U.S. 897, 93 S. Ct. 92, 34 L. Ed. 2d 155 (1972); on remand 478 F.2d 191 (2d Cir. 1973) (hereinafter "Banco I"). Plaintiffs have reserved their right to relitigate on subsequent appeal the legal points determined in the Banco I case, but their counsel concedes that for purposes of proceedings in this district court, those issues are precluded by the plurality opinions of the Supreme Court in 406 U.S. 759, 92 S. Ct. 1808, 32 L. Ed. 2d 466 et seq. and the determination on remand in 478 F.2d 191. For additional discussion of these issues, see Banco Nacional de Cuba v. Sabbatino, 193 F. Supp. 375 (S.D.N.Y.1961), aff'd. 307 F.2d 845 (2d Cir. 1962), rev'd. 376 U.S. 398, 84 S. Ct. 923, 11 L. Ed. 2d 804 (1964); on remand, sub nom. Banco Nacional de Cuba v. Farr, 243 F. Supp. 957 and 272 F. Supp. 836 (S.D.N.Y.1965), aff'd. 383 F.2d 166 (2d Cir. 1967), cert. denied 390 U.S. 956, 88 S. Ct. 1038, 19 L. Ed. 2d 1151, reh. denied 390 U.S. 1037, 88 S. Ct. 1406, 20 L. Ed. 2d 298 (1968), and also the legislative history leading to the enactment of the so-called "Hickenlooper" or "Sabbatino" Amendment, now 22 U.S.C. § 2370(e)(2), passed by Congress to frustrate in part the apparent or perceived rule of the Supreme Court in the Sabbatino case.
There is much literature concerning the events in Cuba following the overthrow of the Batista Government. Much of this literature is partisan in nature and of no assistance in setting forth the background of events described below. Sufficient it is to state that the effective date of the revolution in Cuba, which began in the Sierra Maestra Mountains in December 1956 is generally agreed to have been January 1, 1959.
Almost immediately after the overthrow of the Batista administration, a national government was established by Castro, Che Guevera and others, which concentrated under one hand all the executive and legislative functions of the Cuban Government. The Castro Government regarded itself as a lawful continuum of the pre-existing government of the Republic of Cuba and built for the most part on pre-existing law and institutions, making substantial but piecemeal changes to effect its revolutionary goals. Following the assumption of power it began a swift sequence of social changes in Cuba's internal affairs, and in its relationships with foreign powers and the aliens then resident in Cuba.
Almost immediately, new currency control regulations were imposed, and those regulations were gradually tightened. Banco Nacional was restructured internally in the fashion described below, and it became the sole official licensor of all foreign payments and any remissions of profits earned in Cuba by alien owned enterprises. From time to time, amendments to these regulations and changes in the policy under which they were administered, contrived to place continuously greater limitations on international trade with Cuba. Also limited thereby was the transaction of domestic business in Cuba, including banking, and the enjoyment of property, by foreigners.
Following the revolution, many members of the propertied and professional classes in Cuba took refuge in foreign countries; they fled the realm. Cuba began a swift and purposeful transition from an economy in which most of the means of production were owned and controlled by private individuals and firms, both native and alien, to a nation where the economy was more closely controlled by Government, and where the Government directly or indirectly assumed ownership and operation of the means of production. This new Government has been described loosely in the briefs as a "socialist" Government. At least within the classical definition of these words, it was not. In socialism, we are taught that the workers own and control the means of production. In Cuba, after the revolution, the Cuban Government owned and controlled the means of production, to a gradually increasing extent. The resulting internal organization may best be described as "state capitalism."
By various statutes and decrees, ownership and control of the properties and businesses of those who fled Cuba following the revolution became vested in the Cuban Government. On May 17, 1959 an "agrarian reform law" was enacted, looking towards nationalization and dismemberment of large land holdings in a nation which had previously founded its economy largely on the production of sugar for export. This agrarian reform was administered by an arm of the Cuban Government known as INRA (El Institutio Nacional de Reforma Agraria), which proceeded to act in the nature of a state-owned trading corporation, owning the sugar production facilities and disposing of the export sugar crop. Persons or entities called "interventors" were appointed by the Cuban Government to confiscate and conduct numerous business enterprises owned by absentees, native and foreign.
In November 1959, Banco Nacional de Cuba, the central bank of the Republic of Cuba, was reorganized, and Che Guevera was appointed President of Banco Nacional.
These significant social changes, hereinafter referred to in totality and for simplicity as "the social changes" were accompanied by the usual rhetoric, and by promises, viewed and intended to be viewed by some as threats, that more of the same was to follow shortly. And it did.
Sugar in the world market had been a surplus commodity for many years. Cuban sugar producers had been granted an import quota, politically administered and changed annually, for sugar to be licensed by the United States Government for importation into the American market. In the United States, the price of sugar has traditionally been maintained at a level above the world competitive price, and close to the marginal costs of American beet and cane sugar producers, in order to insure survival of domestic producers. The administration and allotment of the sugar import quotas had been an essential part of American foreign policy for many years in dealing not only with Cuba, but with other sugar producing nations. Adjustments in the sugar quota were treated as diplomatic rewards and punishments for foreign nations producing sugar, based upon their international conduct, their perceived friendliness, and treatment accorded to American nationals.
