Chapter 17 Liabilities of International U.S. Banks for Foreign Deposits
- Robert Effros
- Published Date:
- June 1994
Should the head office of a United States bank be liable for the deposits made in a foreign branch where the assets of the branch have been frozen or expropriated by the sovereign government of the country where the branch is located? Two cases sought a hearing in the U.S. Supreme Court on this issue.1 In lower court decisions two courts of appeals2 ruled against the U.S. bank by holding the head office liable for frozen or expropriated foreign deposits. The U.S. Government asked the Supreme Court to review these cases. The following issues were raised: What is the status of the debt? What is the applicable law under customary choice of law rules? What would be the consequences of holding the head office of the U.S. bank liable for a foreign interbank deposit made abroad where the finding that the head office is liable is based upon an instruction to clear the deposit through an account in New York? To analyze these questions it is necessary to understand the facts and issues raised by the two cases.
The first case was Ngoc Quang Trinh v. Citibank (“Trinh”).3 It involved a retail deposit by a Vietnamese citizen made in the Saigon branch of Citibank, which is headquartered in New York. The deposit was made in piasters, the local currency. In accordance with the terms of the deposit agreement, the deposit was repayable only in Saigon in piasters. Under the terms of the deposit agreement, repayment of the deposit was subject to a force majeure defense under which the bank accepted no responsibility for loss or damage resulting from government orders or laws, or from any other cause beyond the bank’s control. The Vietnamese civil code recognized force majeure as a defense to liability under contracts. Citibank closed its Saigon branch just under a year after the deposit was made, pursuant to the evacuation order of the U.S. Government and in response to an immediate threat of invasion by communist forces. The assets of the branch were subsequently expropriated by the new government.
The U.S. court of appeals ruled that by operating through a branch, instead of through a separately incorporated subsidiary, Citibank assumed the risk that it would be held liable elsewhere in the world for obligations of the branch. The court stated that the Vietnamese law prohibiting foreign banks from operating as subsidiaries required the branch to maintain capital reserves in Viet Nam. According to the court, this requirement removed the ambiguity of where responsibility would ultimately lie for the liabilities of the branch. The court did not deny that the closing of the bank by revolutionary forces is the type of fortuitous cause recognized in a force majeure defense, but the court did not agree that the doctrine should apply where a branch is involved. The court said that the terms of the deposit agreement were insufficient to put the depositor on notice that he would bear the risk of loss in the event of circumstances such as those presented in the case. Any limitation of liability provisions, according to the court, must be explicit and must unmistakably inform depositors that they bear the risk of loss.
The court agreed that under general banking principles recognized in U.S. law, deposits made in a branch are repayable only in the branch where the deposit is made, absent special circumstances. According to the court, one special circumstance is where the home office has closed the branch wrongfully. The court reasoned that Citibank closed its Saigon branch voluntarily in the face of enemy forces and that at the time of closing, the situs of the debt sprang back to the head office in New York. In reaching this conclusion, the court relied on the analysis used in an earlier case, Vishipco Line v. Chase Manhattan Bank, N.A,4 which relied solely on one law review article.5 The courts in both cases concluded that there was no proof that the communist government actually intended to expropriate the liabilities as well as the assets of the branch and, therefore, Citibank could not use expropriation as a defense to its obligation to repay the deposit.
In the other case, there was no retail bank deposit; instead, there was an interbank deposit without a formal deposit agreement. In Wells Fargo Asia v. Citibank, N.A. (“Wells Fargo”),6 a deposit was made by one bank in another bank outside the United States in accordance with an oral deposit agreement, the basic terms of which were confirmed electronically. This approach is typical of interbank Eurodollar deposits. The facts are that a Singapore subsidiary of Wells Fargo, a U.S. bank headquartered in San Francisco, placed two $1 million dollar deposits with the Manila branch of Citibank through a Singapore money broker for a six-month term bearing 10 percent interest. The terms were agreed to orally in a telephone conversation between employees of the Singapore broker and the Manila branch of Citibank. Subsequent telexes specified the interest rate and the tenor of the deposits and confirmed that the deposits and repayments would be made through New York correspondent bank accounts of the two banking institutions.
