Opinion ID: 490523
Heading Depth: 1
Heading Rank: 3

Heading: the merits of the counterclaims

Text: 33 On appeal, Banco Nacional challenges each of the theories on which the district court upheld the counterclaims. In affirming, we focus only on the theories (1) that Cuba assumed all liabilities of Cuban Electric, thereby becoming obligated to defendants under principles of contract law, and (2) that, if Cuba nationalized Cuban Electric without assuming responsibility for the debts owing to defendants, it took property belonging to defendants and thus was obligated to them under principles of international law. In disputing these theories, Banco Nacional contends, inter alia, (1) that Cuba did not assume the liabilities of Cuban Electric with respect to United States creditors, but that if it did, it rescinded any such assumption shortly thereafter, and (2) that what was taken in the expropriation of Cuban Electric did not constitute property belonging to defendants and that international law simply does not require a state to compensate the creditors of a company it has expropriated. 34 We have considered all of Banco Nacional's arguments with respect to these theories and conclude that whether or not Cuba assumed liability for the payment of Cuban Electric's debts to United States creditors, the counterclaims were properly upheld because Cuba's refusal to pay United States creditors--either by having assumed only debts to non-United States creditors or by having assumed but later repudiated the obligation to pay United States creditorswas discriminatory, and thus international law makes Cuba liable either for a taking or for a breach of obligation. 35
36 As a general principle of international law, a state is liable to a private person who is a national of another state if it takes the foreign national's property and the taking is discriminatory. A taking pursuant to a program that excludes from compensation all aliens or all aliens of a particular nationality is discriminatory. See Restatement (Revised) of the Foreign Relations Law of the United States (Restatement (Revised)) Sec. 712(1) (Tent.Draft No. 7, 1986); id. comment f. Similarly, a state's repudiation or breach of its contract with a foreign national is redressable under international law if that repudiation or breach was discriminatory. Id. Sec. 712(2). 37 It is clear beyond peradventure that the actions of the Cuban Government toward United States nationals were intended to be discriminatory. The terms of Law No. 851 singled out nationals of the United States, stating that Cuba sought to expropriate their property or entities in which they had an interest or participation. Thus, a broad-scale intent to discriminate against United States nationals was explicit. See generally Banco Nacional de Cuba v. First National City Bank, 478 F.2d 191, 194 (2d Cir.1973); Banco Nacional de Cuba v. Farr, 383 F.2d 166, 183-85 (2d Cir.1967), cert. denied, 390 U.S. 956, 88 S.Ct. 1038, 19 L.Ed.2d 1151 (1968); Banco Nacional de Cuba v. Sabbatino, 307 F.2d 845, 868 (2d Cir.1962), rev'd on other grounds, 376 U.S. 398, 84 S.Ct. 923, 11 L.Ed.2d 804 (1964); Restatement (Revised) Sec. 712 Reporters' Note 5. 38 Insofar as the nationalization of Cuban Electric was concerned, the discrimination against United States nationals was likewise explicit, as Resolution No. 1 stated that Cuba sought ownership of Cuban Electric and other entities belonging to juridical persons who are nationals of the United States or who operate entities in which the majority interest is in the hands of Americans. The declared goal in nationalizing Cuban Electric and the other listed companies was to take Cuban national wealth out of the hands of foreign interests. 39 Consistent with Cuba's declared intent, the actions of Cuba toward United States nationals have in fact been discriminatory. Thus, it is beyond dispute that Cuba has refused to pay anything to United States creditors, while paying or remaining obligated to pay Cuban creditors. Banco Nacional states in its brief to this Court that [t]here is a uniform pattern of the Republic of Cuba not having paid the debts owing to creditors located abroad of [Cuban Electric]. (Brief for Plaintiff-Appellant at 40.) 40 In all the circumstances one can only conclude that Cuba's actions were intended to and did discriminate against United States nationals within the meaning of international law. For the reasons below, this conclusion requires that we affirm the decision of the district court whether Cuba assumed, as the district court found, the obligation to pay United States creditors, or did not assume, as Banco Nacional contends, the obligation to pay United States creditors.
