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Banco Nacional De Cuba v. Chase Manhattan Bank

decided: August 4, 1981.

BANCO NACIONAL DE CUBA, PLAINTIFF-APPELLANT-CROSS-APPELLEE,
v.
CHASE MANHATTAN BANK, DEFENDANT-APPELLEE-CROSS-APPELLANT .



Appeal and cross-appeal from a final judgment of the United States District Court for the Southern District of New York, Charles L. Brieant, Jr., Judge, 505 F. Supp. 412, in favor of plaintiff Cuban state-owned bank, allowing set-off by counterclaim to extent of $6,904,870 for loss due to expropriation of defendant's branch banks, and dismissing counterclaims relating to other expropriations. Affirmed as modified.

Before Lumbard, Van Graafeiland, and Kearse, Circuit Judges.

Author: Kearse

This is an appeal from a final judgment in one of a number of cases arising out of the revolution in the Republic of Cuba in the late 1950's and the subsequent expropriation by the Cuban government of properties owned by American companies.*fn1 In the present action, Banco Nacional de Cuba ("Banco Nacional"), a Cuban state-owned bank, sought to recover $9,794,022 from Chase Manhattan Bank ("Chase") on claims whose validity is not in dispute. Chase asserted several counterclaims seeking damages for the expropriation by Cuba of branch banking assets owned by Chase in its own right (hereinafter sometimes "branch counterclaim"), and of railroad equipment owned by Chase as a trustee for certain American investors (hereinafter sometimes "railroad equipment counterclaims"). The United States District Court for the Southern District of New York, Charles L. Brieant, Jr., Judge, entered judgment in favor of Banco Nacional on its claim, less $6,904,870 allowed as a set-off on account of Chase's counterclaim for expropriation of its Cuban branches, and dismissed the remaining counterclaims. Banco Nacional has appealed, asserting that Chase's branch counterclaim was not justiciable and that the valuation of Chase's Cuban branches was, in any event, too high. Chase has cross-appealed, challenging the dismissing of its railroad equipment counterclaims and arguing that the district court did not adequately value its branches as a going concern.

While we are in agreement with most of the district court's rulings, we conclude that a realistic appraisal of conditions in Cuba required a lower valuation of Chase's Cuban branches. The judgment should be modified accordingly and as modified, it is affirmed.

I. FACTS

The events surrounding the Cuban revolution have spawned extensive litigation, giving this Court and others several opportunities to review the facts of the overthrow of the Batista regime and the organization and installation of the current government. See, e. g., Banco Nacional de Cuba v. First National City Bank, 270 F. Supp. 1004 (S.D.N.Y.1967), rev'd, 431 F.2d 394 (2d Cir. 1970), vacated and remanded, 400 U.S. 1019, 91 S. Ct. 581, 27 L. Ed. 2d 630 (1971), on remand, 442 F.2d 530 (2d Cir. 1971), rev'd 406 U.S. 759, 92 S. Ct. 1808, 32 L. Ed. 2d 466 (1972), on remand, 478 F.2d 191 (2d Cir. 1973); 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), 383 F.2d 166 (2d Cir. 1967), cert. denied, 390 U.S. 956, 88 S. Ct. 1038, 19 L. Ed. 2d 51 (1968). Familiarity with these discussions is assumed.

A. The Expropriations

The Cuban revolution resulted in the installation of a new national government on January 1, 1959, under the leadership of Fidel Castro Ruz, Che Guevera, and others.*fn2 The new regime viewed itself as the lawful successor to its predecessor, the Batista government, and effected substantial changes in Cuba primarily by building on preexisting laws and institutions. A number of statutes were enacted, and decrees announced, in pursuit of two general goals: to concentrate the means of production in the hands of the Cuban government and to restrict greatly the role of foreign enterprises in the Cuban economy.