Before the maturity date of the Manila deposits, the Philippine Government issued emergency regulations designed to conserve scarce foreign exchange resources. Those regulations prevented Citibank from converting Philippine pesos into dollars to repay the deposits. Specifically, the Philippine monetary board issued a memorandum requiring that “remittance of foreign exchange for repayment of principal on all foreign obligations due to the foreign banks … shall be submitted to the Central Bank … for prior approval.” The central bank effectively prohibited Citibank’s Manila branch from repaying the deposits using Philippine assets, although it subsequently agreed that Citibank could repay those portions of its deposits using funds from non-Philippine dollar-denominated assets. Just over $900,000 of the $2 million in deposits were repaid using such assets, but the balance of the deposits remained on deposit in the Manila branch of Citibank. The central bank permitted Citibank to convert sufficient pesos into dollars to make interest payments on the deposits.
The district court ruled that the parties to the deposits had agreed to settle the transactions in New York but had not reached agreement on where they would be legally repayable. The court confused various terms in the analysis, however. It said, “repayment” was made where wire transfers effectuating payment occurred, but there was no agreement on where the debt would be legally “collectible.” Initially, the district court said that if one assumed that Philippine law applied to the deposit, Citibank would be liable because Philippine law does not prevent Citibank from using assets located outside the Philippines to repay the deposits.
On remand from the court of appeals, the district court ruled that New York law should govern any judicial decision in the case because of the need for uniform rules in international banking transactions and because the facts of the case involved contacts in New York, where Eurodollars are customarily cleared. Applying New York law, the court then held Citibank liable for repayment of the deposits in its head office.
A case decided in 1924, Sokoloff v. National City Bank (“Sokoloff”),7 underpinned the reasoning of the court. Prior to the 1917 Russian Revolution, a deposit was made in Citibank’s New York head office for transmission to the Petrograd branch of Citibank. The initial deposit was made in dollars in New York but was credited in rubles in an account in the Petrograd branch. The revolution subsequently occurred, and the branches of foreign banks were expropriated. The depositors sought repayment at Citibank’s headquarters in New York. The court ruled in favor of requiring the bank to repay the deposit in New York on the grounds that the deposit had originally been made in New York. The court also reasoned that because the U.S. Government, at that time, did not diplomatically recognize the Soviet Union, the court should not give effect to an expropriation decree by the Soviet government to discharge the debt. Neither of these facts applied to either the Wells Fargo case or the Trinh case. Nevertheless, the Sokoloff case was the basis on which the district court found Citibank liable under New York law for repayment of the deposit.
On appeal the court of appeals in Wells Fargo held Citibank’s head office liable for the deposits on different grounds. The court noted that normally a creditor may collect or enforce a debt wherever he can obtain jurisdiction over the debtor, and that the situs of the debt would normally follow the creditor. The court recognized other exceptions acknowledged in other U.S. cases: first, where the branch closes wrongfully and demand cannot be made at the branch, and second, where the parties have agreed that the debt would be repaid elsewhere. Perhaps somewhat confused by the reasoning of the district court following the Sokoloff case, the court of appeals found that the parties to the interbank deposits had agreed that repayment would occur in New York because of the clearing instructions requiring that the deposit and the repayment be cleared through accounts in correspondent banks in New York. Rather, the district court found that the accounts would be “settled” in New York but that there was no agreement of the parties on where the accounts or the deposits would be legally collectible. There were therefore substantial questions about the legal underpinnings of the court of appeals’ decision. Nevertheless, the court quoted the telex confirmations and found that Citibank was liable for repayment in New York.
Because these cases raised several significant issues, the U.S. Government asked the Supreme Court to overrule the court of appeals’ decision in Wells Fargo. The government also asked the Supreme Court to remand the Trinh case to the court of appeals for reconsideration on the basis of its decision in Wells Fargo.
The three legal issues raised by these cases are: (1) Where is the situs of the debt for deposits made in a foreign branch of a U.S. bank? (2) What law applies to the obligations related to a foreign deposit under applicable choice of law rules? (3) What are the consequences of finding the head office of a U.S. bank liable for repaying a Eurodollar deposit based on standard clearing instructions that the deposit and repayment will be made through accounts in New York for final credit and debit in a foreign branch of a U.S. bank?
