Allied Bank International v. Banco Credito Agricola
1985 U.S. App. LEXIS 30026, 757 F.2d 516, 77 A.L.R. Fed. 281 (1985)
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Rule of Law:
The act of state doctrine does not apply to a foreign sovereign's attempt to restructure a private debt when the situs of the debt is located in the United States. The situs of a debt is determined by factors including the place of payment, the currency of the obligation, and whether the foreign government's action can be said to have come to complete fruition within its own territory.
Facts:
- Allied Bank International acted as an agent for a syndicate of thirty-nine banks that extended credit to three Costa Rican banks.
- The defendant banks, which were wholly owned by the Republic of Costa Rica, issued promissory notes agreeing to repay the debt.
- These notes were payable in United States dollars and designated New York City as the place of payment.
- The loan agreements expressly stated that the obligation to pay would not be excused if the Central Bank of Costa Rica failed to provide the necessary U.S. dollars.
- Facing a national economic crisis, the Costa Rican government and its Central Bank issued decrees in 1981.
- These decrees suspended all external debt payments and conditioned any such payments on express approval from the Central Bank.
- The Central Bank subsequently refused to authorize the payment of the debt in U.S. dollars, causing the Costa Rican banks to default on their promissory notes.
Procedural Posture:
- Allied Bank International sued three Costa Rican banks in the U.S. District Court for the Southern District of New York to recover on defaulted promissory notes.
- The Costa Rican banks moved to dismiss, asserting the act of state doctrine as a defense against Allied's cross-motion for summary judgment.
- The district court, as the court of first instance, denied Allied's motion for summary judgment and dismissed the action, holding that the act of state doctrine barred the claim.
- Allied Bank, as appellant, appealed the dismissal to the U.S. Court of Appeals for the Second Circuit, with the Costa Rican banks as appellees.
- A panel of the Second Circuit initially affirmed the district court's dismissal, but subsequently granted a rehearing of the case.
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Issue:
Does the act of state doctrine bar a United States court from adjudicating a breach of contract claim when the controlling governmental act is a foreign sovereign's directive purporting to restructure a debt payable in the United States?
Opinions:
Majority - Judge Meskill
No, the act of state doctrine does not bar adjudication of a breach of contract claim where the situs of the debt is in the United States, not in the foreign sovereign's territory. The act of state doctrine precludes U.S. courts from inquiring into the validity of public acts a recognized foreign sovereign power committed within its own territory. Its application therefore depends on whether the 'property' in question was located in the foreign state at the time of the governmental act. Here, the 'property' is the right to receive repayment of a debt. The situs of this debt is not in Costa Rica because Costa Rica's directives could not come to 'complete fruition' within its own borders; it could not wholly extinguish the banks' obligation to pay U.S. dollars to Allied in New York. The obligation was centered in New York, as evidenced by the agreement to pay in U.S. dollars in New York City and the U.S.'s strong interest in maintaining its status as an international commercial center. Because the situs of the debt is in the United States, the act of state doctrine is inapplicable. Furthermore, the court will not grant comity to the Costa Rican decrees because they are inconsistent with U.S. law and policy, which favors orderly negotiation of international debt, not unilateral repudiation that violates express contractual terms.
Analysis:
This decision significantly narrows the application of the act of state doctrine in the context of international finance, particularly for debts payable in the United States. By establishing a functional test for the 'situs' of a debt, the court provided greater legal certainty to creditors in major financial centers like New York. The ruling reinforces the principle that parties cannot use their own sovereign's subsequent laws to escape contractual obligations governed by U.S. law and jurisdiction. This strengthens the position of New York as a premier forum for international financial transactions by assuring lenders that choice of law and forum clauses will be upheld against foreign governmental interference.