On July 6, 1960, following a serious deterioration of relations between Cuba and the United States, Cuba enacted Law No. 851 which, inter alia, authorized the President and Prime Minister of the Republic "to order( ) the nationalization through forced expropriation of the assets or firms owned by natural or legal persons of United States citizenship ...." Under this law Cuba nationalized numerous American-owned corporations, branches, and businesses. On September 17, 1960, an executive order pursuant to Law 851, denominated "Resolution No. 2," expropriated and nationalized the four Cuban branches of Chase. The Cuban assets of First National City Bank ("Citibank") and First National Bank of Boston ("First Boston") (see note 1, supra ) were expropriated by the same Resolution;*fn3 and thereafter, on October 13, 1960, pursuant to a new law, Law No. 891, virtually all remaining private banking firms were nationalized.*fn4

On October 13, 1960, the Cuban government also promulgated Law No. 890, which nationalized "through forced expropriation" all business, industrial enterprises, and other property of railroads operating in Cuba.

Each of the above laws provided that, under certain circumstances, payment would be made by the Cuban government for the expropriated assets. The parties have stipulated that no payment was made.

B. Banco Nacional and Its Claims

Since its formation in 1948, Banco Nacional has functioned as the central Bank of Cuba. Prior to the revolution, one-half of its stock was owned by the Cuban government, which appointed its president and three of its five directors. The remaining one-half of its stock was owned by private banks, which were required to subscribe thereto. Banco Nacional engaged in domestic and international banking, was the sole depository of state funds, and was granted extensive powers both to control and protect the Cuban currency in international trade and to regulate all commercial banks operating in Cuba.

After the revolution Banco Nacional was granted additional powers and played a key part in restructuring the Cuban economy in general and the banking industry in particular. Under Resolution No. 2, Banco Nacional was designated the instrumentality to take over the assets and businesses of Chase, Citibank and First Boston. Under Law No. 891, Banco Nacional was similarly placed in control of the assets and businesses of the remaining private banks, and thereafter became wholly owned and operated by the Cuban government. Banco Nacional did not have a similar role with respect to nationalization of the railroads under Law No. 890. That law was to be administered by the Corporacion Nacional de Transportes.

Banco Nacional commenced the present action in 1960, asserting several claims totaling $9,794,022, the validity of which is not contested by Chase. First, Banco Nacional sought to recover some $7 million as successor in interest to two other Cuban state-owned banking enterprises, Banco de Desarollo EconEomico y Social ("Bandes") and Fonda de Establizacion de la Moneda ("Fonda"). In 1958 Chase had loaned Bandes $30,000,000, secured by United States Government obligations owned by Fonda and having a face value in excess of $30,000,000. Banco Nacional succeeded these two enterprises in February 1960 and made payments on the loans. On September 17, 1960, the date on which Cuba expropriated Chase's branches, the unpaid balance of the loan was $10,000,000. Within days of the expropriation, Chase sold the collateral then in its possession for more than $17,000,000, applied the proceeds against the outstanding loan balance (including accrued interest), and held a surplus of $7,256,398. Chase notified Bandes and Banco Nacional of the sale and informed them that the surplus would not be returned but rather would be retained to offset Chase's losses resulting from the expropriation.

In addition, Banco Nacional sought to recover in its own right for various sums it had on deposit with Chase on September 17, 1980, aggregating $2,537,622. Chase refused to repay those sums, and instead applied them against obligations allegedly owed it by the Republic of Cuba, its agencies and instrumentalities.

C. Chase's Counterclaims

Chase asserted four counterclaims. The branch counterclaim alleged that Chase had been engaged in branch banking in Cuba continuously since 1925 and at the time of the expropriation maintained four branches. Chase alleged that the properties, which it valued at $8,619,457, had been converted in violation of international law, and sought full recovery from Banco Nacional as the alter ego of the Cuban government. Chase also asserted an alternative counterclaim for the loss of its Cuban branches based on an implied contract theory. This counterclaim asserted that under Law No. 851 Banco Nacional succeeded to all of the liabilities of the seized branches, and that Chase's Cuban branches were indebted to Chase for approximately $6,000,000.