Regarding the first issue, the situs of the debt, the court decisions in the Wells Fargo and Trinh cases recognize that there is under U.S. law a general banking principle that repayment of a deposit can generally be demanded only at the branch where the deposit is made, absent special circumstances. Those special circumstances include an agreement by the bank and the depositor varying the place of repayment or closure of a branch without a legally recognizable excuse. These decisions thus suggest that the situs of the deposit can change from the place where the deposit is made to the place agreed upon by the parties or, if the branch is wrong-fully closed, to the head office of the bank. In fact, with respect to wrongful closure of a branch, another analysis could be more technically accurate. An action for breach of contract may lie against the head office of the bank, but the situs of the debt itself would not actually shift from the place where the deposit is made.
The doctrine that has been identified as underlying the situs of the debt issue is the so-called separate entity doctrine. The clearest explanation of this doctrine is in a 1963 U.S. court of appeals decision, United States v. First National City Bank.8 The facts in that case relate to establishing the situs of the debt with respect to a foreign deposit in the face of an enforcement action by U.S. law enforcement or tax authorities. The case involved an action for a temporary injunction by the U.S. Government brought in the United States against Citibank seeking to freeze the deposit of a Uruguayan corporation in Citibank’s branch in Montevideo. The injunction sought to freeze the assets of the Uruguayan corporation at the foreign branch on the grounds that the U.S. Government would be able to prove that the corporation owed tax liabilities in the United States. Thus the action was intended to prevent dissipation of the assets of the defendant until there could be a judgment on the merits with respect to the tax liability. Under the applicable U.S. tax statute, it was not necessary for the government to obtain a judgment on the merits before seeking the temporary injunction to freeze the taxpayer’s assets.
According to the court of appeals, the question turned on the situs of the debt. The court rejected the argument of the U.S. Government that Citibank was the debtor at its head office in New York, as well as at its Uruguayan branch. The court looked to New York law, which it is required to do in diversity of citizenship cases where the parties are from more than one state or from a foreign country, to try to determine the situs of the debt. The court recognized the so-called separate entity doctrine and reasoned that under that doctrine the branch of a bank is a separate business entity, not merely a teller’s window.
The court found three policy reasons why the branch should be treated as a separate business entity and therefore the only part of the bank obliged as debtor to repay the deposit. First, there would be potential exposure to the U.S. bank from the administrative burden of tracking whether deposits had been repaid in branches other than the one where the deposit was made. No branch could safely pay a check drawn by its depositor without determining whether the deposit had not already been repaid by another branch or the head office. There would be an intolerable burden, according to the court, to require constant transmission of reports on the status of accounts among the various branches and head office of the bank. Technological advances may have made this reason less persuasive today.
The court’s second major reason was the complication arising out of the fact that different branches of a U.S. bank may be subject to the laws of other countries and may be dealing in different currencies in connection with those deposits. This reason has not been adequately explored in the more recent decisions of U.S. courts. When a U.S. bank establishes a branch in a foreign country, it is by definition subject to the laws of that country in the operation of the branch. As in Viet Nam, the country may not permit the bank to operate through a subsidiary and may require the bank to operate through a branch. The varying effects of the laws of foreign countries on the branches of foreign banks will mean that each branch effectively operates under separate rules and laws as to all aspects of a deposit. Without recognition of these differences by applying U.S. law rather than the law of the country where the deposit was made, courts in the United States may be imposing liabilities on U.S. banks from which the U.S. bank is powerless to protect itself. This may be the best current explanation for why the separate entity doctrine should still apply. There is also a recognition that conflicts of laws rules may require the application of local law to obligations related to a deposit and because different laws may apply to different branches of the bank, only the separate entity doctrine can adequately protect the bank.
