MORGAN GUAR. TR. CO. OF NY v. Republic of Palau

• Decision Date: 29 January 1988
• Docket Number: No. 86 Civ. 0590 (RWS).,86 Civ. 0590 (RWS).
• Citation: 680 F. Supp. 99
• 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, v. REPUBLIC OF PALAU, Defendant.
• Court: U.S. District Court — Southern District of New York

680 F. Supp. 99

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, v. REPUBLIC OF PALAU, Defendant.

No. 86 Civ. 0590 (RWS).

United States District Court, S.D. New York.

January 29, 1988.

Jones, Day, Reavis & Pogue (Robert Layton, Barry R. Satine, of counsel), Wilson, Elser, Moskowitz, Edelman & Dicker (Robert B. Wallace, of counsel), New York City, for plaintiffs.

Reboul, MacMurray, Hewitt, Maynard & Kristol (Wayne A. Cross, Stephen J. Riegel, Stephen P. Falvey, of counsel), New York City, for defendant.

OPINION

SWEET, District Judge.

The Republic of Palau ("Palau") has moved pursuant to Rules 12(b)(1) and 12(b)(6), Fed.R.Civ.Pro. to dismiss the action asserted against it by plaintiffs Morgan Guaranty Trust, Morgan Grenfell, the Bank of Tokyo, the Bank of Scotland, and Orion Royal Bank (collectively "the Banks") on the ground that a joint resolution of Congress, enacted as Public Law No. 99-658, § 104(e), 48 U.S.C. § 1681 note (Supp.1987) (the "Joint Resolution") grants Palau immunity from suit and thereby strips this court of jurisdiction. Briefs were submitted, and oral argument was heard on the motion on December 11, 1987. For the reasons set forth below, the motion is denied.

Facts

The background of the recent history of relations between Palau and the United States and of the source of this litigation is set forth in this court's opinions of July 10, 1986 and of April 7, 1987, familiarity with which is assumed. A brief statement of the facts particularly relevant to the instant motion is, however, in order.

In 1983, the Republic of Palau concluded an agreement with the British firm IPSECO International Power Systems Company, Ltd. ("IPSECO") whereby IPSECO would build a plant to generate electricity for Palau. To finance the project, Palau borrowed $24,128,745.12 from International Westminster Bank, PLC and $8,200,000 from County Bank Ltd. In executing the loan agreements, the president of Palau agreed to waive sovereign immunity. Following written assurances by officials of the United States Departments of State and the Interior to the British government that certain U.S. provided funds, including Compact monies, would be available to repay the Palauan debt, the Banks agreed to act as guarantors of these loans. They provided the guaranties to parties that financed or guaranteed the financing of the project, most notably the Export Credit Guaranty Department of the British government.

The plant was built although its performance was not deemed satisfactory to Palau. In March of 1985, the first payment on the loan came due, and Palau failed to meet this obligation. In accordance with their guaranty, the Banks thus paid the full amount of the debt plus interest. They initiated an action to recover the sums paid on December 17, 1985.

On November 14, 1986, Congress enacted the Joint Resolution. It approved the Compact of Free Association between the United States and the Republic of Palau (the "Compact"). The Compact—set forth as Title II to the resolution—will become effective upon the occurrence of certain formal conditions precedent as set forth at § 101(d). It provides for financial assistance from the United States, part of which is to be applied to Palau's energy needs. See § 211(a).

Also included in the Compact at § 174(a) is a prospective, mutual grant of sovereign immunity from the jurisdiction of the courts of each government. Section 104(e) of Title I of the Joint Resolution provides, however, that

the provisions of section 174(a) of the Compact shall apply with respect to any action based on a contract or debt related to any electrical generating plant or related facilities entered into or incurred by Palau prior to the date of enactment of this joint resolution.

This measure, clearly aimed at the very action before this court, is intended to prevent the United States, through its Compact dollars, from absorbing the cost of the IPSECO power plant.

Prior Proceedings

This action was commenced by the Banks on December 17, 1985 in the Supreme Court of New York. On January 21, 1986, Palau removed this action to federal court pursuant to 28 U.S.C. §§ 1441, 1330 on the ground that Palau was a foreign state with removal jurisdiction in the federal district court. The Banks opposed removal on this ground. However, on July 10, 1986, this court held that Palau was a foreign state and was therefore entitled to assert this court's jurisdiction.

