UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
July 22, 1983
SALVADOR BANDES, Plaintiff, against HARLOW & JONES, INC., Defendants; HARLOW & JONES, INC., Interpleader-Plaintiff, against SALVADOR BANDES and DAVID ALVAREZ, Interpleader-Defendants.
The opinion of the court was delivered by: OWEN
OPINION AND ORDER
OWEN, District Judge
In 1979 during the final days of the Nicaraguan civil war, his factory a casualty of mortar fire, Salvador Bandes and his family fled to neighboring Honduras fearing for their safety because of his association with the tottering Somoza regime. At that time Bandes's company had paid an American firm, Harlow and Jones, Inc., the sum of $460,000 for steel billets which had not been, and because of events, never were delivered. Shortly thereafter, having prevailed in the war, the Sandinista revolutionary forces "intervened" -- Bandes claims "confiscated" -- Bandes's company. Today, representatives of the Sandinista government run his factory. The said $460,000, less some $40,000 of offsets, is the subject of this interpleader action.
In more detail the undisputed facts are as follows. Bandes's company, Industria Nacional de Clavos y Alambres de Puas, Sociedad Anonima ("INCA") is engaged in the business of manufacturing and selling steel products, such as nails, barbed wire, and steel construction rods.INCA markets its products within Central America. At full production, it employed approximately 350 workers and supplied in excess of 50% of the domestic Nicaraguan need for such commodities.
INCA's principal place of business is Masaya, Nicaragua, a city of some 35,000 people. It has been in business since 1960, initially having been formed as a partnership called Salvador Bandes & Co. In 1964, this partnership was reformed under its present name. In 1976, apparently as a condition of doing business in Nicaragua, INCA issued approximately 18% of its shares to General Jose Somoza, the brother of dictator General Anastasio Somoza. At the time of the events in issue, mid-1979, Salvador Bandes and the members of his family controlled approximately 75% of the stock, General Somoza owned 18% and some 6% was in the hands of others. Bandes was the president of its board of directors and its general manager, as well as being its majority stockholder.
In 1978, INCA ordered 2,000 metric tons of steel billets from H & J, a company located in Stamford, Connecticut. Subsequently, INCA and H & J agreed to reduce the size of that order to 2,000 tons of billets. In January and February, 1979, INCA paid H & J $460,000 for those billets in three installments. INCA has never taken delivery on the billets.
Thereafter, Bandes, acting pursuant to a long-held general power of attorney, commenced negotiations for the return of the money and, after the revolutionists' intervention of INCA, on September 8, 1979, concluded a settlement agreement with H & J pursuant to which H & J was to refund to Bandes $420,000 and release INCA from its obligation to take delivery of the steel billets. The approximately $40,000 retained by H & J represented both a deduction of some $20,200 in payment of an obligation owed by INCA to H&J and the cost to H & J of the rescission.
Two days prior to the settlement, however, interventor Alvarez sent a telex to H & J stating that only the Nicaraguan State Fideicommisary was authorized to represent INCA, that he was that Fideicommissary, and that INCA was presently under investigation by the state and was operating under government administration. The clear intention of the telex was to put into question the authority of Bandes to represent INCA in any transactions and particularly in the settlement agreement finalized two days thereafter.
Confronted with this development, H & J turned to this court, interpleading Bandes and Alvarez, both of whom move for summary judgment. Central to the resolution of the issues before me are the decrees and acts of La Junta de Gobierno de Reconstruction Nacional de la Republica de Nicaragua (the "Government Council") following its take-over on July 19, 1979.
On July 20, 1979, the Government Council issued Decree No. 3,
thereby empowering the Attorney General of Justice of Nicaragua "to proceed immediately with the intervention, requisition and confiscation of all assets of the Somoza family, military personnel and civil servants who have abandoned the country since December, 1977." On July 22, 1979, the Government Council, by the issuance of Decree No. 10,
declared that "presidents, directors, managers, administrative heads of departments and/or those responsible for any working equipment in private business that refuse to go back to work, abandon it or hinder the working of these businesses" have committed a crime, carrying a "penalty from 3 months to 2 years of public service." Decree No. 10 also empowered the state, "through the competent authorities, to intervene those businesses whose proprietors abandon them or refuse to put them back in operation."
Some six days later the holdings of Bandes and his family in INCA were "intervened" by the Attorney General
and the shares of INCA held by Somoza were "confiscated." At the same time, the Attorney General Authorized the Fideicomiso de Reconstruccion Nacional ("Fideicomiso") to be the administrator of INCA with the power
To represent the company in and outside of Nicaragua, in the capacity of General Administrator; [and] to represent the stock which was intervened in the General Assembly.
