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LIBRA BANK LTD. v. BANCO NACIONAL DE COSTA RICA

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK


August 12, 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

MEMORANDUM OPINION AND ORDER

MOTLEY, C.J.

 This court's opinion and order of July 11, 1983 granted plaintiffs' motion for summary judgment. On July 15, 1983, the date this court was prepared to enter judgment in this case, defendant Banco Nacional de Costa Rica, S.A. (Banco Nacional) moved to reargue the motion. In its July 11, 1983 opinion, this court held that since the act of state doctrine was inapplicable to this case, this court would give no effect to the Costa Rican decrees because "they [were not] 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) (Friendly, J.), cert. denied, 382 U.S. 1027, 15 L. Ed. 2d 540, 86 S. Ct. 648 (1966).Defendant now contends that the nonenforcement of the loan agreement is consistent with the policies and laws of this nation as evidenced by Article VIII, section 2(b) of the Articles of Agreement of the International Monetary Fund (the Bretton Woods Agreement or the Agreement), Dec. 27, 1945, 60 Stat. 1401, T.I.A.S. No. 1502, 2 U.N.T.S. 39, amended by 20 U.S.T. 2775, T.I.A.S. No. 6748, 726 U.N.T.S. 266 (May 31, 1968), amended by 29 U.S.T. 2203, T.I.A.S. No. 8937, U.N.T.S. (April 30, 1978). *fn1" After considering the briefs of the parties on this newly raised question of law, the court reaffirms its decision granting plaintiffs' motion for summary judgment and denies defendant's motion to reargue.

 Article VIII, section 2(b) of the Bretton Woods Agreement provides:

 Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member. *fn2"

 Defendant contends that both the United States and Costa Rica are signatories of the Agreement, that each element of Article VIII, section 2(b) is present in this case, and that the loan agreement is unenforceable.

 By definition, Article VIII, section 2(b) applies only to "exchange contracts." Relying primarily upon the views of a commentator, defendant urges this court to adopt a broad definition of these terms, sufficiently expansive to include international loans. See Williams, Extraterritorial Enforcement of Exchange Control Regulations Under the International Monetary Fund Agreement, 15 Va. J. Int'l Law 319, 338 (1975) (Williams). However, Williams himself acknowledges that he advocates a broad interpretation of the terms and that "[n]o American decision unequivocally supports a liberal interpretation of the term 'exchange contract.'" Id. at 342.

 The broad and narrow interpretations of "exchange contracts" are set forth by a leading commentator as follows:

 The narrow view of "exchange contracts" in Article VIII, Section 2(b) is that they are contracts for the exchange of one currency against another or one means of payment against another. The broad view is that they are contracts involving monetary elements.

 J. Gold, The Fund Agreement in the Courts: Volume II 425 (1982) (Gold). A review of the decisions that have directly addressed the meaning of these terms reveals that they consistently adhere to the narrow interpretation of the terms "exchange contracts."

 In Banco Do Brasil, S.A. v. A.C. Israel Commodity Co. Inc., 12 N.Y.2d 371, 190 N.E.2d 235, 239 N.Y.S.2d 872 (1963), cert. denied, 376 U.S. 906, 11 L. Ed. 2d 605, 84 S. Ct. 657 (1964), the Court of Appeals endorsed a narrow view of the terms "exchange contracts" as contracts which have as their immediate object the exchange of international media of payment, viz. the exchange of one currency for another:

 It is far from clear whether this sale of coffee is covered by subdivision (b) of section 2.... Subdivision (b) of section 2 has been construed as reaching only "transactions which have as their immediate object 'exchange,' that is, international media of payment"..., or a contract where the consideration is payable in the currency of the country whose exchange controls are violated.... More recently, however, it has been suggested that it applies to "contracts which in any way affect a country's exchange resources"....A similar view has been advanced to explain the further textual difficulty existing with respect to whether a sale of coffee in New York for American dollars "involves the currency" of Brazil, the member whose exchange controls were allegedly violated. Again it is suggested that adverse effect on the exchange resources of a member ipso facto "involves" the "currency" of that member.... We are inclined to view an interpretation of subdivision (b) of section 2 that sweeps in all contracts affecting any members' exchange resources as doing considerable violence to the text of the section. It says "involve the currency" of the country whose exchange controls are violated; not "involve the exchange resources".