As a result of rapidly deteriorating foreign relations between the new Cuban Government and the United States, and the abhorrence which nature has for a vacuum, even in diplomacy, the Soviet Union, on February 13, 1960, was able to enter into a barter-type commercial agreement with Cuba by which large quantities of Cuban sugar were permitted to enter Russia and Russian-dominated trading partners where that sugar had not previously been sold. That sugar was to be paid for in merchandise, including, but not limited to armaments produced in the Soviet Union. The United States reacted to this perceived disloyalty or threat to its security by in effect abolishing Cuba's share of the sugar quota, and preventing entry of Cuban sugar into the United States market. See 74 Stat. 330 (1960), which became a law on July 6, 1960.
On July 6, 1960, as an immediate response to the enactment of the aforementioned statute repealing the Cuban sugar quota, the Cuban Government enacted Law No. 851 providing for the nationalization of the businesses and properties located in Cuba of United States citizens. On August 6, 1960, twenty-six United States owned corporations, branches or businesses were nationalized. Interventors were appointed to run each of these businesses for the Cuban Government, and no compensation was made, then or since, to the American owners. On September 16, 1960, United States banking operations in Cuba operated by Chase, Citibank and others were confiscated in the fashion set forth below in greater detail.
Diplomatic relations between the two countries came to an end; transfer of funds between the United States and Cuba was interdicted in both countries. So it remains today.
Organization of Banco Nacional
Banco Nacional was organized by Law No. 13 of December 23, 1948, effective December 30, 1948. Prior to the revolution it was the central bank of Cuba. It had all of the powers of a local commercial bank within the Republic of Cuba, and was engaged in national and international banking. It also exercised the administrative and fiscal powers of government over private banking, much to the same extent that the Federal Reserve System does in the United States, or as the Bank of England or any other central bank, is accustomed to do in the countries allowing private internal or international trade and banking.
One-half of the stock of Banco Nacional had been subscribed for and issued to the Government of the Republic of Cuba. Prior to the Cuban Revolution of 1959, the remaining half had been issued to subscribing private banks, which were required to participate. Its president and three out of five directors were appointed by the Republic. The Government shared in the profits of the Bank after the payment of dividends to its shareholders and appropriations to reserves. Banco Nacional had the sole power to issue currency in the Republic of Cuba, such currency being regarded as an obligation of the Cuban state. It set maximum interest rates for private banks, acted as fiscal agent and economic advisor to the Government, and as agent for the Currency Stabilization Fund created simultaneously and by the same Law No. 13 of 1948.
Prior to the Revolution, Banco Nacional had acted as the representative of the Cuban Government in the International Monetary Fund and the International Bank of Reconstruction and Development. It was exempted from taxation, was the sole designated depositary of state funds, had the power to make loans to the Currency Stabilization Fund and possessed detailed powers and corporate purposes to assist the Currency Stabilization Fund in the exercise of the latter's duty to protect the national currency in international trade. Under Cuban law Banco Nacional had the power to sue and could be sued, and had a specifically authorized capital. Under domestic law it was not liable for any of the duties or obligations of the Cuban Government or any other agency, and its liability was limited to its own capital and assets. That is to say, the Government was not responsible for its debts.
Banco Nacional was given the power to regulate the operations of existing commercial banks and "any other natural or artificial person" habitually engaged in banking. Banks already established prior to 1948 were required to register with Banco Nacional, and upon doing so could continue their business, subject to the regulation of Banco Nacional.
After the Revolution, and particularly by Resolution No. 2 of Law No. 851, dated September 17, 1960, and by Law No. 891 of October 13, 1960, discussed below, Banco Nacional assumed a number of additional governmental functions. There was a studied effort to preserve a continued corporate existence, while reorganizing the central bank to conform it to the new order. Banco Nacional became thereby wholly owned by the Cuban Government as sole shareholder, with all assets and profits vested in or accruing to the Treasury of the Cuban Government. Banco Nacional can be regarded as an essential element or arm of the present Cuban Government, at least at all times on and after September 17, 1960, and perhaps earlier as a result of de facto assumption of absolute control. This status of Banco Nacional as an alter ego of the Republic of Cuba has been confirmed and adjudicated before. Banco I, 478 F.2d 191, 193 (2d Cir. 1973).
As a foundation on which further legislation could be based, the Cuban Revolutionary Government enacted the "Fundamental Law," effective February 7, 1959. Article 24 of this Fundamental Law regulated confiscation of property by the State. In principle, it barred any deprivation of property except by "competent judicial authority, for justified reasons, ... and always upon due payment of adequate indemnity." However, Article 24 contained an exception to this general rule, which was relied on as authority for the numerous expropriations that were to come. This exception authorized the confiscation of property held by the "Tyrant" (Batista, the prior dictator) and any of his collaborators "responsible for the crimes committed against the national economy ... or who have enriched themselves illicitly."
Pursuant to Article 24's provision for the expropriation of property, Law No. 851 was enacted on July 6, 1960. This conferred full authority upon the President and the Prime Minister of the new government to nationalize, through forced expropriation, property held by United States nationals. The President and the Prime Minister were given the power to appoint persons or agencies necessary to administer the nationalized properties, and the appraisers to determine the value of the properties. Law No. 851 provided for payment to be made, based on the appraised value, for the property expropriated.
