Morgan Guar. Trust Co. of N.Y. v. Republic of Palau

• Decision Date: 04 February 1991
• Docket Number: D,No. 1427,1427
• Citation: 924 F.2d 1237
• Parties: 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 Royal Bank, Limited, Plaintiffs-Appellees, v. REPUBLIC OF PALAU, Defendant-Appellant. ocket 89-7096.
• Court: U.S. Court of Appeals — Second Circuit

Page 1237

924 F.2d 1237

MORGAN GUARANTY TRUST COMPANY OF NEW YORK, Morgan Grenfell &amp Co., Limited, The Bank of Tokyo Limited, The Governor and Company of the Bank of Scotland and Orion Royal Bank Limited, Plaintiffs-Appellees, v. REPUBLIC OF PALAU, Defendant-Appellant.

No. 1427, Docket 89-7096.

United States Court of Appeals Second Circuit.

Argued Aug. 15, 1990.

Decided Feb. 4, 1991.

Wayne A. Cross, New York City (Reboul, MacMurray, Hewitt, Maynard & Kristol, New York City, of counsel) for Republic of Palau.

Robert Layton, New York City (Barry R. Satine, Robert B. Wallace, Jonathan D. Schwartz, Darryl S. Lew, Jones, Day, Reavis & Pogue, Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, of counsel) for Morgan Guar. Trust Co., et al.

Before MINER and ALTIMARI, Circuit Judges, KELLEHER, District Judge. ^*

MINER, Circuit Judge:

Defendant-appellant Republic of Palau ("Palau") appeals from a judgment in the amount of $45,953,703 entered in the United States District Court for the Southern District of New York (Sweet, J.) in favor of plaintiffs-appellees 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 Royal Bank Limited ("the Banks") following a non-jury trial. The Banks were the guarantors of certain loans made to Palau, a trust territory of the United States, for the construction of an electric power plant and fuel storage facility. Upon Palau's default, the Banks repaid the loans as required by their undertakings and then commenced this action in the New York State Supreme Court to recoup their losses. Claiming to be a foreign state within the meaning of the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. Sec. 1603(a) (1988), Palau removed the action to the Southern District by invoking the provisions of 28 U.S.C. Sec. 1441(d) (1988), which allows the removal of "[a]ny civil A motion by the Banks to remand the action to the state court from which it was removed, on the ground that Palau was not a sovereign state, was denied by the district court in an Opinion providing an extensive analysis of Palau's status. The court concluded that:

action brought in a State court against a foreign state as defined in 1603(a)."

Palau has been exercising sovereign powers pursuant to its Constitution adopted in January, 1981, and possesses the attributes of sovereignty which entitle it to the status of "foreign state" pursuant to 28 U.S.C. Sec. 1330, 1441(d). The United States and Palau have commenced a new era of Free Association which effectively terminates the Trusteeship regime, triggering the need to accord Palau the dignity of an equal sovereign and implicating the uniformity and sensitivity goals behind the FSIA. The concept of "de facto " sovereignty, of course, presumes that some further acts are required before complete unfettered sovereignty can be claimed. To ignore Palau's exercise of substantial sovereignty and the effective disintegration of the Trusteeship in favor of formalist indicia of international independence would defeat the concept of de facto sovereignty.

Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 639 F.Supp. 706, 716 (S.D.N.Y.1986).

The district court thereafter denied a motion by the Banks for summary judgment on their loan guarantee claims and dismissed the two counterclaims interposed by Palau. Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 657 F.Supp. 1475 (S.D.N.Y.1987). Later, a motion by Palau to dismiss the action on the basis of a Joint Resolution of Congress purporting to confer sovereign immunity upon Palau for the purposes of the action was rejected. Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 680 F.Supp. 99 (S.D.N.Y.1988). After trial, the district court issued an Opinion that concluded as follows: "Since the Guarantors have established their prima facie case and Palau has failed to establish its affirmative defense[s] of sovereign immunity, misrepresentation, and mistake, the relief sought in the complaint will be granted." Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 693 F.Supp. 1479, 1499 (S.D.N.Y.1988). Upon a motion made after entry of judgment, the court reconsidered and adhered to its Opinion, refused to vacate the judgment, rejected a request for judgment dismissing the complaint and granted a stay of enforcement of the judgment upon the filing of a supersedeas bond "in the amount of all the interest payments due since default." Morgan Guar. Trust, 702 F.Supp. 60, 66 (S.D.N.Y.1988).

