Chapter 11 Commercial Bank Liability Under the Law of the United States for Deposits in Foreign Branches That Are Subject to Expropriation or Exchange Restrictions Imposed by Sovereign Governments

Abstract

As the lenders of last resort for financial systems, central bankers have reason to be concerned about the potential risks to domestic banking systems arising from actions that impose unforeseen liabilities on domestic banks. There seems to be a consensus that private sector participants in economic activities should bear the ultimate responsibility for the risks they assume in running their businesses. They consequently need to be able to predict and quantify the risks they are likely to encounter. Armed with these predictions they can draft contracts in such a way that they assume the risks that they are willing and able to assume, and shift the remaining risks to the other contracting party, which will bear responsibility for them. The ultimate test of such contracts is whether they accurately reflect the expectations of the parties and whether the courts will enforce them in accordance with their terms and with applicable law of the jurisdiction.

As the lenders of last resort for financial systems, central bankers have reason to be concerned about the potential risks to domestic banking systems arising from actions that impose unforeseen liabilities on domestic banks. There seems to be a consensus that private sector participants in economic activities should bear the ultimate responsibility for the risks they assume in running their businesses. They consequently need to be able to predict and quantify the risks they are likely to encounter. Armed with these predictions they can draft contracts in such a way that they assume the risks that they are willing and able to assume, and shift the remaining risks to the other contracting party, which will bear responsibility for them. The ultimate test of such contracts is whether they accurately reflect the expectations of the parties and whether the courts will enforce them in accordance with their terms and with applicable law of the jurisdiction.

These issues have come back to the fore in the United States in recent years in connection with the question of the liability of the head offices of U.S. banks for deposits accepted in foreign branches. More specifically, two recent court cases have asked whether U.S. banks can be excused from liability to depositors for repayment of deposits accepted in foreign branches in the face of expropriation of the foreign branches’ assets or imposition of temporary exchange restrictions prohibiting repayment of deposits. These cases, respectively, are Ngoc Quang Trinh v. Citibank, N.A.1 (“Trinh”) and Wells Fargo Asia Ltd. v. Citibank, N.A.2 (“Wells Fargo”). This paper will give you some background on the cases and relevant judicial and regulatory precedent in the United States, and will describe the position that the U.S. Government has taken in submissions to the courts in the two cases.

The common aspects and dissimilarities of these two cases provide a constructive basis for analysis. There are five principal dissimilarities between the two cases. First, Trinh involved expropriation of the assets of the Vietnamese branch of a U.S. bank by the revolutionary communist government in 1975, while Wells Fargo involved an economic restriction imposed by the Philippine Government in 1983 that effectively froze the assets of the Philippine branches of foreign banks. In different ways, however, both cases raised the issue of whether the depositor or the bank should bear the risk of sovereign government action. Second, the deposit in Trinh was denominated in the currency of the country in which the deposit was made, South Vietnamese piasters, whereas the deposit in Wells Fargo was denominated in dollars, or “Asiadollars,” and not in local currency. Third, except for the lack of a choice of law provision, the deposit contract in Trinh was a written, comprehensive agreement, albeit largely a printed form. In contrast, the interbank deposit agreement in Wells Fargo was oral, with confirmations provided in the form of brief computer-generated telexes. Fourth, the parties to the deposit agreement in Trinh could be viewed as having unequal bargaining positions, as Mr. Trinh, the depositor, was an individual and the depository institution, Citibank, is a large multinational financial institution. In contrast, in Wells Fargo, the depositor and the depository institution are both sophisticated banking institutions accustomed to dealings in interbank Eurodollar or Asiadollar deposit markets. Finally, the governmental action taken in Trinh in expropriating the assets of the foreign branch of the U.S. bank was permanent, whereas the economic restriction imposed by the Philippine Government in the Wells Fargo case was considered temporary.

There are five principal common aspects of the cases. First, the amount of money in dispute in both cases was small. In Trinh, the amount in dispute was $1,403.67 plus statutory interest. In Wells Fargo, the amount of the interbank deposits at issue is $1,066,000. The cases have nevertheless been viewed by the U.S. Government as presenting questions of substantial importance to the banking system and to the policies of the United States. Second, as noted above, both cases raised the issue of the extent to which an action of a foreign government excuses the liability of a bank for a foreign deposit. Third, neither case deals with contracts containing choice of law provisions. Fourth, both cases involved deposits bearing interest at a rate higher than rates obtainable in the United States at the time the respective deposits were made. Fifth, both cases raised the question of the interpretation of a deposit agreement in the context of applicable law.