The third policy reason given by the court for the separate entity doctrine was the possibility that the bank could be held liable in more than one place. This reason was given a much clearer explanation in the dissent of Justice Harlan in the Supreme Court decision in the case, which ruled against the bank on grounds unrelated to the separate entity doctrine. The reasoning is that the Uruguayan government might not recognize a decision of the U.S. court holding the bank liable in the United States, and might choose to hold the bank liable on demand for the deposit in Uruguay, causing the U.S. bank to be liable twice—in the United States and in Uruguay—for the same deposit. Moreover, Justice Harlan reasoned, in dissent, if a tort action, based upon the wrongful failure to repay a deposit when a claim is made, could lie in Uruguay, the bank could be held liable multiple times on the tort ground, as well as on a contract ground, both in Uruguay and in New York.
The court of appeals held that the situs of the debt in this case was the branch of Citibank in Uruguay and not the head office in New York. It reasoned that there was no property right of the taxpayer in the United States that was subject to the jurisdiction of the court against which the temporary injunction could lie.
In the Supreme Court, the majority found that the injunction freezing the deposit could lie against the head office of Citibank pending a decision on the merits of the case, thereby overruling the court of appeals. It did not address the question of the separate entity doctrine, but determined that the only issue was a temporary freeze of assets pending a judgment on the merits. The Supreme Court did not respond directly to the reasoning of the court of appeals that there was no property right within the jurisdiction of the court against which the injunction could lie. That analysis was based upon the conclusion that there was no right to receive payment in New York, only a right to receive payment in Uruguay under the separate entity doctrine. In contrast, the Supreme Court reasoned that the head office had the power to control the branch, as it was part of the same corporation, and, therefore, it was appropriate to allow this injunction to lie until the decision about the taxpayer’s liability for U.S. taxes could be made on the merits. The Supreme Court did not specifically question the separate entity doctrine, but instead recognized that a federal court in this country should not necessarily “treat all of the affairs of a branch bank the same as it would those of the home office” where overseas transactions are often caught in a “web of extraterritorial activities.”9 Thus, the Court gave lip service to some of the policy concerns underlying the separate entity doctrine but allowed a temporary injunction to remain.
In his dissent, Justice Harlan contended that the likelihood of being able to gain personal jurisdiction over the taxpayer in the United States for the purpose of a judgment on the merits was so remote that it was inappropriate for the injunction to lie. In addition, he reasoned that the jurisdiction over the property right—the right to receive payment—was also remote. Therefore, he argued that if Citibank failed to repay the deposit in Uruguay, the taxpayer had a cause of action for breach of contract in New York, and the government could garnish the claim under the contract action once it accrued. According to Justice Harlan, no demand had been made at the Montevideo branch; hence, the right to receive repayment under a contract action in New York was too remote for the injunction to lie.
The important part of the analysis related to the issue of the situs of the debt. The Supreme Court and Justice Harlan concluded that there was a right to bring an action for breach of contract for failure to repay the deposit in accordance with the terms of the deposit agreement. There was not a finding that the situs of the debt had itself shifted. Justice Harlan reiterated his concern that the bank might be held doubly or even multiply liable on the claim if the situs of the debt could be held to shift under U.S. law but remain at the foreign branch for purposes of applicable local law. That was his principal reason for recognizing the separate entity doctrine for purposes of where demand for repayment of a deposit could be made, and for purposes of where an enforcement action could be brought or where a temporary injunction could lie as part of the enforcement action. Justice Harlan effectively employed the analysis of the Sokoloff court. In that case, Citibank did not repay the deposit in Petrograd, arguing that there had been an expropriation. The court ruled that because the deposit had originally been made in New York, the failure to repay the deposit in Petrograd gave rise to a cause of action in New York for wrongful failure to repay the deposit. The underpinning of the case was therefore not a situs of debt analysis.
All of these cases demonstrate that U.S. law is in a confused state. It is clear that the support for the reasoning in the later cases that the situs of the debt had sprung from the branch back to the head office when the branch closed is based upon a misreading of earlier cases. This is not the only confusion in U.S. law, however, on the issue of a bank head office’s liability for a foreign deposit, as two other cases make clear. The two cases were decided by courts in New York, one state and one federal.