David Alvarez was thereupon appointed representative of the Fideicomiso and interventor of INCA. Three others were appointed to represent the INCA shares of the Bandes family and the Nicaraguan government at a general assembly of the shareholders of INCA which was to be held on August 1, 1979.
On that same date, a meeting of these newly appointed representatives was held and the following actions -- the legitimacy of which Bandes strenuously contests -- were taken. Bandes and his wife were removed from their positions as officers of INCA; Bandes and the previous board of directors were stripped of all powers and mandates, and expressly the power to represent INCA in any type of litigation or contract; a new board of directors was appointed to manage INCA, and Alvarez was granted a General Power of Administration. Alvarez now continues to administer and represent INCA under the authority of the Corporacion Industrial de Pueblo, the institutional successor to the Fideicomiso.
On November 21, 1979, the Government Council issued Decree No. 172
and thereby suspended the application of Decree No. 38,
prohibited new interventions, confiscations, requisitions, or attachments, and determined that, as to property which had already been intervened but about which a verdict of confiscation had not been entered, the Attorney General should have the sole power to try such cases.
On February 7, 1980, the Government Council issued Decree No. 282.
That decree regulated the status of "natural persons who are outside Nicaragua" whose "assets were intervened or in any other way affected... under Decree No. 38." It required that persons, such as Bandes, wishing to contest the intervention of their property, "do so personally before the Justice Attorney General's Office within the unextendable period of 30 days." Moreover, Decree No. 282 dictated that persons within its scope who failed to appear in person to contest the taking of their property within the said 30 days would "lose whatever rights they may have over the affected assets, which shall become, without indemnity, the property of the State." Pursuant to this Decree one such as Bandes -- whom the current Nicaraguan government claims has abandoned his factory and thereby committed a crime -- was required to appear personally in Nicaragua to object to the seizure of his property or, failing that, at the end of the 30-day period, forfeit it to the State without compensation. Neither Bandes nor any member of his family appeared within the said unextendable 30-day period to contest the taking.
On May 2, 1980, well beyond the 30-day period allowed in Decree 282, supra, the Government Council by Decree No. 422 terminated the power of the Attorney General to confiscate property on the basis of a property owner's failure to personally appear in order to defend his property rights. Decree No. 422 requires the Attorney General to institute an action in th ordinary courts of nicaragua in order to effect a confiscation,
with a property owner entitled to notice and an opportunity to be heard either in person or by counsel. Notwithstanding statements in Alvarez'z memorandum to the contrary, the Nicaraguan authorities appear to be proceeding on the premise that Bandes's ownership had already passed to them by forfeiture under earlier Decree No. 282. The Attorney General's office has not instituted any action against Bandes under Decree No. 422 and his stock remains intervened.
On October 1, 1979, Bandes assigned his rights to the settlement agreement fund to his wife in exchange for $1.
Both Bandes and Alvarez on their respective motions for summary judgment focus for the most part either on the legitimacy and effect of Alvarez's appointment as interventor of INCA, or the extra-territorial application of the Act of State Doctrine, or the compensation due or not due to Bandes as a consequence of his loss of property in Nicaragua. In view of my conclusion that the Act of State Doctrine, as applied to the conceded facts, entitles Bandes to prevail, I discuss other contentions only to the extent that they raise issues which are otherwise not decided.
Chief Justice Fuller offered the classic formulation of the Act of State Doctrine in Underhill v. Hernandez, 168 U.S. 250, 42 L. Ed. 456, 18 S. Ct. 83 (1897), at 252:
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 of the acts of the government of another done within its own territory. Redress of grievances by reason of such acts must be obtained through the means open to be available of by sovereign powers as between themselves.
So stated, the doctrine recognizes first, that to the extent that the United States has an interest in the internal affairs of a foreign sovereign, that interest is best represented by the executive branch, and second, that, in any event, the United States courts are without power to enforce their decrees as they apply to property held extra-territorially without the consent of the foreign sovereign. For these reasons, where the property in issue is within the jurisdiction of the foreign sovereign, the Act of State Doctrine, which counsels a "hands off" approach, is "applicable even if international law has been violated." Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 431, 11 L. Ed. 2d 804, 84 S. Ct. 923 (1964).
Nevertheless, when the confiscated property is located not within the borders of the foreign sovereign but within the jurisdiction of the United States courts, the policies mandating a hands-off attitude no longer apply with the same force.Traditionally, the judiciary has exercised control over property located within th borders of the United States. More importantly, the United States courts have the power to enforce their orders as they affect domestically held property.Therefore, a corollary to the Act of State Doctrine has evolved: "when property confiscated [by a foreign sovereign] is within the United States at the time of the attempted confiscation, our courts will give effect to the acts of [the foreign] state 'only if they are consistent with the policy and law of the United States'." Republic Of Iraq v. First National City Bank, 353 F.2d 47, 51 (2d Cir. 1965), quoting, ALI, Restatement of Foreign Relations law of the United States § 46 (Proposed Official Draft 1962);
accord, Banco Nacional de Cuba v. Chemical Bank of New York, 658 F.2d 903 (2d Cir. 1981).