41 We treat first the proposition that in Resolution No. 1 Cuba assumed all of the liabilities of Cuban Electric and thereby became obligated to pay the debts of that company to foreign and domestic creditors alike. This hypothesis, though implausible in light of the expressed desire of Cuba to seize the wealth of United States entities and reserve it for the Cuban people, has some support, as the district court found, in the language of Resolution No. 1. 42 Assuming that there was such an assumption, however, it is plain that the obligations thereby assumed were repudiated with respect to United States creditors. The district court found that defendants had never been paid, and it is conceded that since the appropriation none of Cuban Electric's United States creditors have been paid. Indeed, Banco Nacional argues, in an effort to have Cuba avoid contract liability, that if there was originally an all-inclusive assumption of liabilities, it was swiftly modified to exclude liabilities representing debts owed to United States nationals. Yet even on the hypothesis that Cuba assumed all of Cuban Electric's liabilities, defendants' rights to prevail on these counterclaims do not rest solely on principles of contract law. 43 As discussed above, international law makes a state liable for a repudiation of its contract with a foreign national if that repudiation was discriminatory, i.e., if it repudiated as to all aliens or as to all aliens of that nationality. There is no indication in the record that the assumption of liability for debts owing to Cuban creditors was ever repudiated. Since it has not paid United States creditors, it is clear that Cuba's partial repudiation of its assumption was discriminatory. Thus, if it assumed all of Cuban Electric's liabilities, Cuba is responsible under international law for the injury caused to defendants by the discriminatory repudiation of the obligation to repay debts to United States creditors. 44
45 The alternative hypothesis, i.e., that Cuba did not assume all of Cuban Electric's liabilities, is divisible into two further possibilities: Cuba either assumed some of those liabilities or assumed none of them. We may quickly dismiss the latter possibility, for if Cuba assumed no liabilities whatever, the assumption-of-liabilities language of Resolution No. 1 would be nonsensical. We note that Banco Nacional does not contend that no liabilities were assumed. Rather, it argues that some liabilities were assumed but that these did not include liabilities to United States creditors. This is a plausible hypothesis and is the one we now explore. 46 The nonassumption theory is that if Cuba did not assume the liabilities representing debts owing to United States creditors, its nationalization of Cuban Electric took property belonging to defendants, thereby causing them compensable injury. In opposition, Banco Nacional argues that when a state nationalizes an enterprise, the only property taken is that of the enterprise, not that of the enterprise's creditors; thus, international law imposes no obligations upon that state in favor of those creditors. This statement, accurate as far as it goes, does not take into account the material fact of discrimination. 47 Preliminarily, we note that there can be little question that a creditor's right to repayment is property. As defined in international law, property commonly includes intangible assets and any interest in property if such interest has a reasonably ascertainable value. Restatement of the Foreign Relations Law of the United States Sec. 191 (1965). This definition plainly encompasses a creditor's right to repayment. See, e.g., Allied Bank International v. Banco Credito Agricola de Cartago, 757 F.2d 516, 521 & n. 3 (2d Cir.), cert. dismissed pursuant to Sup.Ct.R. 53, --- U.S. ----, 106 S.Ct. 30, 87 L.Ed.2d 706 (1985); In re Claim of Eagle Pencil Co., No. SOV-2934 (Foreign Claims Settlement Commission (FCSC) 1959), reprinted in FCSC: Tenth Semi-Annual Report to Congress (Tenth Report) at 226, 227 (1959); In re Williams, No. SOV-4A (FCSC 1957), reprinted in FCSC: Tenth Report, at 203 (1959); Draft Convention on the International Responsibility of States for Injuries to Aliens, reprinted in Sohn & Baxter, Responsibility of States for Injuries to the Economic Interests of Aliens, 55 Am.J.Int'l L. 545, 567, 574 (1961); Wortley, Observations on the Public and Private International Law Relating to Expropriation, 5 Am.J.Comp.L. 577, 584-85 & n. 20 (1956). Thus, Cuban Electric's debts to defendants were defendants' property. The question remains whether this property was taken. 48 In general, if a state merely expropriated a debtor's assets and treated all of its creditors alike, both foreign and domestic, the state would not be liable under principles of international law to foreign creditors for a taking of their property. This is because, though the expropriation of the assets deprived the debtor of the wherewithal to make repayment, any injury suffered by the creditors would be regarded as a remote and incidental, rather than a proximate, result of the expropriation. See Dickson Car Wheel Co. (U.S.A.) v. United Mexican States, 4 Rep. Int'l Arb.Awards 669, 681 (General Claim Commission 1931); In re Claim of Skins Trading Corp., No. CZ-734 (FCSC 1960), reprinted in FCSC: Fourteenth Semi-Annual Report to Congress, at 120, 121 (1961); In re European Mortgage Series B Corp., No. HUNG-1,605 (FCSC 1959), reprinted in FCSC: Tenth Report, at 72, 75-76 (1959). 49 Nonetheless, international law recognizes that when the rights of creditors are directly affected by the expropriation of the debtor's assets, the expropriation does constitute a taking of property belonging to the creditors. 