The first case, decided by the State of New York Court of Appeals, the highest court in the state, was Perez v. Chase Manhattan Bank (“Perez”).10 It involved a certificate of deposit purchased by a Cuban resident just before the Cuban revolution in Chase Manhattan Bank’s branch in Havana. The certificate of deposit was later specifically expropriated by the Cuban government at the time it expropriated the assets of those identified as enemies of the revolution. Some years later, the depositor brought an action in the United States against Chase Manhattan Bank seeking repayment of the deposit. The case was decided in 1984, fifteen or more years after the deposit was made in Havana. As part of the factual evidence presented at the trial of the case, the court found that the manager of the bank’s branch in Havana had made an oral commitment that if the customer purchased a certificate of deposit in Havana, Chase Manhattan Bank would stand behind that deposit anywhere in the world. The court reasoned that because of this commitment, the standard banking law principle, that a depositor can only seek repayment at the branch where the deposit is made, was modified in accordance with an oral agreement that the deposit would be repayable at any branch of the bank. As a result of this factual finding, the court concluded that the debt had multiple situses, effectively at any branch in the world where Chase Manhattan Bank operated. The court ruled, however, that the bank had only one single obligation to repay the deposit. It concluded therefore that the debt was effectively repaid or discharged when the certificate of deposit was expropriated by the Cuban Government. Therefore, the court concluded, there was no right to repayment of the deposit in the United States.
At approximately the same time, similar facts were presented to the federal court of appeals in New York in Garcia v. Chase Manhattan Bank.11 In accordance with federal precedent, a federal court is required to apply state substantive law in deciding cases presented. In Garcia the federal court looked to the lower court decision in Perez to determine New York law, and that decision was later overturned by the New York Court of Appeals decision discussed above. The Garcia court found that the situs of the debt was not in Cuba but outside Cuba, based upon the oral commitments of officials of Chase Manhattan Bank in Cuba to repay the deposit anywhere in the world. Therefore, the court ruled, Chase had an obligation to repay the deposit outside Cuba, and the expropriation had not discharged the debt.
These two decisions cannot be reconciled except to say that a federal court looking at the same case again would be obligated to apply the reasoning of the final Perez decision, which found the debt discharged when it was expropriated.
This leaves several questions. The first question is whether there is still a recognized separate entity doctrine under U.S. law. Each court in each decision discussed above effectively recognized the basic rule that repayment of a deposit can be demanded only at the branch at which the deposit was made; yet, each court recognized exceptions that eroded the rule.
The second issue is what law applies to the deposit obligations under applicable choice of law rules. The situs of the debt issue is confused; but the better reasoning seems to be that the separate entity doctrine applies, and the situs of the debt is in the branch where the deposit was made and not elsewhere. Therefore, the only remedy for the wrongful refusal to repay a deposit is to bring an action in contract against the head office. The brief of the U.S. Government in the Wells Fargo case filed in the Supreme Court argued that, given modern telecommunications techniques, the administrative burden rationale for the separate entity doctrine may be less relevant today than the choice of law implications of the rule. The branches of a multinational bank operate in many different jurisdictions and are subject to the laws of many different countries. Thus a bank is necessarily subject at each branch to individual laws and regulations governing a variety of issues, including withdrawals, interest rates, currency convertibility, capital, reserve requirements, and permitted powers of the branch. As justification for this reasoning the U.S. Government pointed to an interpretation by the Federal Reserve first issued in 1918 that reserve requirements do not apply to deposits in the foreign branches of U.S. banks because those branches are subject to different foreign laws, and the depositor assumes the risk that the deposit may not be repayable owing to the application of those laws. The U.S. Government also pointed to the fact that under U.S. law, insurance assessments of the Federal Deposit Insurance Corporation do not apply to deposits in the foreign branches of U.S. banks unless the deposits have been made explicitly repayable in the United States. The U.S. Government argued that U.S. multinational banks would be disadvantaged competitively because of higher costs and greater legal burdens if U.S. courts do not apply the separate entity doctrine to limit the liability of the banks to a foreign branch in the circumstance where the assets of a branch have been frozen or expropriated by sovereign government action.