We disagree with the district court's conclusion that Palau is a foreign state within the meaning of the FSIA. Accordingly, we find that there was no basis for the exercise of removal jurisdiction in this case and that the district court therefore erred in denying the Banks' motion to remand the action to the New York Supreme Court.

BACKGROUND

Among the tranquil islands of the Southwest Pacific lies a group of approximately 200 islands collectively known as Palau. This archipelago, part of a larger area sometimes referred to as the Caroline Islands, is home to fewer than 15,000 inhabitants. Brushed by the trade winds, Palau lies 600 miles east of the Philippines and 4,000 miles west of Hawaii. There is no industry in Palau, but its waters contain an abundance of fish of various species, and fishing is the principal commercial activity there. There is some tourism, which may be expanded as the result of some recently-discovered opportunities for recreational diving. See Toomb, Palau: In lush lagoons of the South Pacific, a 900-foot cliff, N.Y. Times, Dec. 30, 1990, Sec. 5, at 12, col. 1. These islands are most important for their strategic location, which over the years has been a matter of great interest to the Pacific powers. Most of the islands of Micronesia, including Palau, were governed by Japan under a League of Nations mandate between World War I and World War II. In 1947 the United Nations Security Council and the United States entered According to the Trusteeship Agreement, the United States is obligated to provide for the trust territory's economic, political and social advancement and to "foster the development of such political institutions as are suited to the trust territory and [to] promote the development of the inhabitants of the trust territory toward self-government or independence...." Trusteeship Agreement art. 6(1). Resolutions of the United Nations General Assembly define self-government to include free association with the governing trustee. G.A.Res. 742, 1541, 2625. The classification of the trust territory as a strategic area under the supervision of the United Nations Security Council signifies that any alteration or amendment of the Agreement must be approved by the Council. U.N. Charter art. 83. As to non-strategic trusts, the supervisory functions are performed by the General Assembly on behalf of the United Nations. U.N. Charter art. 85. By identifying the trust as "strategic," the parties to the Agreement have recognized the importance of the trust territory to the maintenance of peace in that area of the world.

into a Trusteeship Agreement whereby the United States was designated Trustee of the more than 2,100 islands formerly governed under the Japanese mandate. See Trusteeship Agreement for the Former Japanese Mandated Islands, Approved by the Security Council on April 2, 1947, entered into force July 18, 1947, 61 Stat. 3301, T.I.A.S. No. 1665, 8 U.N.T.S. 189 (1947). The Trust Territory was comprised of three major archipelagos: the Northern Marianas, the Carolines and the Marshalls, and was designated in the Agreement as the "Trust Territory of the Pacific Islands."

The powers of the United States as Trustee of the Pacific Trust Territory are defined in Article 3 of the Trusteeship Agreement:

The administering authority shall have full powers of administration, legislation, and jurisdiction over the territory subject to the provisions of this agreement, and may apply to the trust territory, subject to any modifications which the administering authority may consider desirable, such of the laws of the United States as it may deem appropriate to local conditions and requirements.

For purposes of governance and administration, the United States has divided the trust territory into four separate political entities: the Northern Mariana Islands; the Marshall Islands; the Federated States of Micronesia (a federation comprised of Truk, Ponape, Kosrae and Yap); and Palau. (The entire trust territory sometimes is referred to as "Micronesia," although it does not include all the Pacific Islands collectively known as Micronesia.) Over the years, these islands have been afforded increasing responsibility for their own governance, and each now has negotiated agreements for permanent changes in political status: to a commonwealth in the case of the Northern Mariana Islands, and to a political status of free association with the United States in the others. Except for the Republic of Palau, all the political entities created from the trust territories have approved the negotiated agreements. Accordingly, on November 3, 1986, President Ronald Reagan issued a Presidential Proclamation purporting to create the Commonwealth of the Northern Mariana Islands; the Republic of the Marshall Islands; and the Federated States of Micronesia; and to terminate the trusteeship as to those entities. Proclam. No. 5564, 3 C.F.R. Sec. 146 (1986).

In the case of Palau, the negotiated agreement known as the Compact of Free Association never has been approved by the Palauan people in accordance with their Constitution. The Compact would confer full powers of governmental administration upon the Republic of Palau, since it provides for political autonomy except as to defense and security matters. Originally, the responsibility for the civil administration of the entire territory was delegated to the Secretary of the Navy by...