8 M. Whiteman, Digest of International Law 994 (1967). The requisite directness may occur, for example, when the state that expropriates the debtor's assets also takes action directly against the creditors, as by annulling their claims or barring suit thereon. See id. at 994, 997-98; In re Claim of Eagle Pencil Co.; In re Williams. The requisite nexus may also exist when the nonpayment of foreign creditors is the product of deliberate national discrimination. See, e.g., Allied Bank International v. Banco Credito Agricola de Cartago, 757 F.2d at 519, 521 & n. 3 (decree prohibiting payment of foreign debts, if given effect, would constitute a taking); cf. Dickson Car Wheel Co. (U.S.A.) v. United Mexican States, 4 Rep.Int'l Arb.Awards at 681 (suggesting that creditor would have a taking claim if taking of debtor's assets were for purpose of injuring creditor); Restatement of the Foreign Relations Law of the United States Sec. 192 (Conduct attributable to a state that is intended to, and does, effectively deprive an alien of substantially all the benefits of his interest in property, constitutes a taking of the property ... even though the state does not deprive him of his entire legal interest in the property.) (emphasis added). 50 If, as Banco Nacional argues, Cuba did not assume liabilities representing debts owing to United States creditors, it is the latter set of principles that is implicated, for under this hypothesis, the nationalization of Cuban Electric plainly did not treat all creditors alike. Instead Cuba expropriated all of the company's assets while providing for some of its creditors to be compensated, excluding from compensation any who were United States nationals. 51 The nationalization of Cuban Electric was thus accompanied by discriminatory action that was intended to and did proximately deprive United States creditors of their Cuban property. Since the actions had their intended effect of taking wealth of United States nationals, it cannot be said that that effect was remote or incidental. The requisite nexus between the expropriation of Cuban Electric and the losses suffered by defendants has adequately been shown, and under the above principles of international law, Cuba may properly be held liable for those losses. 52 To summarize, if, as discussed in Part III.B. above, Cuba assumed all liabilities of Cuban Electric including those representing debts to United States nationals, it is liable to these defendants because its repudiation with respect to United States nationals was discriminatory. If, as discussed in this Part, Cuba, in nationalizing Cuban Electric, assumed some liabilities but excluded those representing debts to United States nationals, it is liable to these defendants because its actions were intended to and did directly deprive United States nationals of their rights to collect, thereby discriminating against them and effecting a taking that is compensable under international law.
53 Banco Nacional also contends that defendants' counterclaims should be rejected because the setoffs will operate as preferences prejudicing other United States nationals having claims against the Cuban government, and because Cuban Electric was insolvent when nationalized and its nationalization thus caused defendants no injury. We reject both contentions. 54 As to the alleged preferences, this Court has held that victims of Cuban expropriation may assert counterclaims as setoffs even though, in effect, preferences may result. See Menendez v. Saks & Co., 485 F.2d 1355, 1373-74 (2d Cir.1973), cert. denied on this issue, 425 U.S. 991, 96 S.Ct. 2201, 48 L.Ed.2d 815 (1976), rev'd on other issues sub nom. Alfred Dunhill of London Inc. v. Republic of Cuba, 425 U.S. 682, 96 S.Ct. 1854, 48 L.Ed.2d 301 (1976). Counterclaims not seeking affirmative recovery are usually not disallowed as preferences. See, e.g., 11 U.S.C. Sec. 553 (1982 & Supp. III 1985). This is especially appropriate when the setoffs were asserted well before the legal formation of an estate for the benefit of creditors. Here it was not until 1963 that the United States Government froze Cuban Government assets in this country, thereby creating such an estate. Thus, it cannot be said that defendants will unduly benefit to the prejudice of other claimants since without the assertion of these counterclaims in 1961 the sums on deposit from the Cuban banks would not have been frozen and would doubtless have been removed from the United States by Banco Nacional long before 1963. 55 As to the alleged lack of injury, neither the record nor the district court's findings support Banco Nacional's contention that Cuban Electric was insolvent when it was nationalized. According to the district court's findings, it was the expropriation itself that caused the nonpayment of the debts to defendants. The court found that [o]n or after August 6, 1960, Cuban Electric was incapable of discharging its debts to [defendants] because of the expropriation of its assets by enactment of Resolution No. 1. (Findings at 4; emphasis added.) Under the clearly erroneous standard set by Fed.R.Civ.P. 52(a), we cannot properly disturb this finding of fact since it is certainly plausible in light of the record viewed in its entirety. Anderson v. City of Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1985). There was uncontradicted evidence that Cuban Electric had a net worth of $72,613,220 on December 31, 1959, five weeks after its initial default. There is no evidence that it was insolvent when formally expropriated some seven months later. 56 Moreover, even if Cuban Electric had been insolvent when it was nationalized, this would not necessarily have meant that Cuba's action caused defendants no injury. Defendants were injured so long as assets existed after the nationalization to pay creditors some percentage of their claims. We note that a mere 39% liquidating or reorganization dividend would have sufficed to pay each defendant more than the amount of its offset here. For these reasons, Banco Nacional's lack-of-injury argument must be rejected.