Law No. 851 was executed through resolutions, only one of which is relevant here. Resolution No. 2, signed by President Torrado and Prime Minister Castro on September 17, 1960, ordered that all the property of Chase, Citibank and The First National Bank of Boston be nationalized through forced expropriation, and that the President of Banco Nacional administer the assets and the banking businesses of these firms. Further, the resolution declared that the member of the Board of Directors of Banco Nacional who was appointed by the "foreign" banks pursuant to Law No. 13, Article 23 (enacted December 23, 1948) would cease to represent the nationalized banks while on the Board. In accordance with this resolution, the branch banks and the assets in Cuba of Citibank, Chase and The First National Bank of Boston were expropriated.
Law No. 851 and the accompanying Resolution No. 2 were both promulgated for the stated purposes of defense of the national sovereignty and protection of the economic development process of Cuba, and to remove a perceived imperialist threat on the part of the banks. The next step in further nationalization of property was the adoption of Law No. 890 and Law No. 891, which were enacted together on October 13, 1960.
Law No. 890 nationalized the "large industrial and business enterprises (other than banks, but including railroads) which (had) not yet adapted ... to the revolutionary reality."
Law No. 891 of October 13, 1960 was entitled as the "Bank Nationalization Law." Its preamble noted that the monetary and credit policy forms part of the general economic policy of the Government and performs a fundamental strategic function in the assignment and orientation of the productive resources of the country; that it was essential to change the old banking structure of the nation, and adjust to the new conditions of economic development created as a consequence of the revolutionary process, and that the creation of currency and extension of credit should be public functions, vested exclusively in the State in accord with the requirements of economic planning, and should not be in the hands of private concerns, which operate under the urge of profit and with greater consideration to individual than to collective interests. The preamble adjudged that it was necessary, to achieve the foregoing objectives, to nationalize and expropriate in favor of the State all the national private banking concerns that operate in the nation as a step precedent to the definitive structure of the national banking system.
Law No. 891 by Article I declared the banking function public, to be carried only by the State, through the organs created for that purpose. By Article III of that Law it was ordered that the nationalization and subsequent adjudication to the Cuban State ordered in the preceding Article be effected through Banco Nacional de Cuba as the autonomous body charged with moving the banking function of the State. Banco Nacional was declared to be the legal successor, subrogated in the place and stead of a natural or juridical person engaged as a banker, and it was legislated that upon the "consequent taking over of Banco Nacional de Cuba of the assets and liabilities of the juridical persons or companies affected by this law" they were declared dissolved and extinguished. Article V of the Law provided that the partners or stockholders of the juridical persons or companies dissolved or extinguished were entitled to the right of indemnity resulting from the appropriations ordered, and that payment will be made by liquidating the corporate credits or shares as well as the dividends or profits earned up to the effective date of this Law "according to the system of appraisal selected by the President of the Bank" (Banco Nacional de Cuba) at the close of operations December 31, 1960. Additional provisions are set forth requiring the issuance of bonds for part of the amounts due. The statute provided that Banco Nacional "shall assume liability for the deposits existing in the banks" affected by the Law, and shall "guarantee the owners thereof as to the normal handling of the operations related thereto."
The Board of Directors and the assembly of stockholders of Banco Nacional were "dissolved" and their functions assumed by the President of the Bank under the advice of a Consultative Council of the highest ranking officials of other specialized banks. The Currency Stabilization Fund, established June 10, 1939 was dissolved and reorganized. By Article XVI, two Canadian banks, Royal Bank of Canada and Bank of Nova Scotia, were exempted from nationalization. These were acquired later.
Law No. 930, adopted February 23, 1961, reorganized Banco Nacional de Cuba further. It purported to continue the independent juridical status and patrimony of the Bank, but also provided that it should exercise the monetary sovereignty of the nation, the monopoly of the power to issue currency.
The Claims and Counterclaims
Banco Nacional as plaintiff asserts its claim against Chase in its capacity as successor in interest of other Cuban banking institutions owned by the Cuban Government. On August 19, 1958 Chase had loaned $ 30,000,000, later reduced by partial payments, to Banco de Desarollo Economeco y Social (hereinafter "Bandes") and Fonda de Establizascion de la Moneda (hereinafter "Fonda"). The loan was secured by United States obligations. On February 17, 1960, Bandes and Fonda were each dissolved by Law No. 730, enacted on that date, and by statute, Banco Nacional succeeded to their assets and liabilities. On August 17, 1960, a further payment of $ 5,000,000 was made to Chase by Banco Nacional on account of the Bandes loan, which reduced the amount owed to $ 10,000,000, the amount due at the time of the nationalization of Chase's Cuban banking branches. Additionally, Banco Nacional then had on deposit with Chase at its home office, $ 2,500,000, together with $ 37,622 accrued interest.
On or about September 19, 1960, after learning of the confiscation of its Cuban branches, Chase sold the remaining collateral which it then held for the Bandes loan for an amount in excess of $ 17,000,000. After applying the amount so realized to the payment of the outstanding principal and interest on the Bandes loan, Chase was left with a surplus of $ 7,256,398. Chase was thus indebted to Banco Nacional in that sum, plus the amount of Banco Nacional's deposit with accrued interest, making a total of $ 9,794,020. Chase does not dispute that it was indebted to Banco Nacional in that amount. It concedes liability on the complaint, and asserts the four separate counterclaims or set-offs discussed below.
