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

• Decision Date: 08 April 1987
• Docket Number: No. 88 Civ. 0590 (RWS).,88 Civ. 0590 (RWS).
• Citation: 657 F. Supp. 1475
• 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

657 F. Supp. 1475

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. 88 Civ. 0590 (RWS).

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

April 3, 1987.

As Amended April 8, 1987.

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

Reboul, MacMurray, Hewitt, Maynard & Kristol, New York City (Wayne A. Cross, Susan L. Arinaga, of counsel), for defendant.

SWEET, District Judge.

Plaintiffs Morgan Guaranty Trust, Morgan Grenfell, The Bank of Tokyo, the Bank of Scotland, and Orion Royal Bank (collectively "the Guarantors") have moved this court pursuant to Fed.R.Civ.P. 56 for an order striking the affirmative defenses of the defendant the Republic of Palau ("Palau"), dismissing its counterclaims, and granting judgment in its favor for $36,129,003. Palau has opposed the Guarantors' application, but has not cross-moved. Both parties filed extensive briefs, and argument was heard on October 24, 1986, at which time parties requested and were granted leave to submit supplemental documents and memoranda of law. The motion was finally fully submitted on December 16, 1986. For the reasons set forth below, the Guarantors' application for an order granting it judgment on its claims is denied, and their application for dismissal of Palau's counterclaims is granted.

Facts

Seeking to provide badly needed electrical service for its citizens, the Republic of Palau borrowed $24,128,745.12 on June 8, 1983, from International Westminister Bank, PLC ("Nat West") and $8,200,000 from County Bank Ltd. ("County Bank") to finance a power generating plant that would be built by IPSECO International Power Systems Company, Ltd. of London ("IPSECO"). The five banks who are plaintiffs here — Morgan Guaranty Trust, Morgan Grenfell, The Bank of Tokyo, the Bank of Scotland, and Orion Royal Bank—were Guarantors of the loan.

In March, 1985, the first payment on the loan came due, and Palau did not make it. Consequently, the Guarantors paid the full amount of the debt plus interest, for which they are now suing Palau. Guarantors have moved for summary judgment against Palau in the amount of $36,129,003 plus interest and costs from April 4, 1986.

Palau opposes summary judgment on a number of grounds, including that it is immune from the jurisdiction of this court due to sovereign immunity, but also on the substantive grounds: 1) that the contract under which the Guarantors are proceeding is void and unenforceable because Palau's executive exceeded the authority legislatively delegated to him in signing it; 2) that the agreement is void because Palau was fraudulently induced to enter into it. Palau has not cross-moved for summary judgment.

Jurisdiction

Palau has claimed that it is immune from the jurisdiction of this court pursuant to the Foreign Sovereign Immunity Act of 1976, 28 U.S.C. § 1602 et seq. Section 1604 of the Act provides:

Subject to existing international agreements to which the United States is a party at the time of enactment of this Act a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter.

28 U.S.C. § 1604. Section 1605 sets out certain exceptions to a foreign state's jurisdictional immunity, relating primarily to various forms of waiver, and the banks point to provisions in the Recourse and Co-ordination Agreements in which Palau purports to waive its immunity from suit. Palau argues that any such waiver was not authorized under the law of Palau and therefore is void and unenforceable.

The financing documents pursuant to which Palau obtained financing for the power plant and pursuant to which plaintiffs guaranteed Palau's obligation to repay the loans were negotiated in 1982. In February of 1983, plaintiffs went to Palau with final versions of the financing documents, which the President of Palau signed. It was later feared that the executive branch lacked the authority under Palauan law to bind Palau to the financing arrangements with plaintiffs, and special legislation was sought authorizing the President to enter into contracts for the construction, operation and financing of the power station. As passed by the legislature of Palau, the Olbiil Era Kelulau ("OEK"), and approved by the President, the Act, RPPL 1-54, contained a clause allowing the President to waive Palau's sovereign immunity. Pursuant to section 4 of Secretarial Order No. 3039, 44 Fed.Reg. No. 94, page 28116 (May 14, 1979), Palau submitted RPPL 1-54 to the High Commissioner of the Trust Territory of the Pacific Islands for her review. On May 5, 1983, the High Commissioner suspended section 2(b)(II) of RPPL 1-54, which empowered the President of Palau:

to waive the immunity of the Republic of Palau from suit, attachment or execution to such extent as the President shall determine consistent with the constitution.