Thereafter, on October 24, 1986, the Banks moved to dismiss Palau's counterclaims, moved for judgment in their favor, and moved to strike the affirmative defenses of Palau. Palau had asserted, among other defenses, that it was immune from suit under the Foreign Sovereign Immunities Act, 28 U.S.C. § 1602 et seq., and that its President's agreement with the Banks was ultra vires. The parties requested and were granted additional time to submit supplemental documents and memoranda of law. The motion was fully submitted on December 16, 1986, more than one month after the Joint Resolution had become law.

On April 7, 1987, this court denied the Banks' motion for judgment in its favor but granted its motion for dismissal of Palau's counterclaims. In granting the Banks' motion to dismiss the affirmative defenses, this court held that it properly had jurisdiction over this action under the Foreign Sovereign Immunity Act. Moreover, it held that the President of Palau had acted within his statutory authority.

At no time while the motion was pending did either of the parties bring the Joint Resolution or its effect to the attention of the court, although each of the parties had undertaken extensive lobbying efforts on their respective sides of the issue. This matter was first brought to the court's attention by way of a letter from counsel for Palau dated November 24, 1987. Thereafter, Palau made the instant motion on December 11, 1987 to dismiss this action for want of subject matter jurisdiction on the basis of sovereign immunity.

Discussion

The parties focused initially on whether § 104(e) is presently effective or whether it will become law upon the effective date of the Compact. Palau has asserted, and this court agrees, that the structure of the Resolution makes it clear that the effectiveness of the Resolution is not conditioned upon the ultimate effectiveness of the Compact. For example, Title I of the Resolution is wholly separate from Title II which incorporates the text of the Compact. In fact, Title I states that "any references in the Joint Resolution to the `Compact' shall be treated as a reference to the Compact of Free Association set forth in Title II of this joint resolution." § 101(b). Additionally, the provisions of Title I authorize a wide variety of executive action and expenditure which are clearly independent of the effectiveness of the Compact. For example, § 104(d) provides that "not later than one year after the date of enactment of this joint resolution," the Secretary of Agriculture must report on the feasibility and cost of restoring the fertility of the soil of the islands of Peleliu and Angaur. § 104(d). These provisions evidence an intent to make Title I and hence § 104(e) presently effective.

Moreover, regardless of the effective date, upon signing of the Compact it will be applied retroactively. Thus, any ruling this court issues could, if this law is applied, fail to be enforceable. See de Rodulfa v. United States, 461 F.2d 1240, 1252-53 (D.C.Cir.) (until action is finally disposed of, including appellate process, legislation may abate proceedings), cert. denied, 409 U.S. 949, 93 S.Ct. 270, 34 L.Ed.2d 220 (1972). Therefore, of greater import to the disposition of this action are issues of sovereign immunity, of a sovereign's ability to waive that immunity, and of congressional authority to regrant immunity that has been at least facially waived thus abrogating private agreements and the assurances of the executive branch of government.

Waiver of Sovereign Immunity

Section 174(a) of the Compact provides that

"the Government of Palau shall be immune from the jurisdiction of the courts of the United States, and the Government of the United states shall be immune from the jurisdiction of the courts of Palau."

According to Palau, this section, effective in this case through the operation of § 104(e) of the Joint Resolution, does not merely grant sovereign immunity but strips this court of subject matter jurisdiction. To bolster its argument, Palau points to draft versions of the legislation and the legislative history of the act.

According to the legislative history, the congressional motivation behind this section was the prevention of spending U.S. dollars on the failed power plant project. To accomplish this goal, Congress attempted to prevent the Banks from seeking federal funds in court. See H.R.Rep. No. 663, 99th Cong., 2d Sess. 11 (1986); 132 Cong. Rec. S15469 (daily ed. October 6, 1986) (remarks of Sen. McClure). In fact, an earlier House version of the bill provided that

no party other than the Government of Palau or the Government of the United States shall have standing in any court of the United States, or any State, Territory, Commonwealth of the United States, or the District of Columbia ... by reason of any claim with respect to a contract or debt of such Government entered into or incurred prior to the date of enactment of this joint resolution.

H.R.Rep. No. 663, 99th Cong., 2d Sess. 8 (1986).

However, the House version never became law. Rather than enact a law that would prevent the Banks from enforcing their agreement in any court for reasons of justiciability, Congress granted both sovereigns the defense of immunity from suit. Contrary to Palau's argument, the statute enacted does not state that federal courts automatically cease to have jurisdiction, but that...