Plaintiff in the second above entitled action, Banco Para el Comercio Exterior de Cuba, referred to by the parties for convenience as "Bancec," was a Cuban bank established by Law No. 793 of May 4, 1960. As can be seen below, it too is properly regarded as an alter ego of the Cuban Government to the same extent that Banco Nacional has been so found to be, and for substantially the same reasons.
For an understanding of the relevant corporate history of Bancec, we must digress slightly, to describe the claim asserted here in its behalf.
As a result of the Agrarian Reform Act of May 17, 1959, INRA had become the owner of a cargo of animal feed sugar sold by Bancec pursuant to contract for delivery into the United States. The contract was supported by an irrevocable letter of credit in the favor of Bancec, issued in New York on August 18, 1960 by Citibank in the amount of $ 650,000 U. S. funds payable at sight on readiness to discharge in a U. S. port. On that date, Citibank was operating its branches in Cuba. The "intervention" of its branches and those of Chase, discussed herein, did not take place until September 17, 1960.
On September 15, 1960 Citibank received from Banco Nacional for collection, a sight draft and supporting documents authorizing payment of $ 193,280.30 for a portion of the sugar actually delivered and discharged at Pascagoula, Mississippi. On September 20, 1960, following intervention, Citibank "paid" the draft to the account of Banco Nacional and purported to set-off the proceeds against the value of its Cuban branches, then in possession of Banco Nacional.
By Law No. 930, dated February 23, 1961, Bancec was dissolved, and Banco Nacional succeeded to all the assets, rights and claims of Bancec "peculiar to the banking business." No disposition of any other assets or claims of Bancec was made in Law No. 930.
At the time of the enactment of Law No. 930, the claim sued upon herein had the status of a draft upon an irrevocable letter of credit. Such a res or chose in action is regarded as being the sort of asset, right and claim peculiar to the banking business, and accordingly, probably should be regarded as vested in Banco Nacional as of February 23, 1961. In any event, Banco Nacional had previously made claim on Citibank as the collecting agent.
Thereafter, by Law No. 934, promulgated on the same day, the assets and claims of Bancec not peculiar to the banking business were vested in the Ministry of Foreign Trade of the Government of Cuba. This governmental body was authorized to establish entities, in the nature of state trading corporations, under its supervision to conduct foreign trade. This law provided that the Ministry was not to be liable for any obligations these enterprises might undertake. The Ministry of Foreign Trade, by Resolution No. 1, dated March 1, 1961, created Empresa Cubana de Exportaciones (Cuban Enterprise for Exports), which was empowered to conduct all commercial export operations of the nation formerly conducted by Bancec "remaining subrogated in the rights and obligations of said bank (Bancec) as regards the commercial export activities." This particular assignment or delegation must be regarded as irrelevant because the sugar, which is the subject of this lawsuit, had already been delivered, and at the time of the Resolution, had become transformed into a debt.
Thereafter, by Resolution No. 102, issued by the Ministry of Foreign Trade on December 29, 1961, Empresa Cubana de Exportaciones was dissolved as of December 31, 1961. On January 1, 1962, the same Ministry issued Resolution No. 1 of that year, creating Empresa Cubana Exportadora de Azucar y sus Derivados, referred to at trial and hereinafter as "Cuba Zucar." It succeeded to the rights and obligations of Bancec relating to foreign commerce in sugar and its derivatives.
By motion docketed in this litigation on May 2, 1975, plaintiff moved for an order pursuant to Rule 25, F.R.Civ.P., substituting Empresa Cubana Exportadora de Azucar y sus Derivados (Cuba Zucar) as the plaintiff herein. In opposition to that motion defendant argued that despite the provisions of the various laws and resolutions having to do with the devolution of the claim, which Citibank regarded as self-serving, the subsequent agencies could not be insulated from the counter-claims of defendant against the Cuban Government, and that none of the subsequent agencies could take any more or obtain any better title than its predecessors, the Ministry of Foreign Trade of the Republic of Cuba, or Bancec. As background for the May 2, 1975 motion, the parties had previously stipulated that the Republic of Cuba itself should be substituted as a plaintiff, and should serve an amended complaint. A stipulation to that effect was marked "SO ORDERED" on July 6, 1961. This stipulation, docketed July 7, 1961, authorized the "supplemental complaint in the form annexed," but no such supplemental complaint was apparently annexed or submitted to the Court. No such amended complaint was ever served and filed, and no formal substitution of the Republic of Cuba took place.
By a memorandum decision docketed August 4, 1975, Judge Bryan denied the motion to substitute Cuba Zucar, pointing out that substitution of parties under Rule 25(c), F.R.Civ.P. lies "in the sound discretion of the court."
These occurrences naturally inject a question of "real party in interest" into the discussion of Bancec's claim. The Court perceives no significance or validity to any arguments based on that concept. Bancec and its successors in interest are to be equated with the Cuban Government. Bancec was created by the Government to engage in a state function. All of its capital was contributed by the Government, and it had no function to fulfill, except to manage the export of commodities for the account of the Government. Thereafter, the devolution of the claim, however viewed, brings it into the hands of the Ministry, or Banco Nacional, each an alter ego of the Cuban Government. For our purposes we accept the present contention of plaintiff's counsel that the order of this Court of July 6th permitting, but apparently not requiring, the service of an amended complaint in which the Republic of Cuba itself would appear as a party plaintiff in lieu of Bancec was based on counsel's erroneous assumption, or an erroneous interpretation of the laws and resolutions providing for the devolution of the assets of Bancec. Assuming this to be true, it is of no moment. The Ministry of Foreign Trade is no different than the Government of which its minister is a member.