Chase stated two counterclaims in its capacity as trustee for American investors owning railroad equipment leased to the Cuban Railroad Company and Cuban Northern Railways Company under financing leases. This equipment, valued by Chase at $4,047,910, was nationalized on October 13, 1960, and Chase, as Trustee, sought recovery on behalf of the equipment trust certificate owners.

Chase did not seek affirmative relief on its counterclaims, the total value of which exceeded the amount sought by Banco Nacional, but merely requested that Banco Nacional's complaint be dismissed.*fn5

D. Decision of the District Court

The case was tried before the late Judge Frederick van Pelt Bryan who died without having rendered a decision. The action was then assigned to Judge Brieant who, with the agreement of the parties, decided the case on the basis of the record made before Judge Bryan.

In a reasoned opinion, reported at 505 F. Supp. 412, Judge Brieant ruled that, for purposes of Chase's branch counterclaim, Banco Nacional is the alter ego of the Cuban government,*fn6 that the branch counterclaim is justiciable, and that Chase is entitled to a set-off on this counterclaim in the amount of $6,904,870. The court dismissed Chase's implied contract counterclaim on its merits. Chase's counterclaims as railroad equipment trustee were dismissed on the ground that these counterclaims could not properly be interposed under Fed.R.Civ.P. 13(b).*fn7 Banco Nacional's claims not having been disputed, judgment was entered for Banco Nacional in the net amount of $2,889,150, with the instruction that Chase pay that amount into a special account controlled by federal authorities under the Cuban Assets Control Regulations, 31 C.F.R. Part 515 (1980).*fn8

E. Issues on Appeal

On this appeal Banco Nacional argues that the district court erred in allowing Chase to assert its counterclaim for the expropriation of its Cuban branches, contending that, under Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 84 S. Ct. 923, 11 L. Ed. 2d 804 (1964) ("Sabbatino"), the act of state doctrine bars the court from adjudicating the counterclaim, and that the amount of compensation, if any, due under international law for an expropriation of property is a nonjusticiable, political question. In addition Banco Nacional contends that the court overvalued Chase's Cuban assets in several respects.

Chase makes two principal arguments in support of its cross appeal. First, as to its branch counterclaim, it contends that the district court placed too low a going-concern valuation on the branches, and that the amount of the setoff it was allowed should therefore have been higher.*fn9 Second, Chase contends that it should have been allowed to pursue its two counterclaims asserted in its capacity as trustee of the railroad equipment that was nationalized on October 13, 1980.

We have examined all of the arguments of the parties and find merit only in Banco Nacional's contention that Chase was not entitled to recover for the "going concern" value of its branches.

II. JUSTICIABILITY OF THE BRANCH COUNTERCLAIM

We turn first to the question of whether Chase's counterclaim with respect to the expropriation of its Cuban branches is justiciable. Notwithstanding the rule laid down in Sabbatino, we conclude that the district court's decision that the branch counterclaim is justiciable was compelled by the Supreme Court's decision in First National City Bank v. Banco Nacional de Cuba, 406 U.S. 759, 92 S. Ct. 1808, 32 L. Ed. 2d 466 (1972) ("Citibank I ").

A. The Act of State Doctrine

The history and development of the centuries-old act of state doctrine were thoroughly explored by the Supreme Court in Banco Nacional de Cuba v. Sabbatino, supra. Prior to Sabbatino, although there was considerable disagreement as to the precise contours of the doctrine, see generally Note, Rehabilitation and Exoneration of the Act of State Doctrine, 12 N.Y.U.J. Int'l Law & Pol. 599, 601-10 (1980), the doctrine was generally viewed as having its origins in principles of sovereign immunity, id. at 600-01; Sabbatino, supra, 376 U.S. at 445-50, 84 S. Ct. at 949-51 (White, J., dissenting), and in the United States it was generally described as barring the courts of this country from adjudicating the validity of acts of the government of another country committed within its own territory. See, e. g., Underhill v. Hernandez, 168 U.S. 250, 18 S. Ct. 83, 42 L. Ed. 456 (1897).