In its brief in the court of appeals in the Trinh case, the U.S. Government argued that Vietnamese law should apply to the deposit, because in accordance with the deposit agreement the deposit was made in Viet Nam and was repayable only in Viet Nam in piasters at a time when piasters were a controlled currency and could not be taken freely out of the country. There was also an agreement of the parties to make the deposit subject to a force majeure defense that was recognized under Vietnamese law. The United States argued that it was the intention of the parties that under those circumstances Vietnamese law should apply, and the branch was subject to regulation by the Government of Viet Nam. Because there had been an expropriation, it was argued, the head office should not be held liable because there was a legal excuse for not repaying the deposit in Viet Nam.
In the Wells Fargo case, the United States argued in the court of appeals that if Philippine law required Citibank to bring assets from outside the Philippines to repay the deposits, then that law should not be enforceable in U.S. courts because it would be contrary to U.S. law and policy, otherwise the bank could be made doubly liable for frozen deposits. Evidence submitted in the case from the Philippine central bank was that Philippine law did not require that Citibank repay the deposits from assets located outside the country. The U.S. Government’s brief in the Supreme Court suggested therefore that under either Philippine law or New York law, Citibank should not be held liable. Under Philippine law, on the basis of the evidence from the central bank, there was no obligation to repay the deposits in the Philippines. Under New York law, the separate entity doctrine should apply, and Citibank should not be liable to repay the deposits in New York because the failure to repay the deposits in the Philippines was legally excused. Under this analysis, foreign law should apply to repayment of deposits in foreign branches of U.S. banks in the country in which those branches are located, unless there is a public policy reason for not applying that law.
Despite this analysis, and the arguments of the U.S. Government, the courts in the Trinh and Wells Fargo cases held Citibank liable to repay the deposits at its head office. For that reason Citibank sought Supreme Court review of the decisions. Citibank argued that applicable judicial decisions are so erratic that the Supreme Court should recognize a federal common law rule that the head office of a U.S. bank is not liable for deposits made in foreign branches unless there has been an explicit agreement to the contrary to repay those deposits at the head office or unless there is a wrongful failure to repay the deposit at the branch, in which case a contract action would lie in the United States against the head office of the bank.
The U.S. Government, in its brief requesting Supreme Court review of the decisions, refused to argue for a federal common law rule. Instead, the government contended that established general principles of banking law are clear. Under the separate entity doctrine, the head office is not liable unless there is a specific agreement to the contrary. According to the U.S. Government, the Supreme Court should endorse the separate entity doctrine, thereby endorsing the rule that underlies federal regulations of reserve requirements and deposit insurance assessments.
As to the consequences of holding a head office liable for repaying a Eurodollar deposit based upon standard clearing instructions that the deposit and repayment will be cleared through accounts in correspondent banks in New York, the U.S. Government contended that holding the head office liable in the circumstances of the Wells Fargo case is contrary to existing federal regulations. It argued that Federal Reserve Board regulations governing reserve requirements and the law with respect to insurance assessments are based upon the assumption that the head office will not be liable unless it has specifically agreed to make the deposit repayable in the United States. The obligation to repay the deposit falls to the foreign branch of the U.S. bank, not its head office. In fact, the U.S. Government argued that the Eurodollar market developed because reserve requirements and deposit insurance assessments did not apply outside the United States, thereby making it less costly for U.S. banks to operate abroad. As a result, an enormous market developed in dollars outside the United States not subject to U.S. requirements.
Well over 90 percent of all U.S. dollar transactions are cleared in New York, where some $750 billion a day are cleared. If a simple clearing instruction, which generally applies to all U.S. dollar deposits outside of the United States, can be read as an agreement of the parties that the deposit will be repayable in New York, then all Eurodollar deposits would be repayable in New York. The U.S. Government argued that if the bank is held liable in the circumstance of the Wells Fargo case, then the economic basis for the Eurodollar market would be undermined with billions of dollars outstanding on the basis of the previous cost calculations. Foreign banks have not been held liable by the courts of their home jurisdiction in similar circumstances, giving rise to the further argument that the competitive position of U.S. banks abroad would be threatened by a continuing application of the Wells Fargo decision. For these reasons the government asked the Supreme Court to overrule the court of appeals’ decision.