Citibank also argues as an alternate theory, that Banco Nacional is the real party in interest here because the draft against the letter of credit was deposited with Banco Nacional as an agent for collection (P 7 of Court's Ex. 1, Stipulation). Banco Nacional made demand on Citibank in New York for payment in dollars and under prevailing local banking practice, would be required to and would, account in Havana to Bancec for the proceeds in Cuban pesos. Citibank argues therefrom in effect, that it honored the draft in favor of Banco Nacional, and instead of remitting the funds to Banco Nacional, set-off its claims against Banco Nacional against the funds which it had become obligated to pay, not Bancec, but Banco Nacional. This analysis, if accepted, would place Bancec in the status of a beneficiary of a promise by Citibank to pay Banco Nacional, and thereby subject it to the defenses and set-offs existing in favor of Citibank against Banco Nacional.
The Court rejects as invalid this alternate theory of set-off as between banks. The relationships here are regulated by § 350-a, et seq. of the New York Negotiable Instruments Law, since repealed effective September 27, 1964, as to transactions occurring after that date, upon adoption of the Uniform Commercial Code. That section provided in relevant part:
"§ 350-a. Bank as agent for collection.
Except as otherwise provided by agreement and except as to subsequent holders of a negotiable instrument payable to bearer or indorsed specially or in blank, where an item is deposited or received for collection, the bank of deposit shall be agent of the depositor for its collection and each subsequent collecting bank shall be sub-agent of the depositor but shall be authorized to follow the instructions of its immediate forwarding bank and any credit given by any such agent or sub-agent bank therefor shall be revocable until such time as the proceeds are received in actual money or an unconditional credit given on the books of another bank, which such agent has requested or accepted. Where any such bank allows any revocable credit for an item to be withdrawn, such agency relation shall nevertheless continue except the banks shall have all the rights of an owner thereof against prior and subsequent parties to the extent of the amount withdrawn." [Emphasis added]
This section, adopted in 1929, was declaratory of prior New York law, at least as to the point under consideration. McBride v. The Farmers Bank of Salem, Ohio, 26 N.Y. 450, 454 (1863) and prior New York cases cited therein, reached this result on reasoning that the collecting bank was not a bona fide holder in due course for value, because antecedent debt is not such a consideration. On this actual point hung the dispute between New York State courts and the Supreme Court following the decision in Swift v. Tyson, 41 U.S. (16 Pet.) 1, 10 L. Ed. 865 (1842) overruled in Erie R. R. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938). Compare, The Bank of the Metropolis v. The New England Bank, 42 U.S. (1 How.) 234, 11 L. Ed. 115 (1843) permitting set-off by a collecting bank as sought herein. In a pre-Erie case, Carnegie Trust Co. v. First Nat. Bank of the City of New York, 213 N.Y. 301, 304, 107 N.E. 693 (1915) the New York Court of Appeals (per Cardozo, J.) assumed, but found it unnecessary to hold, that a collecting bank had the right before it made remittance to apply the collections against its deposit with the plaintiff bank of deposit. The Court suggested that the issue would turn on "the relation between the (collecting) bank and the plaintiff," which it characterized as "obscure." The Court noted that if the bank held the drafts for collection only, as trustee or agent for the depositor, "the rules of equitable set-off do not permit a trustee or agent to apply a claim in his own right in cancellation of his liability as a fiduciary," citing Morris v. Windsor Trust Co., 213 N.Y. 27, 106 N.E. 753 (1914).
Thereafter, in Dakin v. Bayly, 290 U.S. 143, 54 S. Ct. 113, 78 L. Ed. 229 (1933), the Supreme Court, in a case involving a Florida statutory scheme similar to § 350, et seq. of the New York NIL, distinguished Bank of the Metropolis, supra, and held that in light of the agency relationship existing between the depositor and forwarding bank, no set-off could be permitted in favor of the collecting bank for lack of mutuality. The Supreme Court held (p. 146 of 290 U.S., 54 S. Ct. at 114) "a defendant sued upon his individual debt may not avail himself for this purpose of a demand against the plaintiff held in a fiduciary capacity." (Citations omitted).
To the same effect is the holding in Friedman v. Irving Trust Co., 164 Misc. 811, 300 N.Y.S. 51 (Mun.Ct.N.Y.C.1937) applying New York law. There, the Court held:
"The Huguenot Bank [depositary bank] acted only as plaintiff's collecting agent; the defendant, as subagent. The credit given by defendant to the Huguenot Bank was given after the suspension of the Huguenot Bank.... While the defendant claims it paid the proceeds of these checks to the Huguenot Bank, the actual fact is that the so-called "payment' was nothing more than a mere accounting item on its books after the suspension of the depositing bank; this so-called "payment' was neither a payment in currency nor an "unconditional credit' of a character recognized in law (see sections 350-a, and 350-1, Negotiable Instruments Law) and, if anything, it would appear that what the defendant did do, in effect, was to reduce on its own books an indebtedness due to it from the Huguenot Bank.
