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LIBRA BANK LTD. v. BANCO NACIONAL DE COSTA RICA

July 6, 1983

LIBRA BANK LIMITED, LIBRA INTERNATIONAL BANK, S.A., BANCO DE LA PROVINCIA DE BUENOS AIRES, BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA, BANCO DE VIZCAYA, S.A., BANQUE INTERNATIONALE A LUXEMBOURG, S.A., BANQUE ROTHSCHILD, and THE NATIONAL BANK OF WASHINGTON, Plaintiffs, against BANCO NACIONAL DE COSTA RICA, S.A., Defendant.


The opinion of the court was delivered by: MOTLEY

AMENDED AND SUPPLEMENTAL OPINION

MOTLEY, C.J.

 Plaintiffs bring this action to recover their share of principal amounts, plus interest, of a $40 million loan made by sixteen banks, including seven of the plaintiffs herein, to defendant Banco Nacional de Costa Rica (Banco Nacional). Plaintiffs have moved from summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, seeking an order requiring Banco Nacional to repay the principal amounts, plus interest, allegedly due under the promissory notes issued in connection with the loan. As its sole defense, Banco Nacional asserts that it is barred from repayment by an act of the Costa Rican government and that this court is barred from entering the requested order by the act of state doctrine. Also before the court is plaintiff's motion for an order compelling Banco Nacional to return and deposit $2.5 million with the Clerk of the Court as partial security for any judgment entered against Banco Nacional. Plaintiffs claim that this order is warranted because defendant allegedly absconded with such funds in an effort to avoid an order of attachment. For the reasons set forth below, plaintiffs' motion for summary judgment is granted but the motion to compel defendant to return its assets is denied.

 Background

 In or about December, 1980, Libra Bank Limited (Libra Bank), a banking corporation organized under the laws of the United Kingdom with a representative office in New York City, acted as an agent for sixteen banks *fn1" in the making of a $40 million loan to Banco Nacional, a banking concern wholly owned by the Costa Rican government, in order to provide pre-export and export financing of sugar and sugar products from Costa Rica. In connection with this loan, Banco Nacional entered into a loan agreement with plaintiffs. The agreement provided, inter alia, that the loan would be repaid in four successive installments to occur on July 30, August 30, September 30 and October 30, 1981.

 After the loan agreement was executed, Banco Nacional drew down the full $40 million loan proceeds by requesting Libra Bank to credit Banco Nacional's account at a bank in New York City with such funds. Libra Bank subsequently honored that request pursuant to paragraph two of the loan agreement. On July 30, 1981, Banco Nacional paid Libra Bank the sum of $5 million plus interest in satisfaction of the first installment due under the loan agreement and the promissory notes executed thereon. Banco Nacional continued to pay interest until August 18, 1981. From that day forward, Banco Nacional has made no further payments.

 According to Banco National, it was prevented from honoring the loan agreement by a resolution adopted by the Central Bank of Costa Rica on August 27, 1981, three days before the second payment was due. *fn2" The resolution was adopted in an effort to remedy Costa Rica's problems in servicing its external debts, i.e. debts to foreign creditors in foreign currency. *fn3" According to Banco Nacional, Costa Rica's banking laws require all foreign exchange transactions to be authorized by the Central Bank of Costa Rica. The August 27th resolution adopted by the Central Bank provided that only repayments of external debts to multilateral international agencies would be authorized. *fn4" Banco Nacional's requests for foreign currency in order to repay plaintiffs' loan was denied by the Central Bank. *fn5" On November 24, 1981, the President and the Minister of Finance issued a decree providing that the Republic and all public sector entities, including Banco Nacional, could not pay principal or interest on external debt in foreign currency without the prior approval of the Central Bank in consultation with the Minister of Finance. *fn6" The alleged effect of these decrees was to prevent Banco Nacional from repaying its loan to plaintiffs.