Keeping the foregoing in mind, I turn to Bandes's specific contentions.
Bandes initially contends that pursuant to Nicaraguan corporate law, the appointment of Alvarez as administrator of INCA was invalid because certain Nicaraguan legal requirements, among others, were not met: 1) the revocation of his most general power of attorney was never embodied in a deed registered with the official notary; 2) he did not receive requisite notice thereof; and 3) the August 1, 1979 shareholder meeting, at which Alvarez was appointed administrator and Bandes was stripped of power, was improperly constituted.In these particulars, Bandes's contention is similar to one raised -- and rejected by the Supreme Court -- in Banco Nacional de Cuba v. Sabbatino, supra. In Banco Nacional, the representative of a Cuban corporation challenged a decree of expropriation on the ground, inter alia, that the decree had not been published in the official newspaper as required by Cuban law. The Supreme Court, holding that the Act of State Doctrine barred scrutiny of precisely this kind of question, stated:
An inquiry by United States courts into the validity of an act of an official of a foreign state under the law of that state would not only be exceedingly difficult but, if wrongly made, would be likely to be highly offensive to the state in question.Of course, such review can take place between States in our federal system, but in that instance there is similarity of legal structure and an impartial arbiter, this Court, applying the full faith and credit provision of the Federal Constitution.
Another ground supports [this] resolution of [the] problem.... Were any test to be applied it would have to be what effect the decree would have if challenged in Cuba. If no institution of legal authority would refuse to effectuate the decree, its "formal" status -- here its argued invalidity if not properly published in the Official Gazette of Cuba -- is irrelevant. It has not been seriously contended that the judicial institutions of Cuba would declare the decree invalid.
376 U.S. at 415 n.17.
The foregoing requires rejection of Bandes's first contention. The Attorney General of Nicaragua plainly authorized the appointment of an administrator for INCA and vested that administrator -- Alvarez -- with the power "to represent the company in and out of Nicaragua" and "to represent the stock which was intervened." The shareholder assembly of INCA plainly endeavored to expressly revoke Bandes's power to represent INCA in litigation and contractual matters. Further inquiry into Nicaraguan law is not permitted.
Bandes next contends that Alvarez's authority to represent INCA, at face value, does not entitle him to take the interpleader fund because it fails to invest him with the power to represent INCA in this proceeding. Specifically, he contends that prior to his flight from Nicaragua he was vested with INCA's most general power of attorney, i.e., the broadest authorization to act on the behalf of a corporation available pursuant to Nicaraguan law.He claims that Alvarez has been vested with a lesser authorization and that there is no reason for this court to create a further power of confiscation in Alvarez than the Government Council has given him. See, Tabacalera Severiano Jorge, S.A. v. Standard Cigar Co., supra, 392 F.2d at 714.
Apart from the Tabacalera case, I have found no other authorities supporting this "under-appointment" doctrine and I question its vitality. In a close case where the terms of a new representative's, e.g. Alvarez's, appointment, may or may not supervene the powers of the existing representative, e.g., Bandes, the inquiry which a court must undertake to unravel the chain of authority invites the same risks which the Act of State Doctrine seeks to foreclose. Moreover, in Tabacalera itself, the court raised the Act of State bar as an alternative ground for it holding. 392 F.2d at 714. I believe that that remains the better course in this instance.
Second, even if I were to reach the authorization question, the plain language of Alvarez's appointment appears to dispose of Bandes's contention. Alvarez was authorized "to represent the company in and out of Nicaragua" and "to represent the stock which was intervened." Bandes's contention that his authority remains senior to Alvarez's is insufficient in the face of such broad language.
Bandes's third and final contention is that, as a practical matter, the actions of the Government Council, particularly the enactment of certain laws and the intervention of INCA, need not be given effect because a) the interpleader fund lies within the United States and b) the confiscatory actions of the Government Council are not consistent with the policy and laws of the United States. Bandes asserts that this court must therefore ignore the confiscatory conduct and regard the situation as if the confiscation had never occurred. Given this, Bandes urges that under traditional principles of domestic and international law he is entitled to the interpleader fund. I agree.