The facts of Trinh and Wells Fargo3 and relevant judicial precedent and regulatory interpretations are discussed, in turn, below. The Trinh case involved a deposit in a savings account in the Saigon (now Ho Chi Minh City) branch of Citibank in 1974 in the name of a citizen and resident of the Republic of Vietnam, Mr. Trinh, and his son, also Mr. Trinh, who was then living as a student in the United States. The deposit was made in piasters and was limited by the terms of the printed deposit agreement to repayment solely in Saigon and solely in piasters. The deposit agreement also contained a force majeure clause:

Citibank does not accept responsibility for any loss or damage suffered or incurred by any depositor resulting from government orders, laws … moratoriums … or from any other cause beyond its control.

The clause was consistent with provisions of the Vietnam Commercial Code of 1972 that recognized the defense of force majeure as legally excusing performance under a contract. The savings account paid interest at the rate of 19 percent per annum at a time when the interest rate on similar accounts in the United States was legally limited to 5 percent.

In April 1975, as the revolutionary communist forces advanced toward Saigon, officials of the U.S. embassy in Saigon developed a plan of evacuation for U.S. citizens and employees of U.S. companies. During this time, branch depositors who inquired were encouraged to withdraw their money, although for reasons of safety, no notices to that effect were officially posted. On April 24, 1975, Citibank closed its Saigon branch and its personnel left the city in accordance with the plan of evacuation developed by the U.S. embassy. All of the documents were left in the branch, while the branch’s keys, vault combination, and a list of official documents were given to the economic attaché in the U.S. embassy with a request that they be turned over to the National Bank of Vietnam, the central bank of the Government of the Republic of Vietnam.

The next day, the Republic of Vietnam’s Finance Ministry and the National Bank issued a joint communiqué announcing that the branches of American banks in the Republic of Vietnam had closed without the permission of the Government and that the National Bank “guarantee[d] to return all the money legally deposited.” By the end of April, communist forces had entered Saigon and established a new government. On May 1, 1975, the new revolutionary administration of Vietnam declared a victory and formally expropriated the branches of the U.S. banks by declaring: “All … banks … will be confiscated and, from now on, managed by the Revolutionary administration.”

The National Bank of Vietnam reopened under the new government and announced that it was ready to settle claims on banks, including deposits, and would consider what to do about the assets and accounts of those who had fled the country or were collaborators with the United States. Mr. Trinh was an official in the former government who had gone underground. In 1980 Mr. Trinh’s son presented the passbook for the account, which his father had mailed to him, to Citibank’s office in New York for repayment. Citibank refused payment on the grounds that the National Bank of Vietnam was responsible for the account.

The younger Mr. Trinh brought an action against Citibank in a U.S. district court, and the trial court ruled in his favor on several grounds. First, the court rejected the bank’s claim that it was relieved of liability by the defense of force majeure under both the terms of the deposit agreement and the Republic of Vietnam’s Civil Code. Instead, the court reasoned, the bank’s decision to close its Saigon branch was a matter of “voluntary choice” and not an act of God, act of government, or “fortuitous cause beyond its control,” as required by the law of the Republic.

The court also rejected the bank’s contention that the new government of Vietnam was responsible for repayment of the deposit because it had expropriated the assets and liabilities of the bank’s Saigon branch. The court concluded that the argument could not succeed for two reasons. First, the court reasoned that when the bank voluntarily closed its branch in the face of oncoming revolutionary forces, the situs of the deposit sprang back from Saigon to the head office of the bank in New York. Second, the court found that the bank had failed to prove that the new revolutionary government had clearly expropriated the liabilities, as well as the assets, of the branch.