By the express terms of section 350-a of the Negotiable Instruments Law, defendant was the subagent of the plaintiff; the funds in question, upon collection by the defendant, were a trust fund for the benefit of the plaintiff."
Within § 350-a of the New York NIL, Bancec has never received the proceeds of the sight draft in "actual money." There is no showing that it ever received an "unconditional credit." In In re Bank of United States, 243 App.Div. 287, 277 N.Y.S. 96 (1st Dept. 1935) it was held that:
"The term "unconditional credit,' although frequently recurring, is nowhere defined throughout article 19-A of the Negotiable Instruments Law (section 350, et seq.). That article, commonly known as the Bank Collection Code, in many respects has revolutionized the ancient principles pertaining to the collection of commercial paper by banks. ... Construing together all the provisions of that article, the term "unconditional credit' can only mean a credit which may not be withdrawn, even if it is eventually found that the item for which it is given is not collectible. It imports a credit which is not "revocable' under section 350-a, nor "provisional' under section 350-b."
Recently in Fuller v. Fasig-Tipton Co., 587 F.2d 103, 106 (2d Cir. 1978), the Court of Appeals held that "one dealing with an agent for a disclosed principal may not set-off the agent's personal indebtedness against amounts due the principal." The stipulated facts, while showing that the draft was deposited by Banco Nacional for collection, does not state whether the agency relationship was known to Citibank. Probably such knowledge can be inferred from all the facts, but if not, Citibank was aware of the statutory presumption and had no factual knowledge indicating otherwise. Accordingly, Citibank here cannot discharge its obligation to Bancec by setting-off against Bancec the indebtedness to it of Banco Nacional as collecting or depositary bank with respect to the sight draft which is the subject of plaintiff's claim.
Rather, the Court will look to the realities of the situation, which justify regarding Bancec and its successors in interest the same as Banco Nacional or the Cuban Government for these purposes, in accordance with the rule of Banco I, Sabbatino and Farr, discussed supra, pp. 418-419.
No factual or legal basis is perceived to distinguish between the one Government wholly owned bank, Banco Nacional, on the one hand, and the other Government wholly owned bank, Bancec, on the other hand. The law creating Bancec describes it as "an official, autonomous, credit institution for foreign trade with full juridical capacity and capital of its own." This view of Bancec is not controlling on the Court. Under all of the relevant circumstances shown in this record, including the Stipulated Facts, it is clear that Bancec lacked an independent existence, and was a mere arm of the Cuban Government, performing a purely governmental function. The control of Bancec was exclusively in the hands of the Government, and Bancec was established solely to further Governmental purposes. Moreover, Bancec was totally dependent on the Government for financing and required to remit all of its profits to the Government.
While analogy to American institutions is of slight value, Bancec's complete financial dependence on the Cuban Government distinguished its situation from that of the Tennessee Valley Authority ("TVA"), regarded by plaintiff as being analogous to itself. The TVA has far greater financial independence, including the authority to issue bonds to finance its projects, subject only to prior approval of the Secretary of the Treasury, and less direct government control of its management, 16 U.S.C. § 831n-1-n-4. Bancec, in its relationship to the Government, seems closer to the now defunct Reconstruction Finance Corporation ("RFC") and its subsidiaries, which on numerous occasions were held to be an agent or arm of the United States Government, and shared in the privileges, responsibilities and immunities of that Government. See, e.g., Keifer & Keifer v. RFC, 306 U.S. 381, 59 S. Ct. 516, 83 L. Ed. 784 (1939). Of course cases involving American governmental agencies are of slight value as precedent here; at most they support an a fortiori argument.
Also of slight weight are reported cases in American courts decided before January 21, 1977 involving agencies and instrumentalities of foreign countries, most of which have been resolved factually according to the degree of independence of the corporate entity. United States v. Deutsches Kalisyndikat Gesellschaft, 31 F.2d 199 (S.D.N.Y.1929); Coale v. Societe Co-Operative Suisse Des Charbons, Basle, 21 F.2d 180 (S.D.N.Y.1921); Ulen & Co. v. Bank Gospodarstwa Krajowego, 261 App.Div. 1, 24 N.Y.S.2d 201 (1940). Also inapposite are cases in which private corporations were continued to be treated as such, notwithstanding acquisition by government of stock ownership of those corporations. See, e.g., Bank of the United States v. Planters' Bank of Georgia, 22 U.S. 904, 9 Wheat. 904, 6 L. Ed. 244 (1824); Ballaine v. Alaska Northern Ry. Co., 259 F. 183 (9th Cir. 1919); Panama R. Co. v. Curran, 256 F. 768 (5th Cir. 1919).
Cases decided under the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. §§ 1602-11, e.g., Yessenin-Volpin v. Novosti Press Agency, 443 F. Supp. 849 (S.D.N.Y.1978); Edlow International Co. v. Nuklearna Elektrarna Krsko, 441 F. Supp. 827 (D.D.C.1977), provide support for our conclusion that Bancec is an instrumentality of the Cuban Government for purposes of this case. Bancec is not a mere private corporation, the stock of which is owned by the Cuban Government, but an agency of the Cuban Government in the conduct of the sort of matters which even in a country characterized by private capitalism, tend to be supervised and managed by Government. Where the equities are so strong in favor of the counter-claiming defendants, as they are in this case, the Court should recognize the practicalities of the transactions. Doing justice in the case should not be obfuscated or side-tracked by self-serving recitals in post-revolutionary statutes of the Cuban Government, undoubtedly drawn with litigation of this sort in mind. The Court concludes that Bancec is an alter ego of the Cuban Government.