In Sabbatino, which arose out of the Cuban government's expropriation of the Cuban assets of an American commodities broker who had contracted to purchase Cuban sugar, the Supreme Court reexamined the foundations of the doctrine and arrived at a new formulation. Briefly, the Court rejected the traditional sovereign immunity analysis of the doctrine, 376 U.S. at 421, 84 S. Ct. at 936, and found it rooted, principally, in the Constitution's separation of the powers of the three branches of government, id. at 423, 84 S. Ct. at 937. The Court described the doctrine as a principle of decision that is not technically required by the Constitution, but that must nevertheless reflect "the proper distribution of functions between the judicial and political branches of the Government on matters bearing upon foreign affairs." Id. at 427-28, 84 S. Ct. at 939-40. Further, it observed that the propriety of a court's adjudication of a particular type of international law question increased as the degree of codification or consensus as to the substantive principles concerning the area increased. Id. at 428, 84 S. Ct. at 940. Recognizing the need for flexibility in accommodating the role and needs of the Executive Branch in dealing with matters affecting the country's international relations, the Court announced that

the Judicial Branch will not examine the validity of a taking of property within its own territory by a foreign sovereign government, extant and recognized by this country at the time of suit, in the absence of a treaty or other unambiguous agreement regarding controlling legal principles, even if the complaint alleges that the taking violates customary international law.

Id.

The Court proceeded to review the sharp divergence of views as to the limitations on a state's power to expropriate property of aliens within its borders, id. at 428-30, 84 S. Ct. at 940-41, and to remark on social and ideological schisms underlying some of the disagreements as to the standards relating to expropriations. Id. at 430, 84 S. Ct. at 941. Concluding that it could easily risk interference with the Executive Branch's negotiations by passing on questions arising in so uncertain an area, the Court held that the act of state doctrine foreclosed inquiry into the Cuban expropriation of the Cuban assets of the sugar broker, even if the expropriation violated international law.

B. The Decision in Citibank I

While the result and reasoning of Sabbatino would appear to require that Chase's present counterclaims be held nonjusticiable under the act of state doctrine, later action by the Supreme Court dictates the contrary result. Citibank I, 406 U.S. 759, 92 S. Ct. 1808, 32 L. Ed. 2d 466, involved precisely the same factors as exist here with respect to Chase's branch counterclaim: Citibank sought a setoff for the expropriation on September 16, 1960, pursuant to Resolution No. 2 of Law No. 851, of its Cuban branches, up to the amount of claims asserted by Banco Nacional to recover for deposits that Citibank refused to repay and to recover a surplus realized by Citibank on the sale of collateral held as security for a loan to Bandes. After an initial decision by the district court holding Citibank's counterclaim justiciable,*fn10 this Court ruled that the act of state doctrine as set forth in Sabbatino barred adjudication of Citibank's counterclaim, 431 F.2d 394. At the direction of the Supreme Court, 400 U.S. 1019, 91 S. Ct. 581, 27 L. Ed. 2d 630, we reviewed our decision in light of a letter from the Legal Advisor of the Department of State advising that the foreign policy interests of the United States would not be injured by adjudication of the merits of the counterclaim, 442 F.2d 530, and we adhered to that decision notwithstanding our ruling some years before in Bernstein v. N. V. Nederlandsche-Amerikaansche Stoomvaart-Maatschappij, 210 F.2d 375 (2d Cir. 1954) ("Bernstein"). In Bernstein we had initially refused to allow adjudication of the validity of acts of the Nazi government of Germany in the absence of any expression of views ...


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