In ruling for the depositor, the court’s reasoning was based almost completely upon the analysis of the U.S. Court of Appeals for the Second Circuit in New York in the earlier case of Vishipco Line v. Chase Manhattan Bank, N.A.4 (“Vishipco”), which was decided in 1981. That case involved deposits in a branch of Chase Manhattan Bank in Saigon under circumstances almost identical to those in the Trinh case. While the decision of the court of appeals in the Vishipco case was reached without benefit of the views of the U.S. Government, in Trinh the United States sought and received the permission of the appellate court to express its views in opposition to the trial court’s decision. The brief as amicus curiae, or “friend of the court,” was filed by the U.S. Department of Justice on behalf of the Departments of State and Treasury; the Board of Governors of the Federal Reserve System (“Federal Reserve Board” or “Board”); and the two other federal bank regulatory agencies, the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

The principal argument of the Government’s brief was that the Trinh court had rewritten the terms of the deposit agreement to shift the risk of sovereign government action or force majeure to the bank instead of to the depositor, as provided for in the agreement. The substantially higher interest on the deposit as compared with a similar deposit in the United States was noted as supporting the conclusion that the depositor bore the sovereign risk on the deposit.

The U.S. Government made four principal arguments in the brief filed as amicus curiae in the Trinh case. First, the United States argued to the court that the threat of imminent danger from advancing enemy forces constituted a cause beyond the bank’s control within the meaning of the force majeure clause contained in the deposit agreement, and provided for under Vietnamese law, that should have been found by the court to excuse the bank’s performance under the deposit agreement. The United States noted that requiring a U.S. company to keep its doors open until its business was actually closed down by enemy action would place the lives of U.S. citizens and employees in danger.

The amicus brief of the U.S. Government also pointed out that in recognizing the defense of force majeure, Vietnamese law is consistent with the law of the United States, as stated in the Restatement (Second) of Contracts, and with international decisions finding that performance of a contract may be excused if it would present undue risks to persons involved. The brief pointed to a decision of the Iran-United States Claims Tribunal that found force majeure an excuse to the obligation of a U.S. contractor to complete work in Iran because of “threats and perceived threats to [the] safety” of its personnel.5 Moreover, the brief cited U.S. Supreme Court precedent that “reasonable precautions” are appropriate in the face of war and that performance under a contract could be excused on the basis of a “business sense” reading of the contract.6

Second, the brief of the United States advised the court that the springing debt theory adopted in the Vishipco case had no basis in precedent. Rather, the Government contended, the trial court failed to give effect to judicial precedents that do not hold the head offices of U.S. banks liable for repaying deposits in expropriated foreign branches. The early precedents for this principle arose out of the Russian revolution. For example, in Dougherty v. National City Bank of New York7 (“Dougherty”), the court saw the “fundamental issue” as whether the deposit relationship was between the depositor and the bank’s foreign branch or between the depositor and the home office. The court examined the deposits made in rubles in foreign branches of the U.S. bank in Russia under Russian law before and after the revolution and concluded that no contractual arrangement between the foreign depositor and the home office existed. As a result, the court found that the head office of the U.S. bank was not liable to repay the deposits.

Similarly, in Tillman v. National City Bank of New York8 (“Tillman”), the court looked to concepts of contract law in evaluating the effect of an expropriation of the bank’s Russian branch and concluded that there was no reason to suppose that any right to seek repayment from the head office of the bank in New York “survived the involuntary novation which under the Russian law substituted a government agency as debtor for… defendant.” In that case, too, the deposit was payable in rubles in Russia.

In contrast, both the trial court in Trinh and the Second Circuit Court of Appeals in Vishipco had relied on another case stemming from the Russian revolution, Sokoloff v. National City Bank9 (“Sokoloff”), to find the head office of the bank liable for expropriated deposits. Sokoloff was not an appropriate precedent, the U.S. Government argued in its amicus brief, because the case was distinguishable from Trinh. First, Sokoloff involved a deposit made in New York in dollars and therefore the depositor had contracted at least initially with the head office of the bank, and not the foreign branch, and the depositor was seeking repayment in the currency in which the deposit was made. Second, the case apparently involved the bank’s wrongful refusal to repay the deposit prior to the onset of the Russian revolution, and therefore the loss might not be viewed as resulting from the revolution. Finally, the court in Sokoloff was apparently never presented with, and therefore never ruled on, the defense of force majeure in the face of the chaotic conditions prevailing in Russia at that time. The United States advised the appellate court that unlike the trial court in Trinh, which rewrote the deposit agreement allocating sovereign risk between the parties, the courts in Dougherty and Tillman enforced the relevant deposit agreements in accordance with their terms.