 12 N.Y.2d at 375-76, 190 N.E.2d at 236, 239 N.Y.S.2d at 873-74 (emphasis added; citations omitted).

 In J. Zeevi & Sons, Ltd. v. Grindlays Bank (Uganda), Limited, 37 N.Y.2d 220, 333 N.E.2d 168, 371 N.Y.S.2d 892 (Zeevi), cert. denied, 423 U.S. 866, 46 L. Ed. 2d 95, 96 S. Ct. 126 (1975) the Court of Appeals adhered to its narrow interpretation of the terms "exchange contracts." On March 24, 1972, Hiram Zeevi & Company (Uganda) Ltd., an Israeli corporation, deposited with defendant Grindlays Bank (Uganda) Ltd., local currency valued at $406,864.80 in American dollars. The purpose of the deposit was to provide an account against which plaintiff J. Zeevi & Sons, Ltd., a partnership, could draw money. Defendant subsequently issued a letter of credit acknowledging that it had opened its irrevocable credit No. 110/84 for $406,846.80 in favor of the partnership.

 By official directive, the Uganda government subsequently notified defendant that foreign exchange allocations in favor of Israeli companies and nationals should be cancelled and ordered defendant to make no foreign exchange payments pursuant to the letter of credit.Thereafter, when plaintiff presented for reimbursement 10 drafts drawn under the letter of credit at defendant's New York agent bank, the bank refused to honor the drafts. Plaintiffs brought suit. The Supreme Court held that the letter of credit was enforceable and granted plaintiff's motion for partial summary judgment.The Appellate Division affirmed.

 On appeal, the Court of Appeals affirmed the lower courts and specifically rejected defendant's contention that enforcement of the letter of credit violated Article VIII, section 2(b) of the Bretton Woods Agreement. Judge Cooke held:

 Contrary to defendants' position, the agreement, even when read in its broadest sense, fails to bring the letter of credit within its scope, since said letter of credit is not an exchange contract. In Banco Do Brasil, S.A. v. Israel Commodity Co., 12 N.Y.2d 371, 375-376, 239 N.Y.S.2d 872, 874, 190 N.E.2d 235, 236, this court frowned on an interpretation of said provision of the Bretton Woods Agreement which "sweeps in all contracts affecting any members' exchange resources as doing considerable violence to the text of the section".

 37 N.Y.2d at 229, 333 N.E.2d at 174, 371 N.Y.S.2d at 900. Cf. Weston Banking Corp. v. Turkiye Garanti Bankasi, 57 N.Y.2d 315, 332-34, & nn. 5-6, 456 N.Y.S.2d 684, 442 N.E.2d 1195 (Jasen, J., dissenting).

 Other cases that have squarely addressed the issue also adhere to a narrow interpretation of the terms "exchange contracts." See Theye y Ajuria v. Pan American Life Insurance Co., 245 La. 755, 161 So.2d 70, 74 (S. Ct. La.) ("a contract payable in the state of Louisiana in United States currency is not a foreign exchange contract") (Theye), cert. denied, 377 U.S. 977, 84 S. Ct. 1922, 12 L. Ed. 2d 1046, reh'g denied, 379 U.S. 872, 85 S. Ct. 20, 13 L. Ed. 2d 79 (1964); Pan American Life Insurance Co. v. Raij, 156 So.2d 785, 786. (Fla. Dist. Ct. App. 1963) ("an American contract... to or by the appellant in United States currency, [is] not an unenforceable contract within the provisions of Article VIII, § 2(b) of the Bretton Woods Agreement") (footnote omitted), cert. denied, 379 U.S. 920, 13 L. Ed. 2d 334, 85 S. Ct. 275 (1964). *fn3" See also Nussbaum, Exchange Control and the International Monetary Fund, 59 Yale L.J. 421, 428 & n.34 (1950).