 On September 14, 1981, plaintiffs obtained an order issued by the Supreme Court of the State of New York, County of New York, requiring defendant to show cause why an order of attachment should not be entered attaching the property of Banco Nacional in New York State. Defendant subsequently defaulted. On November 12, 1981, the application for an order of attachment was granted. Thereafter, the Sheriff of New York County levied upon the bank accounts of Banco Nacional in various banks in New York. Plaintiffs were able to attach approximately $800,000 held by defendant in various accounts.

 On December 8, 1981, after levy had been made by the Sheriff, defendant removed the action to this court. Defendant also moved to dismiss for lack of in personam jurisdiction based on insufficiency of process *fn7" and to vacate the order of attachment. On December 11, 1981, plaintiffs moved to remand this case to the state court on the ground that this court lacked subject matter jurisdiction. The motion was denied. See Libra Bank Limited, et al. v. Banco Nacional de Costa Rica, S.A., No. 81 Civ. 7624 (S.D.N.Y. Dec. 18, 1981). Before the scheduled date for argument on defendant's motion to vacate the attachment, defendant brought on by order to show cause a motion to expedite consideration of its motion. This court granted the motion to expedite and by opinion dated December 22, 1981, this court granted the motion on the ground that Banco Nacional had not waived its immunity to pre-judgment attachment. Libra Bank Limited, et al. v. Banco Nacional de Costa Rica, S.A., No. 81 Civ. 7624 (S.D.N.Y. Dec. 22, 1981).

 On April 12, 1982, the Second Circuit vacated this court's order noting, inter alia, that the authority relied on by the District Court, is "not controlling on this Court." Libra Bank Limited, et al. v. Banco Nacional de Costa Rica, S.A., 676 F.2d 47, 50 (2d Cir. 1982). Thereafter, plaintiffs attempted to have the United States Marshal levy on the same banks upon which the New York Sheriff had levied as well as a number of other banks. Plaintiffs discovered, however, that Banco Nacional no longer maintained accounts at any of those banks and had no other accounts in any New York banks.

 Plaintiffs then brought the instant motions for summary judgment and for an order requiring defendant to return its assets.

 I.

 A motion for summary judgment may be granted when 1) there are no disputed issues of material fact requiring trial and 2) the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c); New York State Energy Research and Development Authority v. Nuclear Fuel Services, 666 F.2d 787, 789 (2d Cir. 1981).

 Banco Nacional has submitted the affidavit of its Assistant General Manager, Alvaro Santisteban Castro, in opposition to plaintiffs' motion for summary judgment. An examination of Santisteban's affidavit and defendant's memoranda indicates that Banco Nacional's opposition to the motion is based on its view that the events occurring on August 27 and November 24, 1981, in Costa Rica constitute a defense to repayment under the act of state doctrine and that in any event material issues of fact exist with respect to these events. Plaintiffs claim that any factual disputes with respect to these events are immaterial. They claim that even if the court credits Banco Nacional's version of the facts that the Costa Rican decrees prevented it from obtaining foreign currency, the act of state doctrine is no defense to liability in this case because 1) the act of state doctrine applies only when the foreign state expropriates property within its own territorial boundaries -- since the situs of the property in question is in the United States this court need not abstain from examining the acts' validity; and 2) even if the act of state doctrine does apply, this case falls within the commercial activity exception to that doctrine so that the court need not abstain from examining those acts.

 A. The Act of State Doctrine

 The early cases charting the development of the act of state doctrine viewed that doctrine as being rooted in principles of sovereign immunity. See Underhill v. Hernandez, 168 U.S. 250, 252, 42 L. Ed. 456, 18 S. Ct. 83 (1897) ("Every sovereign state is bound to respect the independence of every other sovereign state, and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory."); Oetjen v. Central Leather Co., 246 U.S. 297, 62 L. Ed. 726, 38 S. Ct. 309 (1918); Ricaud v. American Metal Co., 246 U.S. 304, 62 L. Ed. 733, 38 S. Ct. 312 (1918); see generally Note, Rehabilitation and Exoneration of the Act of State Doctrine, 12 N.Y.U. L.J. Int'l Law & Pol. 599, 600-610 (1977) (early history and development of the doctrine). Some forty years after the doctrine's first pronouncement by Chief Justice Fuller in Underhill v. Hernandez, the Cuban revolution and the legal disputes arising from those events led the Supreme Court to rethink the doctrine. 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, 11 L. Ed. 2d 804, 84 S. Ct. 923 (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 (1968).