The U.S. Government also took clear issue in its brief with the Trinh court’s suggestion that the bank had failed to prove that the new revolutionary government in Vietnam intended to expropriate the liabilities as well as the assets of the branch. The United States argued that it was unrealistic to place on a private company the burden of identifying a clearly worded decree of expropriation that covered all aspects of the business. The amicus brief stated that the United States has a longstanding policy against expropriation without prompt, adequate, and effective compensation. It said that the court’s decision provided “essentially a ‘road map’ whereby foreign governments could seize the property of U.S. nationals … [while leaving] U.S. nationals legally obligated on liabilities related to assets then owned by the expropriating governments.”

Further, the United States advised the court that the U.S. Foreign Claims Settlement Commission had expressly considered a claim for expropriation against the revolutionary Vietnamese Government in a proceeding presenting substantially the same issues as the Trinh case and had concluded that the Vietnamese Government seized accounts in, and succeeded to the liabilities of, the Saigon branch of Chase Manhattan Bank and became liable to make payment for the confiscated accounts.10 After oral argument in the Trinh case, Citibank advised the court of two French decisions that reached similar conclusions.11

Finally, the U.S. Government advised the trial court in Trinh that by preventing U.S. banks from limiting their liability by contract, the court’s decision would make it more difficult for U.S. banks to assess and limit their liability for expropriations and could thereby subject them to double liability for a loss—once when their branch assets were expropriated and a second time when the head office was required to repay the claims of foreign depositors. In those circumstances, the system in the United States for providing financial support for U.S. banks in times of temporary financial difficulties could be subject to unforeseen strains if the court’s decision were carried to its logical conclusion.

On appeal in the Trinh case, the U.S. Court of Appeals for the Sixth Circuit affirmed the decision of the district court in all particulars in a vote of two-to-one by the three-judge panel. With respect to the contractual issues in the case, the reasoning of the court of appeals went at least as far as the court in Vishipco in seeking to protect the depositor against the risks implicit in local-currency deposits. In its opinion the court stated that while banks can seek to limit by contract the extent of their exposure to liability, “to be effective, such limitation provisions must be explicit and must clearly and unmistakably inform depositors that they have no right to proceed against the home office.”12

The court, however, refused to recognize the force majeure clause as providing sufficient notice to the depositor, even though the court accepted the fact that “the closing of a bank by revolutionary forces is the type of fortuitous cause contemplated by the law of force majeure.…”13 With no explanation of the underlying analysis, the court concluded that by operating as a branch in Saigon, Citibank accepted the risk that the head office would be liable on such an obligation.

The court adopted the Vishipco court’s suggestion that an explicit waiver by the depositor might be necessary to relieve the head office of the bank of liability:

Since its Vietnamese depositors did not waive their right to proceed against the home office, Citibank cannot be heard to argue that the inability of its Saigon branch to perform relieves the home office of liability for the bank’s debts incurred in Saigon.14

Under the court’s reasoning, no deposit contract between a foreign depositor and the foreign branch of a U.S. bank can provide for the depositor to bear the risk of the expropriation of the foreign branch unless the depositor has signed an explicit waiver to that effect. No similar requirement has been imposed under U.S. contract law in other contexts. In fact, the court’s reasoning shifts the burden of proof in such cases from the plaintiff depositor to the defendant bank.

With respect to the other issues raised in the case, the majority of the court accepted the district court’s reasoning. The court stated that it was not persuaded that the new government in Vietnam undertook to assume the liabilities of foreign banks that had fled the country in the face of the fall of the Republic of Vietnam.15 In any event, the court reasoned, the decrees of confiscation would not have had any effect on the bank’s debt to Mr. Trinh, because the deposits in its Saigon branch “no longer had their ‘situs’ in Vietnam at the time of the decrees.”16

As explained above, the springing debt theory on which this aspect of the court’s analysis is based has no foundation in judicial precedent. It is clear from the court’s concluding quotation from the Vishipco decision that the majority found fundamentally unfair the fact that the bank’s branch was closed in Saigon without the depositors being given an opportunity to withdraw their deposits, even though the withdrawals would have been in a currency that was to become worthless shortly thereafter.

