Morgan Guar. Trust Co. of NY v. Rep. of Palau

• Decision Date: 05 August 1988
• Docket Number: No. 86 Civ. 0590 (RWS).,86 Civ. 0590 (RWS).
• Citation: 693 F. Supp. 1479
• 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

693 F. Supp. 1479

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.

August 5, 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.

Plaintiffs Morgan Guaranty Trust Company of New York ("MGT"), Morgan Grenfell & Co. Limited ("Morgan Grenfell"), Bank of Tokyo, Ltd., The Governor and Company of the Bank of Scotland, and Orion Royal Bank Limited, are banking institutions (collectively the "Guarantors"), that seek to recover from defendant Republic of Palau ("Palau"), a foreign state and from 1981-1983 a Trust Territory of the United States, over $40 million arising out of the financing in 1983 of a power plant thereafter constructed on the island of Babeldoab for Palau. The action was tried before the court, and in accordance with the following findings of fact and conclusions of law judgment will be entered on behalf of the Guarantors.

The facility was projected to consist of a 16MW power station (the "Plant") and a fuel storage facility (collectively the "Project"). It was to be built for Palau with funds lent by County Bank Limited ("County Bank") and International Westminster Bank PLC ("Nat West"), the repayment of which was guaranteed by the Guarantors. The Plant produces electricity, but to date without charge.

In March of 1985 Palau defaulted on repayment of the loans. As a result of the defaults the guarantees were called, and the Guarantors performed their undertaking and commenced an action for repayment. Palau has alleged affirmative defenses of fraud and mistake alleging its understanding that the payments for the underlying loan were to be self-financing from sales of electricity from the Plant and fuel from the tank farm.

This action has presented an involved factual matrix and complicated issues of sovereignty and commercial law arising out of the struggle of the unsophisticated island people of Palau to achieve independence, both economic and political. Sympathy and support for those seeking to emerge from a colonial status must be balanced against the rights of those who provided the means to conduct the struggle. The difficulty of the resolution was aided by the skill of counsel for the parties during the litigation. It is recognized that this decision is but one step along what may turn out to be a long road, but at least this phase has been completed, hopefully in a fashion which may assist others who may have to confront these challenging issues.

Prior Proceedings

This action was initiated by a petition for removal filed on January 21, 1986, the action having been commenced by the Guarantors in the Supreme Court of the State of New York on December 17, 1985.

By motion of March 3, 1986 the Guarantors sought a remand to the state court, alleging a lack of diversity jurisdiction on the grounds that Palau was not a foreign state. By an opinion of July 10, 1986 after a review of Palau's status from World War I to the present time, having considered the establishment of the Palauan Constitution on January 1, 1981 and the effect of the Final Compact of Free Association (the "Compact"), the motion was denied.

In an opinion of April 3, 1987, in response to Palau's motion for summary judgment, the court held that Palau is not immune from the jurisdiction of this court by reason of sovereign immunity and that Palau's executive did not exceed the authority legislatively delegated to him by signing the loan agreements, the Recourse Agreement, and the Coordination Agreement. The Guarantors' cross-motion for summary judgment was also denied, 657 F.Supp. 1475.

Palau initially claimed in support of its counterclaim and affirmative defense of fraud and mistake that representatives of the Guarantors had stated in the presence of the Palauan representatives concurrence with revenue projections made prior to its construction of the Plant by the proponent of the Project, its contractor. One such declaration was considered in connection with the court's denial of the request for summary judgment on behalf of the Guarantors. Three days before trial Palau disavowed the truth of the declaration.

Palau again moved to dismiss on the grounds of sovereign immunity relying on Public Law 99-658, § 104(e), 48 U.S.C. § 1681 (Supp.1987) and by an opinion of January 29, 1988 the motion was denied.

The facts and conclusions as set forth in the opinions referred to above have not been controverted by the evidence adduced at trial, and they are here adopted in addition to those set forth below. Familiarity with the opinions is assumed.

After discovery and the proceedings just described, the action was tried to the court from April 11 to April 18, 1988. Final argument and submission were heard on June 24, 1988.