The ground for the High Commissioner's suspension was that waiver of Palau's immunity would expose United States grant funds to diversion from the purposes for which they were granted, contrary to United States law and Secretarial Order No. 3039.

According to Palau, although the High Commissioner's suspension of that part of the power plant legislation authorizing the President to waive Palau's immunity from suit was communicated to the banks in May of 1983, the banks did not remove from the financing documents the provisions waiving Palau's immunity. The Recourse Agreement and the Coordination Agreement, both of which contain waiver provisions, were fully executed in England on June 8, 1983. Palau submits that this history establishes that its representatives had no power to sign any agreement purporting to waive Palau's sovereign immunity from suit.

However, even accepting Palau's version as to waiver, the Guarantors submit that Palau's activity in this case is still not immune from jurisdiction. 28 U.S.C. § 1605(a)(2) provides that a foreign state shall not be immune from jurisdiction in any case:

in which the action is based upon a commercial activity carried on in the United States by the foreign state; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.

At issue in this case is the performance by Palau of its obligations under the Recourse Agreement, which, as Section 6, Para. 6.01(i)(ii) of the Recourse Agreement explains, constitute commercial activity:

The execution and delivery of and the performance of its obligations under this Agreement by Palau constitute private and commercial acts done for private and commercial purposes ...

Moreover, the Supreme Court has held that the repudiation of a commercial debt is a commercial, and not a governmental, action:

Repudiation of a commercial debt cannot, consistent with this restrictive approach to sovereign immunity, be treated as an act of state; for if it were, foreign governments, by merely repudiating the debt before or after its adjudication, would enjoy an immunity which our Government would not extend them under prevailing sovereign immunity principles in this country. This would undermine the policy supporting the restrictive view of immunity, which is to assure those engaging in commercial transactions with foreign sovereignties that their rights will be determined in the courts whenever possible.

Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 698-99, 96 S.Ct. 1854, 1863, 48 L.Ed.2d 301 (1976). Palau having cited no authority to the contrary, the activity in this case is not protected by sovereign immunity, and the court has jurisdiction.

Ultra Vires

Palau argues that its executive was not endowed with the requisite authority to commit the general revenues of the Republic to repay the loan, but rather was explicitly statutorily limited to committing only revenues that resulted from the operation of the power plant itself. The case involves a difficult issue of statutory construction of laws passed by a still young — in terms of nation-lives — legislature.

Three Palauan laws are relevant to this case: RPPL 1-20, RPPL 1-54, and RPPL 2-10. RPPL 1-20, the National Government Private Borrowing Act, was enacted in 1981 to permit the President of Palau to negotiate loans with private parties for public work projects, including power plants. Under the law, the President is empowered to pledge the full faith and credit of Palau as security.

Believing that he was acting pursuant to RPPL 1-20, the Palauan President entered into negotiations for the construction and finance of a power plant, which involved extended discussions between IPSECO, Palauan representatives, and the various banks involved. In February, 1983, when the President signed the documents consumating the transaction, the Recourse Agreement included provisions pledging Palau's full faith and credit as security for the loan.¹ On the same day that the President signed the documents, the Palauan Acting Attorney General signed an opinion letter stating that all the loan documents complied with RPPL 1-20.

After the documents were signed, the Chief of Koror, a local Palau official, filed a lawsuit challenging the loan documents. One of the co-lenders with Nat West (which was responsible for about $24 million of the financing) was England's Export Credit Guarantee Department (the "ECGD"), which is an instrumentality of the government of England. In the Guarantors' words, this raised the possibility that the transaction "may not have been authorized by...