Chase admits that it is indebted to Banco Nacional in the amount of $ 9,793,021.70, except to the extent that it is entitled to assert set-offs, in reduction of that amount. Citibank concedes and admits that it is indebted either to the Cuban Government, Bancec, the Ministry of Foreign Trade, Banco Nacional, Empresa Cubana de Exportaciones, or Cuba Zucar in the amount of $ 193,280.30, as a result of an accepted draft against its letter of credit to Bancec referred to above. This concession also is subject to the right of set-off.
There is also at issue whether these claims are entitled to accrue pre-judgment interest, and that question also applies to the counterclaims. The matter of interest is discussed infra, p. 448.
Legal Basis for the Counterclaims
The set-offs pleaded here arise generally out of the nationalization of the branch banks of Chase and Citibank in Cuba. On September 16, 1960, Citibank maintained eleven branch offices in Cuba, and Chase had four such branches. The organization and nature of the branches is described in greater detail below. Citibank had been engaged continuously in branch banking in Cuba since 1915 and Chase had been so engaged since 1925.
The first of Chase's claims arises out of the claimed confiscation on September 17, 1960 of its Cuban branches, said to be in violation of international law. Chase asserts that the Cuban Government was liable to it for the value of such property; and that the Government of Cuba and Banco Nacional as its wholly owned financial instrumentality are indistinguishable entities for purposes of the liability for the seized property. In addition, Banco Nacional took over, assumed control of and enjoyed all of the benefits of the assets and banking branches of Chase in Cuba, giving rise to an alternate theory based on implied contract.
Chase exercised a set-off for what it claims to be the value of the property of its Cuban branches, including good will and going business value so confiscated. It so advised Banco Nacional.
At about the same time, Chase was also acting as trustee for American investors owning leased railroad equipment in possession of two Cuban railroads under what are conceded to have been financing leases. The Cuban Government expropriated the railroads and their rolling stock on October 13, 1960, pursuant to Law No. 890, and has repudiated the obligations of the railroads to Chase as trustee for the equipment trust certificate owners. The resulting damages are claimed to be $ 4,073,497.00, also asserted here as a set-off.
With respect to all of their claims, Chase and Citibank each recognize that they cannot proceed affirmatively against plaintiffs in this action, or the Government of Cuba, but are at most entitled to a full set-off. See National City Bank v. Republic of China, 348 U.S. 356, 75 S. Ct. 423, 99 L. Ed. 389 (1955); 28 U.S.C. § 1607(c).
Chase has pleaded the claims arising out of the loss of its Cuban banking branches separately on alternative theories of liability, and has also asserted separately its counterclaims arising out of the railroad equipment.
Banco Nacional has defended in accordance with what may be characterized as at least five separate theories. These are: (1) Banco Nacional is a separate entity from the Government of Cuba and not liable for the obligations of the Cuban Government for the value of American property in Cuba which was confiscated; (2) Even if the Cuban Government and Banco Nacional are indistinguishable entities, Chase's claims arising out of the expropriation of the Cuban branches and credits located in Cuba are not actionable here by reason of the doctrine of sovereign immunity; (3) The claims against the Government of Cuba insofar as they concern assets and credits specifically located in Cuba are barred by the Act of State doctrine; (4) The expropriation or nationalization of Chase's Cuban branches and the seizure of the leased railroad equipment by the Cuban Government were not violations of international law, and did not give rise to a claim against the Cuban Government by Chase for the value of such property; and (5) The claims of Chase in its capacity as trustee for the value of the confiscated railroad property, to which Chase held title as trustee for others, cannot be asserted as a counterclaim or set-off in this lawsuit because they violate the "opposing party doctrine" developed in cases construing Rule 13(b), F.R.Civ.P.
Insofar as the Chase branch banks are concerned, the liability theory asserted by Chase in this litigation has already been validated in the companion Citibank litigation. See, Banco I, 270 F. Supp. 1004, 1006, 1010 (S.D.N.Y.1967, on remand, 478 F.2d 191, 193-94 (2d Cir. 1973). See also, National City Bank v. Republic of China, 348 U.S. 356, 75 S. Ct. 423, 99 L. Ed. 389 (1955). For the reasons stated in Banco I, Chase can set-off the full value of its branches and their assets in this lawsuit, and little purpose will be served in a further or additional analysis of the law concerning that liability. The Court recognizes that plaintiffs, which have briefed the issue comprehensively, seek to relitigate the correctness of Banco I, and they in turn recognize that this Court at trial level is precluded by the prior appellate pronouncements affirming in substantial part the decision of Judge Bryan in Banco I.
Basically that litigation stands for the purpose that Banco Nacional and the Government of Cuba are and were one and the same for all purposes of the litigation of this type of claim; and that in a suit by a foreign sovereign in our courts, the sovereign immunity doctrine does not bar a set-off up to the amount recovered by the foreign sovereign (see National City Bank v. Republic of China, supra, and cases cited in Banco I, 270 F. Supp. at 1006, 1007. Also, Banco I stands for the point that a claim of set-off is not barred under the circumstances of this case by the Act of State doctrine as enunciated in Banco Nacional v. Sabbatino, 376 U.S. 398, 84 S. Ct. 923, 11 L. Ed. 2d 804 (1964), because the set-off is authorized by the so-called Hickenlooper or Sabbatino Amendment to the Foreign Assistance Act of 1964, 22 U.S.C. § 2370(a)(2), as amended, 79 Stat. 658-59.