FINDINGS OF FACT

Palau is a 200 island archipelago in the south central Pacific ocean, approximately 4,000 miles west of Hawaii and 600 miles east of the Philippines. Its population is approximately 14,200 and its principal commercial activity is fishing.¹ Its natural resources are limited.

Palau became a Trust Territory of the United States in accordance with resolution of the United Nations after World War II. It has received over the years approximately $20 million in aid annually from the United States while it was a Trust Territory and is administered by the Department of the Interior ("Interior"). Palau sought to achieve its independence through a Compact of Free Association with the United States which is in the process of ratification and, it is hoped by Palau, final adoption by all the necessary parties. The process has been complicated in part by rights sought to be reserved by the United States for its security purposes. In the event that the Compact is performed, it is anticipated that Palau will receive $28 million in Compact Funds.

In 1981, Palau recognized that obtaining a reliable source of electrical power was an urgent national priority for the well-being of Palau's people and the development of the national economy. Its existing generators on loan from the United States were inadequate and frequently inoperative. Palauan President Haruo Remeliik ("Remeliik") appointed a Task Force, headed by Vice President Alfonso Oiterong ("Oiterong") to look for solutions to Palau's power problem.

In September 1981 International Power Systems Company Ltd. of London ("IPSECO") made a proposal for a 16 megawatt diesel power plant and a fuel storage facility. The proposal was advanced by the President of IPSECO, Gordon Mochrie ("Mochrie"), who had arranged for the construction of a power plant in the Marshall Islands. IPSECO is today defunct. The Olbiil Era Kelulau, the legislative body of Palau, ("OEK") enacted Republic of Palau Public Law ("RPPL") 1-20 (the "National Government Private Borrowing Authority Act") at a time when the Treasury was almost $2 million in debt. The Act provided that the Palauan Congress delegated to the Palauan President the authority to borrow up to thirty-five million dollars from non-governmental bodies for public purposes including power development. The Act further provided that the borrowing would be backed by the full faith and credit of Palau.

The Task Force entered into negotiations with IPSECO for construction of the Plant in Palau. On December 15, 1981, Palau and IPSECO signed a Statement of Understanding and Agreement to enter into good faith negotiations and on February 2, 1982, Palau and IPSECO signed an agreement ("Supply Contract") for the construction by IPSECO of the Plant, subject to the conclusion of financing for the Project. IPSECO agreed to locate and arrange financing and made preliminary efforts with Lloyd's Bank International which were unsuccessful. The Plant was proposed to be self-financing.

Palau requested the United States to provide technical assistance to determine the viability of the undertaking. As a result of this request, two officials from the Inspector General's Office of the DOI, accompanied by an Assistant Attorney General from the Trust Territory Government ("TTG"), arrived in Palau in May of 1982 to conduct an inspection and investigation.

In June of 1982, an insurance broker introduced Mochrie to Stephen Syrett ("Syrett"), presently a director of Morgan Grenfell, who was at the time heading a small section of the bank dealing with export guarantees and George Hudson ("Hudson"), an employee of Morgan Grenfell and an assistant to Syrett. Mochrie explained that a financing package had been discussed with Lloyd's Bank International, but he did not think that bank could put it together. Syrett told Mochrie that based upon the package available at that time, Morgan Grenfell was not prepared to go into the transaction. The package that Mochrie had discussed included a three year policy insuring against frustration of repayments. Mochrie left Syrett with background documents describing the United States aid and the funds that Palau was to receive pursuant to the Compact. Syrett instructed Hudson to draft a security package which would include insurance that would cover more than three years of the loan, the availability of Compact funds and an escrow account. Syrett believed IPSECO's revenue projections were overly optimistic.

In September of 1982, a Palauan delegation including Oiterong, Minister of Finance Haruo Willter ("Willter"), Task Force Secretary David Nolan ("Nolan"), Chief Ibedul Gibbons of the Koror, ("the Ibedul"), a traditional Chieftain with tribal authority and in...