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July 15, 1991


The opinion of the court was delivered by: Sweet, District Judge.


Plaintiffs Morgan Guaranty Trust Company of New York, Morgan Grenfell & Co., Limited, The Bank of Tokyo Limited, The Governor and Company of the Bank of Scotland and Orion Bank, Limited (collectively "Morgan Guaranty") have moved pursuant to 28 U.S.C. § 1447(c) and Rule 11 of the Civil Rules of this court for costs and actual expenses, including attorneys' fees, resulting from the removal of this action by the defendant Republic of Palau ("Palau") from the state court. This motion raises once more in this difficult and important action issues that are significant and of first impression. For the reasons set forth below, the motion is granted in part and denied in part. Prior Proceedings

Plaintiffs were the guarantor banks of certain loans made to Palau in connection with the construction of a power station and fuel storage facility to be constructed on the island of Palau in Micronesia. Palau defaulted on the loans in 1985. The guarantees were called and the guarantors made payment.

On December 17, 1985 Morgan Guaranty commenced this action in the Supreme Court of the State of New York. The plaintiffs relied upon a Recourse Agreement between the plaintiffs and Palau, together with related agreements and opinion letters.

On January 21, 1986, Palau removed the action to this court, contending that it was a "foreign state" for purposes of the Foreign Sovereign Immunities Act, 28 U.S.C. § 1603(a), and that federal jurisdiction therefore existed pursuant to 28 U.S.C. § 1441(d) and 1330. On March 3, 1986 Morgan Guaranty moved for remand, contending that Palau was not a "foreign state" and that subject matter jurisdiction did not exist. Palau opposed the motion and argued that Palau was either a de jure sovereign or a de facto sovereign. By opinion of July 10, 1986 (reported at 639 F. Supp. 706 (S.D.N Y 1986)), Palau was held to be a de facto sovereign and denying the motion to remand.

The action proceeded, and Palau filed an answer and counterclaims, contending that (i) it was entitled to sovereign immunity; (ii) Palau's President had acted ultra vires in entering into the agreements with plaintiffs; and (iii) the plaintiffs had fraudulently induced Palau to enter into the agreements. Morgan Guaranty moved to strike Palau's affirmative defenses, to dismiss Palau's counterclaims and for summary judgment. Palau opposed the motion. By opinion of April 3, 1987 (reported at 657 F. Supp. 1475 (S.D.N.Y. 1987)), the court held that Palau had waived its sovereign immunity and that Palau's President had not acted ultra vires, but also held that there existed triable issues of fact regarding Palau's fraudulent inducement defense.

On December 3, 1987, Palau moved to dismiss the complaint. Palau's motion was based on Public Law 99-658, § 104(e), 100 Stat. 3672 (1986), which Palau contended immunized Palau from the jurisdiction of the courts of the United States. Morgan Guaranty opposed the motion. By opinion of January 29, 1988 (reported at 680 F. Supp. 99 (S.D.N.Y. 1988)), it was held that the statute relied upon by Palau had created a waivable, as opposed to an absolute defense of sovereign immunity, and that Palau's President had waived sovereign immunity.

In April 1988 a six-day bench trial was conducted and by opinion of August 5, 1988 (reported at 693 F. Supp. 1479 (S.D.N.Y. 1988)), it was determined that plaintiffs had established their prima facie case, and that Palau had failed to establish its affirmative defenses of sovereign immunity and fraudulent misrepresentation. Judgment for plaintiffs in the amount of $45,953,703.00 was entered on August 12, 1988.

Palau moved for reconsideration and vacation of the judgment on the grounds that: (i) it had not waived its sovereign immunity; and (ii) no evidence supported the court's conclusion that Palau had not relied on a misrepresentation by omission of the plaintiffs, and by opinion of December 9, 1988 (reported at 702 F. Supp. 60 (S.D.N.Y. 1988)), the motion for reconsideration was granted, and the remainder of the motion denied.

On January 18, 1989, Palau filed a Notice of Appeal from the order of April 6, 1987, the order of January 29, 1988, the order of August 8, 1988, the judgment of August 12, 1988, and the order of December 27, 1988. Both parties filed briefs on the merits with no suggestion by either side that subject matter jurisdiction was in doubt. Oral argument was heard on August 15, 1990. During the argument, the Court of Appeals questioned whether subject matter jurisdiction was present in that Palau was not a "foreign state" for purposes of FSIA. The parties were directed to file supplemental briefs on that issue alone.

In its supplemental brief, filed on August 29, 1990, Palau departed from its previous claims of sovereignty and submitted post supplemental brief materials in the form of an Interior Department Order.

On February 4, 1991, the Second Circuit vacated the judgment against Palau, stating:

Morgan Guaranty v. Republic of Palau, 924 F.2d 1237,
1238 (2d Cir. 1991). The Court also noted that:

   . . It is significant here that Palau does not
  now argue, as it did when this action was removed
  from the state court, that it is a foreign
  sovereign ...

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