Efforts to obtain a favorable ruling for Citibank in the Supreme Court faced several hurdles. First, it was argued that U.S. banks should be able to resolve the issue of the liability of a head office for foreign deposits by contract, rather than far-reaching judicial decision. U.S. banks have in fact had great difficulty contracting around this issue as the Trinh case shows. That case involved a deposit agreement that explicitly provided that the deposit was repayable only in piasters and only in Saigon, subject to a force majeure defense recognized under Vietnamese law. The court found, nevertheless, that the deposit agreement was not determinative, and the head office of the bank was held liable for the deposit in the United States in dollars. Moreover, the Wells Fargo case involved a nondocumentary agreement, which is customary for interbank deposits in the Eurodollar market, but which makes limiting liability by contract difficult for a bank.
In response to the argument, Citibank experimented with trying to add a statement onto its telex confirmations that liability for repayment of an interbank deposit rests with the branch and not with the head office. In several of these cases, foreign banks have rejected the added words on the telex confirmation and have sent back messages or letters saying nothing will be recognized in the written confirmations of the deposits other than the specific terms of the deposit, specifically, the interest rate, the tenor, and the clearing instruction.
Second, the Supreme Court also was reluctant to intervene in a case that did not actually raise issues of federal law. Under a normal choice of law analysis, the appropriate law to apply to the Trinh and Wells Fargo cases is the law of the place where the branch is located. This approach recognizes that a branch by definition operates under foreign law, and repayment is the primary obligation of the branch. As a result, the reasoning goes, the law of the location of the branch should apply. In this approach there is no federal law question.
In response to the issue of whether the federal interest in the case was sufficient to justify consideration in the Supreme Court, Citibank argued that given the confused rules of decision under state court rulings, state law should be preempted by federal law in order to provide more certainty for multinational U.S. banks with foreign branches. Federal preemption has been recognized by U.S. courts under the supremacy clause to the U.S. Constitution for those issues of national significance that cross state lines or for issues of international significance, including interstate commerce and foreign relations.
Citibank contended that because these cases involve the issue of the liability of a bank for sovereign government action that freezes or expropriates the assets of a foreign branch, they extend beyond the normal credit risk that a bank can control by contract to the narrow range of circumstances where a bank has no control over, or ability to contract around, the action of a foreign sovereign government. Therefore, Citibank contended that only a uniform federal rule of decision could adequately protect U.S. banks from liability for deposits in foreign branches that had been frozen or expropriated by sovereign government action. The U.S. Government alternatively contended that the Supreme Court should recognize the uniform rule of law embodied in the separate entity doctrine, but did not suggest that state law had been preempted on the basis of the laws applicable to deposit insurance assessment or reserve requirements. Both approaches recognize the importance of a uniform rule of decision for such cases in order to bring certainty to billions of dollars in interbank and retail deposit transactions in foreign branches of U.S. banks.
The Supreme Court agreed to hear the Welts Fargo case but refused to hear the Trinh case. The Supreme Court vacated and remanded the Wells Fargo case to the court of appeals on the grounds that the district court’s conclusion that the parties had failed to reach agreement on where the deposits would be repaid was not clearly erroneous. Thus, the Supreme Court rejected the court of appeals’ conclusion that the clearing instructions were in themselves a sufficient basis for finding such an agreement. The Supreme Court reasoned that there are two principal theories on which Citibank could be required to allow collection of the deposits in New York. The first theory was based on an agreement of the parties and the second on a recognized duty under New York law to repay the deposits.
On remand the court of appeals again found Citibank liable for the deposits in the Philippines but on the ground that New York law applies and nothing in New York law prohibits collection of the deposits there. Thus the court turned the separate entity doctrine on its head, holding the head office liable when foreign sovereign government action prevents repayment of a deposit in a foreign branch. The Supreme Court refused to hear the case a second time. Therefore, confusion continues in the decisions of U.S. courts on the issue of the liability of a U.S. bank for deposits in a foreign branch subject to sovereign government action freezing or expropriating the assets of the branch. The U.S. Congress is considering whether the issue should be resolved through legislative action.