 In Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 11 L. Ed. 2d 804, 84 S. Ct. 923 (1968) (Sabbatino), the legal dispute was precipitated by the Cuban government's nationalization of the property within Cuba of an American commodity broker who had contracted to purchase sugar exports from Cuba. In Sabbatino, the Supreme Court renunicated its earlier pronouncement, set forth in Underhill v. Hernandez, that the act of state doctrine is rooted in principles of sovereign immunity. 376 U.S. at 421. Instead, the Court held that although the doctrine is not required by the Constitution, it does have constitutional underpinnings because it is rooted in the "basic relationships [among] branches of government in a system of separation of powers." Id. at 423. The doctrine "concerns the competency of dissimilar institutions to make and implement particular kinds of decisions in the area of international relations," and embodies the "strong sense of the Judicial Branch that its engagement in the task of passing upon the validity of foreign acts of state may hinder rather than further this country's pursuit of goals both for itself and for the community of nations as a whole in the international shpere." Id. Since the act of state doctrine obtains its status as a binding principle of legal decision ultimately from the constitutional principle of the separation of powers, "its continuing validity depends upon its capacity to reflect the proper distribution of functions with respect to matters implicating international relations among the three branches of government." Id. at 427-28. Rather than laying down an inflexible or an all encompassing rule, the Supreme Court held 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. at 428. The Court then concluded that however offensive to the public policy of this nation the Cuban seizure may be, the dual goals of maintaining the judicial function in its appropriate sphere within our system of government and of establishing the rule of law among nations are best served by the foreclosure of judicial inquiry into the validity of the Cuban expropriations within its own territory. Id. at 437.

 B. Application of the Act of State Doctrine to Extraterritorial Takings

 Under Sabbatino's formulation, the act of state doctrine forecloses judicial inquiry into the validity of foreign seizures only when there is "a taking of property within its own territory by a foreign sovereign government," id. at 428 (emphasis added). This "territorial corollary," see Note, supra, 12 N.Y.U. L.J. Int'l Law & Pol. at 623-31, goes to the applicability of the act of state doctrine. Unless the expropriation occurs within the foreign state, this court is free to inquire into the validity of the acts of the foreign nation. This important limitation on the preclusive scope of the doctrine was recently stated by the Second Circuit:

 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...; 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."

 Banco Nacional de Cuba v. Chemical Bank of New York, 658 F.2d 903, 908 (2d Cir. 1981) (Kearse, J.) (quoting Republic of Iraq v. First National City Bank, 353 F.2d 47, 51 (2d Cir. 1965) (Friendly, J.), cert. denied, 382 U.S. 1027, 15 L. Ed. 2d 540, 86 S. Ct. 648 (1966)). See First National Bank, et al. v. Banco Nacional de Cuba, 658 F.2d 895, 901 (2d Cir. 1981); Menendez v. Saks & Co., 485 F.2d 1355, 1364 (2d Cir. 1973), rev'd on other grounds sub nom. Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 48 L. Ed. 2d 301, 96 S. Ct. 1854 (1976); United Bank, Ltd. v. Cosmic International, Inc., 542 F.2d 868, 873 (2d Cir. 1976), aff'g and modifying, 392 F. Supp. 262 (S.D.N.Y. 1975). See also Stroganoff-Scherbatoff v. Weldon, 420 F. Supp. 18, 20 (S.D.N.Y. 1976); F. Palicio y Compania, S.A. v. Brush, 256 F. Supp. 481, 483-84 (S.D.N.Y. 1966), aff'd per curiam, 375 F.2d 1011 (2d Cir.), cert. denied, sub nom. Brush & Bloch v. Republic of China, 389 U.S. 830, 88 S. Ct. 95, 19 L. Ed. 2d 88 (1967).