 The authorities relied upon by defendant do not persuade this court to adopt a broad interpretation of the terms "exchange contracts." *fn4" The advocates of the broad view in this nation are primarily commentators. See Gold, supra, at 92; Williams, supra, at 337-44; Meyer, Recognition of Exchange Controls After the International Monetary Fund Agreement, 62 Yale L.J. 867, 885-88 (1953). At least one commentator, in urging the broad view, argues that the term "exchange" should be deleted from Article VIII, section 2(b). See Williams, supra, at 395 (suggesting the terms "exchange" and "involve the currency" be deleted from Article VIII, section 2(b) in order to "establish that a broad interpretation of this provision is correct..."). As the provision is presently written, however, a broad interpretation of "exchange contracts," sufficiently expansive to include international loans, does violence to the text of the section. See 33 C.J.S. § 1(b) (1942) ("The word exchange is generally regarded as synonymous with barter, swap, or trade and it is distinguishable from compromise, lease, or loan.") (emphasis added). See also Black's Law Dictionary 505 (5th ed. 1979) (defining exchange to mean "[t]o barter; swap. To part with, give or transfer for an equivalent."); Ballentine's Law Dictionary 428 (3d ed. 1969) (defining exchange as "[a]n exchange of the money of one country for the money of another at a rate which depends upon the respective values of the two currencies in the money markets of the world.").

 The court declines to depart from the interpretation of exchange contracts consistently propounded by the courts that have directly addressed the issue. The court holds that a contract to borrow United States currency, which requires repayment in United States currency, and which designates New York as the situs of repayment, is not an exchange contract within the meaning of Article VIII, section 2(b). *fn5" The Bretton Woods Agreement is therefore inapplicable to this case.

 Moreover, assuming arguendo that the loan agreement is an exchange contract, defendant has submitted no authority for its view that a contract, valid and enforceable when made, may be rendered unenforceable by an intervening currency regulation. Indeed, there is authority in support of the contrary view.See Blanco v. Pan-American Life Insurance Company, 221 F. Supp. 219, 229 (S.D. Fla. 1963) ("[T]hese [foreign currency regulations] do not apply to cover the situation of a Cuban national enforcing an executory contract in the forum of another jurisdiction according to the terms of an obligation existing prior to the passage of those laws."), aff'd on other grounds, 362 F.2d 167, 171 (5th Cir. 1966) (holding that because Cuba had since withdrawn from International Monetary Fund, Cuba was no longer entitled to protection of Agreement but also noted that "[e]ven if this were not so, the Bretton Woods Agreement would not be applicable to contracts such as the insurance policies here involved."); Theye, 161 So.2d at 72-73 (in reversing lower court that gave effect to intervening currency regulations under Bretton Woods Agreement, court held that where currency regulations permitted payment in United States currency at time insurance policy was executed, subsequent currency regulation requiring repayment in pesos had no effect on existing obligation); see also F. Mann, The Legal Aspect of Money 377-78 (4th ed. 1982) ("In short, Art. VIII(2)(b) gives international recognition to the original ineffectiveness of an exchange contract, but does not touch a contract which during its life [becomes] an exchange contract contrary to regulations."); but see Gold, supra, at 91-92; Williams, supra, at 364-67. *fn6"

 Finally, this court concludes that defendant has not demonstrated that these currency regulations are "maintained or imposed consistently with [the Fund] Agreement...." In its attempt to discharge this burden, defendant makes the bland assertion that

 [t]he decrees of the Costa Rican government are imposed and maintained "consistently" with the Bretton Woods Agreement inasmuch as they fulfill the purposes of the Agreement, namely, to promote exchange stability and to maintain orderly arrangements among members of Bretton Woods. *fn7"

 About the task of demonstrating consistency, a leading commentator has written:

 [A] defendant who relies on Article VIII, Section 2(b) necessarily asserts that exhange controls are maintained or imposed consistently with the Articles, and he should have the burden of proving this fact.