There was a strong dissent in the Trinh case,17 which took the position that the majority had failed accurately to distinguish the Vishipco case. In Vishipco, the court had construed the deposit agreement under New York law; whereas in Trinh, the bank had contended that under Vietnamese law the deposit agreement did not provide a basis for recovery. Moreover, the dissent also took the view that under the deposit agreement itself, the depositor must bear the loss of his deposit under the circumstances of the case. According to the dissent, “the provision discharging the Saigon branch of liability serves to discharge the domestic home office of liability as well if the governmental action or other cause precludes payment in Vietnam in piasters.”18 The dissent concluded that the communist overthrow of Saigon and the subsequent nationalization of the branch “surely falls within the deposit agreement’s discharge-of-liability provision and prevents Citibank’s domestic home office from paying Trinh in Vietnam in piasters.”19 The dissent distinguished Sokoloff on the grounds that in that case the court was interpreting New York law where the facts involved an initial deposit in the United States in U.S. dollars. Finally, the dissent agreed that foreign depositors are assured of greater safety for their deposits in the foreign branch of the United States bank than a locally incorporated bank but only for credit risks and not for political risks.20 Thus, the dissent would have overruled the district court’s decision and absolved the bank from liability for Mr. Trinh’s deposit, a position rejected by a majority of the panel of judges deciding the appeal.21

The facts of the Wells Fargo case are different from those in Trinh but also raise the question of when the head office of a U.S. bank should be liable for sovereign risk with respect to the bank’s foreign deposits. Because of the importance of the issues in the case, the United States again received the permission of an appellate court to submit a brief as amicus curiae.

The Wells Fargo case involves two $1 million time deposits made on June 10, 1983 by a Singapore bank, Wells Fargo Asia Limited (“Wells Fargo Asia”), a subsidiary of Wells Fargo Bank, N.A. of the United States, with the Manila branch (“Citibank Manila”) of Citibank, N.A. (“Citibank”). The interest rate on the deposits was 10 percent, and the term was six months. At the time the deposits were made, banks in the United States were paying an interest rate on comparable deposits of 8.85 percent. The deposit was placed through an Asian money broker, but the deposit agreement between Wells Fargo Asia and Citibank Manila was reached orally by telephone. The confirmations of the deposits were made by several computer-generated telexes among the parties and the broker. A confirmation provided by Wells Fargo Asia stated the following:

Please remit U.S. DLR 1,000,000 to our account with Citibank New York. At maturity we remit U.S. DLR 1,050,277.78 to your account with Wells Fargo Bank Intl. Corp. N.Y. through Citibank New York.

Four months later, in October 1983, the Philippine Government announced a number of measures to deal with the country’s deepening economic crisis. The principal purpose of those measures was evidently to conserve scarce foreign exchange and to establish priorities for the use of the country’s reserves. On October 15, 1983 the Minister of Finance and the Governor of the Central Bank of the Philippines transmitted a telex to foreign bank creditors of the Philippines requesting a rollover for 90 days of indebtedness of public and private sector Philippine obligors (called the “Standstill Telex”). The rollover covered debt owed to Philippine branches of foreign banks. In connection with this request for a rollover, the Central Bank of the Philippines also issued a decree called “Memorandum to Authorized Agent Banks” (known as “MAAB 47”), which provided:

Any remittance of foreign exchange for repayment of principal on all foreign obligations due to foreign banks and/or financial institutions, irrespective of maturity, shall be submitted to the Central Bank thru the Management of External Debt and Investment Accounts Department (MEDIAD) for prior approval.... Appropriate sanctions shall be imposed on banks which fail to strictly comply with this directive.

Thus, MAAB 47 provided that payment by local banks, including the branches of foreign banks, of foreign-currency debts owed to foreign banks and financial institutions could be made only with the prior approval of the Central Bank of the Philippines. At the time that MAAB 47 was issued, Citibank Manila held approximately $600 million in dollar-denominated interbank deposits placed by non-Philippine banks.