 In Republic of Iraq v. First National City Bank, 353 F.2d 47 (2d Cir. 1965) (Republic of Iraq), the Republic of Iraq confiscated the assets of its deposed monarch, King Faisal II, held in deposit and custody accounts with a bank in New York City. Judge Friendly stated that in determining whether to question the validity of the confiscation decree, a court must first determine whether the property was located in the United States at the time of the attempted act of confiscation. 353 F.2d at 51. If the property is located in this country, a court must examine that act of seizure within the framework of our own policies and laws and must enforce it only if it is consistent with our system of jurisprudence. Because the Second Circuit concluded that King Faisal's assets were located in the United States, it refused to give effect to the foreign decree.

 In the instant action, defendant argues that the acts of state in question occurred in Costa Rica. *fn8" Defendant also argues that the acts in question are the August 27, 1981 and the November 24, 1981 decrees passed by the Costa Rican government regulating the conduct of its banks with the effect that the loan cannot be repaid in New York. This case, according to defendant, is to be distinguished from Republic of Iraq where the decree stated that the foreign nation was seizing property located in New York. The court finds this argument to be without merit. First, the acts in question are not the resolutions passed by the Costa Rican government. As Judge Wisdom has stated, the act of state "refers to full exercise by the foreign state of dominion over the property in question, not to the documentary execution of whatever legal action the foreign state takes toward the property or its own national.... it looks not to the execution of a nationalization decree but rather to exercise of dominion over real property located in the United States." Maltina Corporation v. Cawy Bottling Company, 462 F.2d 1021, 1025 n.3 (5th Cir.) (emphasis added), cert. denied, 409 U.S. 1060, 34 L. Ed. 2d 512, 93 S. Ct. 555 (1972). Second, defendant's argument that the Costa Rican decrees do not confiscate property but merely prevented defendant from repayment is also without merit. The property in question in this case is plaintiffs' legal right to repayment of the debt owed by the defendant. The Costa Rican decrees purport to alter the legal relations of the parties because they attempt to extinguish plaintiffs' rights. That act is as much an attempt to confiscate plaintiffs' property in this case as was the attempt to confiscate King Faisal's accounts in Republic of Iraq. That tangible property may have been involved in Republic of Iraq as opposed to intangible property here is a distinction without legal significance since in a strict legal sense all property is intangible. The American legal concept of property refers not to possession of "things," but to certain legal rights among persons with respect to "things." See generally B. Ackerman, Private Property and the Constitution, 26-27 (1977). Since the court finds defendant's attempts to distinguish this case from Republic of Iraq to be unavailing, the court turns now to an examination of cases illuminating Judge Friendly's two step analysis.

 In Menendez v. Saks, 485 F.2d 1355 (2d Cir. 1973) (Menendez), the Second Circuit stated that "[f]or purposes of the act of state doctrine, a debt is not 'located' within a foreign state unless that state has the power to enforce or collect it." 485 F.2d at 1364. The court further stated that "the power to enforce payment of a debt,... the basis of our decision in Republic of Iraq [,]... generally depends on jurisdiction over the person of the debtor." Id. at 1365 (citing Harris v. Balk, 198 U.S. 215, 49 L. Ed. 1023, 25 S. Ct. 625 (1904)).

 Menendez involved a dispute between former owners of a cigar manufacturing business and agents of the Cuban government or "interventors" who had been placed in charge of operating these businesses after their nationalization by the Cuban government. Both the former owners and the interventors asserted rights to preseizure debts owed by cigar importers in New York City.The court held that the doctrinal obstacle of the act of state did not bar judicial inquiry:

 Application of the principles of [Republic of Iraq] 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.