It is also a foreclosed issue that the taking of Citibank's Cuban branches by the Government of Cuba was in violation of international law because (a) Cuba failed to provide compensation for the taking; (b) the taking was a retaliatory measure against the United States citizens because of their Government's actions with respect to the Cuban sugar quota; and (c) the taking discriminated against American nationals in that Cuban owned, as well as Canadian and French private banks were not acquired by the Cuban State until much later.
In connection with our discussion of Act of State, it must be observed that Chase and Citibank each have a "Bernstein letter" from the Office of the Secretary of State of the United States. Bernstein v. N. V. Nederlandsche, 210 F.2d 375 (2d Cir. 1954). The 5-4 decision of the Supreme Court at 406 U.S. 759, 92 S. Ct. 1808, 32 L. Ed. 2d 466 (1972) in Banco I must be read to hold that the Act of State doctrine does not bar consideration of Citibank's off-set up to the amount of Banco Nacional's claim against Citibank. That conclusion applies with equal vigor to Chase's offsets here pleaded.
The plurality opinions in Banco I each found a different factor determinative of the question of when and under what circumstances the courts of this country may examine the legality of expropriations within its boundaries by a foreign government of property of American citizens. At least it may be inferred from Banco I that the Bernstein exception to the Act of State doctrine is regarded by Chief Justice Burger and Justices Rehnquist and White as having continued vitality. In the view of Justice Douglas, a foreign sovereign which brings suit in American courts waives its defense of sovereign immunity, and pro tanto waives the Act of State doctrine defense, insofar as concerns counterclaims up to the amount of the claim which the foreign sovereign asserts. This view is apparently codified in 28 U.S.C. § 1607(c). The Foreign Sovereign Immunities Act of 1976 was regarded by the court in Yessenin-Volpin v. Novosti Press Agency, 443 F. Supp. 849, 851 (S.D.N.Y.1978) as retrospective, and applicable to cases undecided on January 21, 1977. The Department of State has expressed the same view. See fn. 1 in Yessenin-Volpin, supra. Banco I suggests Justice Powell believes that the doctrine of the Bernstein letter exception implies a violation of the separation of powers, although he agreed that the Act of State doctrine should not apply to the facts of Banco I.
After deciding only the inapplicability of the Act of State doctrine, or alternatively the effectiveness of the Bernstein letter, the Supreme Court remanded Banco I to the Court of Appeals for the second time "for consideration of (Banco Nacional's) alternative bases of attack on the judgment of the district court." 406 U.S. at 770, 92 S. Ct. at 1814. Thereafter, the Court of Appeals unanimously affirmed the holding of the district court that Citibank was entitled to set-off, against Banco Nacional's claim, such amount as was due and owing from the Cuban Government as compensation for the seizure of Citibank's Cuban properties which had devolved into the ownership and control of Banco Nacional (478 F.2d 191 (1973)). The opinion of Judge Hays in that regard may be held to constitute a holding that Banco Nacional and the Government of Cuba had acted as a single entity in the expropriation of Citibank's Cuban property and were one and the same for purposes of that litigation. It further held that the expropriations of the Citibank Cuban properties by Cuba and Banco Nacional violated international law, citing Banco Nacional de Cuba v. Sabbatino, 307 F.2d 845 (2d Cir. 1962), rev'd. on other grounds, 376 U.S. 398, 84 S. Ct. 923, 11 L. Ed. 2d 804 (1964) and Banco Nacional de Cuba v. Farr, 383 F.2d 166 (2d Cir. 1967), cert. denied 390 U.S. 956, 88 S. Ct. 1038, 19 L. Ed. 2d 1151 (1968).
There is no reason why the Court should hold otherwise in the case of Chase's branches, and this Court regards these issues as having been conclusively decided. We note in passing that the point of Banco I, that a counterclaim by way of set-off, limited to the amount of a foreign state's principal claim as plaintiff, is not barred by the Act of State doctrine or by sovereign immunity, has been reaffirmed by the majority, concurring and dissenting opinions in Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 96 S. Ct. 1854, 48 L. Ed. 2d 301 (1976).
In sum, it follows from the foregoing that under international law Chase is entitled to compensation for its Cuban branches confiscated. Apart from the stare decisis effect of Banco I available to Chase here, it is to be noted that Professor Lillich in his authoritative work entitled The Valuation of Nationalized Property in International Law (1973), Vol. 2 at p. 121, n. 6, has written:
"The Cuban nationalizations "based upon a totally illusory funding system and payable in bonds that were never printed' so patently violated international law that serious analysis was unnecessary."
As was also observed by the late Judge Bryan in Banco I (270 F. Supp. 1008-10), the acts of the Cuban Government exhibited the same retaliatory, discriminatory character as the measure condemned as violative of international law by the Court of Appeals in Sabbatino, supra, 307 F.2d at 845, 865.
Banco Nacional denies that compensation is required by international law, and suggests that the principle of compensation is no longer generally recognized. As the Supreme Court noted in ...