A few relevant and undisputed facts mandate this result. Prior to the advent of the hostilities in Nicaragua, Bandes unquestionably was the principal representative of INCA. He owned and controlled a majority of its shares and he was duly empowered to act on its behalf.Absent the intervening actions of the Government Council, there can be no doubt that Bandes is the proper party to receive the debt owed by H&J. Since the Council's actions affect property held in the United States, it is incumbent on me to scrutinize those which purport to divest Bandes of his rights to the fund in order to determine whether pursuant to policies of domestic and international law such actions should be sustained by the United States courts.
Decrees 3, 10, and 282, all promulgated in July, 1979, are in issue. Decree No. 3 empowered the Attorney General to intervene Bandes's property, Decree No. 10 fixed criminal penalties for the "abandonment" of property, and Decree No. 282 disallowed any challenge to the intervention unless made in person within an unextendable period of 30 days and mandated forfeiture without payment for failure to challenge. While it may be argued that on its face Decree No. 422, promulgated some time after the INCA forfeiture, in some way mitigated the harshness of the prior decrees, their net effect was (1) to wrest control and ownership of INCA from Bandes and lodge it in the Government Council through the agency of Alvarez and (2) to restrict Bandes's right to protest his loss in a way which put his personal safety at peril.
Of course, were these same events to occur in our domestic system the Fifth Amendment to the United States Constitution would proscribe the uncompensated taking of property by the state. Although our Constitution does not apply to a taking in Nicaragua, this same policy has been applied to matters where the taking was effected not by a governmental entity in our federal system but by a foreign sovereign. As our Court of Appeals has explained. Republic of Iraq, supra, 353 F.2d at 52:
It is true that since [the Fifth Amendment and other provisions of the Constitution] are addressed to action by the United States or a state, they might not prevent a court of the United States from giving effect to a confiscatory act of a foreign state with respect to property in the United States. But at least they show that, from its earlier days under the Constitution, this nation has had scant liking for legislative proscription of members of a defeated faction, although -- or perhaps because -- many states, in their dealings with property of the loyalists immediately after the Revolution, had practiced exactly that. Foreigners entrusting their property to custodians in this country are entitled to expect this historic policy to be followed save when the weightiest reasons call for a departure.
... [T]he policy of the United States is that there is no such thing as a "good" confiscation by legislative or executive decree.
Thus, where there has been a taking without compensation by a foreign state and that state thereby purports to reach property within the United States, the taking will not be given effect. Moreover, the act of state by which the foreign government sought to achieve its taking will be rendered a nullity for the purpose of property within the United States.
Applying this principle to the facts now before me, I find that the decrees of the Government Council do constitute a taking without compensation, that such a taking is "contrary to our public policy and shocking to our sense of justice," Republic of Iraq, supra, 353 F.2d at 51, and that as a result the consequence of the decrees, i.e., the appointment of Alvarez and his claims on the fund, are a nullity. Bandes, by virtue of his status prior to the taking is entitled to the interpleader fund.
Alvarez has argued that the intervention of Bandes's INCA holdings does not constitute a permanent taking but rather is only an intermediate step which still affords Bandes a right to protect and seek redress. Nevertheless, the possibility of redress pursuant to the procedures set up by the decrees may well be deemed illusory. Cf. Banco Nacional de Cuba v. Sabbatino, supra, 376 U.S. at 402 & n.4.
Bandes should not be forced to imperil his person to demonstrate to this court that the intervention of his assets is in fact a confiscation. The failure of the Government Council to deprive Bandes of technical title to his INCA assets at this time does not make Bandes's loss any less final. See, F.Palicio y Compania, S.A. v. Brush, 256 F. Supp. 481, 488 (S.D.N.Y. 1966), aff'd 375 F.2d 1011 (2d Cir. 1967).
In view of my disposition of Bandes's motion for summary judgment, Alvarez's cross-motion for summary judgment is denied. It is appropriate, however, to address two contentions raised therein: first, that Bandes is not entitled to compensation for property he lost in Nicaragua either because his property there was valueless or because he has already been sufficiently compensated therefor, and second, the argument that he has abandoned INCA.
Alvarez's compensation argument, as I view it, misconceives the issue. This is not a valuation proceeding and my authority does not employer me to act as some sort of Nicaraguan Court of Claims to determine such issues. This, then, leaves before me only the task of applying the Act of State Doctrine. See Republic of Iraq v. First National City Bank, supra. The interpleader fund is the property of INCA; it is to be taken by the rightful representative thereof. Insofar as the facts and precedent dictate that I not give effect to the intervention of INCA's assets, Bandes remains the duly empowered representative of INCA.
For much the same reason, Alvarez's abandonment argument fails. It is Bandes's status as the representative of INCA that entitles him to take what is INCA's -- the interpleader fund. Not having been displaced under circumstances which policy requires me to accept, Bandes continues to be possess the authority he held before the hostilities.
Bandes's motion for summary judgment is granted, and that of Alvarez is denied. Submit order on notice.