 485 F.2d at 1364.

 In United Bank, Ltd. v. Cosmic International, Inc., 542 F.2d 868 (2d Cir. 1976), Bangladesh and Pakistani plaintiffs asserted conflicting rights to payment for jute products exported from East Pakistan and resold in the United States prior to the March 26, 1971 "Proclamation of Independence" declaring East Pakistan to be the sovereign state of Bangladesh. The defendant, Cosmic International, Inc., a Delaware corporation with its principal place of business in New York, held two funds amounting to $97,043.50 and $433,365.96 which represented the proceeds from the sale of the jute products in question. The defendant admitted that it owed the money but sought judicial clarification as to whom it should pay. In sum, the issue was whether the pre-revolution owners or the post-revolution successors owned the debt. The District Court, relying on Republic of Iraq and Menendez, held that the situs of the debt was in New York:

 [I]t is clear the sales transactions were complete and all that remained was the right to receive payment, which was to be made in New York City.This right existed before December 16, 1971, the date the new Bangladesh government gained control of East Pakistan.The act of state doctrine is inapplicable because the situs of the debts was New York at the time the Bangladesh government attempted to seize them.

 United Bank, Ltd. v. Cosmic International, Inc., 392 F. Supp. 262, 265 (S.D.N.Y. 1975).The Second Circuit affirmed the District Court's analysis of the act of state doctrine, 542 F.2d at 872, and rejected each of the Bangladesh plaintiffs' arguments placing the situs of the debt in Bangladesh. Id. at 873-77. *fn9" See also Vishipco Line v. Chase Manhattan Bank, N.A., 660 F.2d 854, 862 (2d Cir. 1981) (Vishipco Line) (for purposes of act of state doctrine, "[t]he rule announced in Harris v. Balk, 198 U.S. 215, 25 S. Ct. 625, 49 L. Ed. 1023 (1905), continues to be valid on this point: the power to enforce payment of a debt depends on jurisdiction over the debtor), cert. denied, 459 U.S. 976, 103 S. Ct. 313, 74 L. Ed. 2d 291 (1982).

 The territorial limitation on the act of state doctrine was recognized recently by the New York Court of Appeals in Weston Banking Corporation v. Turkiye Garanti Bankasi, 57 N.Y.2d 315, 442 N.E.2d 1195, 456 N.Y.S.2d 684 (1982) (Weston Banking). In Weston Banking, the plaintiff, a Panamanian bank, sought to enforce a promissory note that was signed by the representatives of the defendant, a Turkish bank, on July 9, 1976, in Istanbul, Turkey. According to the terms of the note, defendant undertook an obligation to repay plaintiff principal in the amount of 500,000 Swiss francs, plus interest calculated at 9% per annum. The note provided that all payments were to be made at the offices of Chemical Bank (Chemical) in New York City. The note designated New York as the proper jurisdiction for the resolution of any disputes and, under the terms of the note, the defendant consented to the jurisdiction of the New York courts. 456 N.Y.S.2d at 685. The defendant bank duly borrowed the 500,000 Swiss francs. As the interest became due, defendant made payments in Swiss francs at Chemical's International Division in New York City. When the note was presented for repayment of the principal, defendant refused to pay on the grounds that the then existing Turkish banking regulations barred it from repaying the note in Swiss francs. Plaintiff moved for summary judgment.The trial court denied the motion. The Appellate Division modified, on the law, and granted plaintiff's motion for summary judgment. On appeal, the New York Court of Appeals affirmed. Noting that "the note requires payment to be made at Chemical Bank in New York City and designates New York law to be controlling," 456 N.Y.S.2d at 688, the court stated:

 We conclude that on these facts the Act of State doctrine does not constitute a defense to plaintiff's action to recover on this note. A debt is not located within a foreign State unless it has the power at the instance of an interested party to enforce or collect it.... Here, the debt is equally capable of being enforced against the defendant's assets in New York as it is capable of being enforced against its assets in Turkey, and the state of Turkey has no power to enforce collection of this debt.The mere fact that this suit might have been commenced in Turkey, instead of New York, does not bar the action. Indeed, the note provides that New York shall be the proper jurisdiction for dispute resolution. Such a provision naturally contemplates enforcement of any judgment which would resolve the dispute. Thus, the Act of State doctrine does not bar this action.

 Id. (citations omitted). See also Manas y Pineiro v. Chase Manhattan Bank, N.A., 106 Misc.2d 660, 434 N.Y.S.2d 868, 872 (Sup. Ct. 1980) (act of state doctrine applicable where both the res and the ...


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