 Gold, supra, at 334; see also id. at 358 (urging that in determining consistency the "only safe course is to seek the advice of the [International Monetary] Fund."); see also 14 M. Whiteman, Digest of International Law 556 (1970) ("[T]he Fund is prepared to advise whether particular exchange control regulations are maintained or imposed consistently with the Fund Agreement.") (quoting International Monetary Fund, Annual Report, 1949, at 82-83).

 A careful examination of the Articles of Agreement of the International Monetary Fund demonstrates that defendant's simple statement hardly suffices to demonstrate consistency with the Fund Agreement.

 Article VIII, section 2(a) provides: (a) Subject to the provisions of Article VII, Section 3(b) and Article XIV, Section 2, no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions. *fn8"

 Article XXX defines "current transactions" as follows:

 (d) Payments for current transactions means payments which are not for the purpose of transferring capital, and includes, without limitation:

 (1) all payments due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities;

 (2) payments due as interest on loans and as net income from other investments;

 (3) payments of moderate amount for amortization of loans or for depreciation of direct investments; and

 (4) moderate remittances for family living expenses.

 The Fund may, after consultation with the members concerned, determine whether certain specific transactions are to be considered current transactions or capital transactions. (Emphasis added.)

 The distinction between current or capital transactions can be a crucial one since a member of the International Monetary Fund (the Fund) is free to impose restrictions on capital transactions without the approval of the Fund. Article VI, section 3 provides:

 Section 3. Controls of capital transfers

 Members may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments, except as provided in Article VII, Section 3(b) and in Article XIV, Section 2. *fn9"

 With these provisions in mind, the court concludes that a showing that these currency restrictions are maintained or imposed consistently with the Fund includes the following: defendant may show that it has obtained Fund approval for these restrictions. Alternatively, defendant may demonstrate that these are restrictions upon capital as opposed to current transactions and the Fund's approval is therefore unnecessary. Defendant has failed to sustain its burden by accomplishing either task, and its bland assertion alone does not suffice to discharge its burden. Cf. Blanco, 221 F. Supp. 219, 224-25 (submitting an official statement of the Fund with respect to regulations consistent with the Fund Agreement); Southwestern Shipping Corp. v. National City Bank, 11 Misc.2d 397, 410, 173 N.Y.S.2d 509, 523 (Sup. Ct.) (official Fund statement about currency regulations), aff'd, 6 A.D.2d 1036, 178 N.Y.S.2d 1019 (1st Dep't 1958), rev'd on other grounds, 6 N.Y.2d 454, 160 N.E.2d 836, 190 N.Y.S.2d 352, cert. denied, 361 U.S. 895, 4 L. Ed. 2d 151, 80 S. Ct. 198 (1959).

 Conclusions

 The court concludes that this loan agreement is not an exchange contract and that the Bretton Woods Agreement is inapplicable. Assuming arguendo that the loan agreement is an exchange contract, defendant has not persuaded this court than an intervening change in foreign currency regulations rendering a contract unenforceable is within the scope of Article VIII, section 2(b). Finally, defendant has not demonstrated that there currency regulations were imposed consistently with the Fund Agreement.

 After considering defendant's newly raised arguments on their merits, the court declines to alter its previous ruling granting plaintiffs' motion for summary judgment and denies the motion to reargue.

 Settle and submit a final judgment with notice by no later than 12:00 a.m. on August 16, 1983.

 SO ORDERED


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