The representative of Citibank Manila was told repeatedly by officials of the Central Bank of the Philippines that all foreign-currency deposits placed by foreign financial institutions with the defendant bank were frozen and that no payment would be allowed. As a result, Citibank Manila did not repay the deposits when they matured on December 9 and 10, 1983. Wells Fargo Asia sued for nonpayment on February 10, 1984, and on February 20, 1984, Citibank Manila applied for permission to repay deposits to the extent repayment could be made with its non-Philippine assets. Permission was granted on March 13, 1984, and Wells Fargo Asia was repaid 46 percent of its outstanding deposits. The remaining 54 percent of the deposits, or $1,066,000, has continued to earn interest during the litigation and is the amount in dispute.

Wells Fargo Asia brought suit in the U.S. district court in New York. Its basic contention was that under the contract between the two banks the head office of Citibank was required to repay the deposits on the maturity date because the contract contained no express exception to that obligation shifting the risk of sovereign government restrictions on repayment from Citibank to Wells Fargo Asia. A corollary to that contention, according to Wells Fargo Asia, was the principle found in Philippine law that the head office of a corporation is responsible for the obligations of its branches. Wells Fargo Asia also claimed that Citibank Manila’s inability to prove, during the trial of the case, that the interest rate paid on the deposits is higher than the rates on interbank deposits in other major markets outside the United States demonstrated that there was no understanding in the industry that the sovereign risk presented by deposits in the Philippines would be borne by the depositor.

Citibank contended that contracts must be interpreted in accordance with applicable law; that the applicable law was the law of the jurisdiction where the deposits were made—in this case, the Philippines; and that under the Standstill Telex and MAAB 47, the obligation of Citibank Manila to make payment was suspended temporarily. Philippine law, according to Citibank, also did not impose any obligation on Citibank to repay the deposits from funds located outside the Philippines; and if Philippine law were interpreted to impose that obligation, it would be contrary to U.S. law and policy. As to the interest rate on the deposits, Citibank Manila argued that the fact that the deposits in the Philippines carried a higher interest rate than a bank could legally pay on deposits in the United States showed that there was no understanding among the parties to the contract, either explicit or implicit, that the deposits were repayable in New York.

The district court ruled in favor of Wells Fargo Asia. In reaching that result, the court reasoned that under the general corporate law of the Philippines, obligations incurred at a branch are obligations of the bank as a whole. The court concluded that Citibank, as a corporate entity, was therefore obligated to repay the deposits with any of its assets, regardless of where they are located. Moreover, the court concluded that the Stand-still Telex and MAAB 47 did not prevent Citibank from repaying its Philippine obligations with non-Philippine assets. Further, according to the court, the fact that the essential purpose of the restrictions on payment was to prevent the outflow of foreign exchange from the Philippines means that the Philippine Government’s concerns are not implicated by repayment of the deposits with funds held outside the Philippines.

The U.S. Government sought the permission of the court of appeals to file a brief as amicus curiae in the Wells Fargo case because of its concerns about the implications of an interpretation by the court that could permit a foreign government to freeze the assets of a foreign branch of a U.S. bank while requiring that assets from outside the country be brought in by the bank to meet local liabilities.

In its amicus brief, the United States referred the appellate court to judicial precedents in the United States in support of the proposition that automatic application of foreign law is not required by the principle of comity if the foreign law is contrary to the law and policy of the United States. The brief stated that the United States has a strong policy—supported by legislative and regulatory provisions—to the effect that, in the absence of an agreement of the parties to the contrary, U.S. banks should not bear sovereign risk on the deposits of their foreign branches.

As the brief indicated, legislation enacted by the U.S. Congress has exempted deposits payable only outside the United States from reserve requirements and assessments for deposit insurance. Moreover, since 1918, the Federal Reserve Board has indicated through regulations and interpretations, that the exemption of foreign deposits from reserve requirements is based upon the premise that the depositor assumes the risk that a foreign government will impose restrictions on the deposits booked at the foreign branch of a U.S. bank. The brief makes clear that the premise is based upon a distinction between risks against which a U.S. bank can protect itself and risks against which it cannot. According to the brief, the head office of a U.S. bank is generally liable for certain risks—including insolvency and acts of negligence such as fire, theft, fraud, and embezzlement—against which the bank can take actions to protect itself, but that it should not be held liable for sovereign risk, because it cannot protect its assets from the actions of a foreign sovereign.

As to the facts presented by the Wells Fargo case, the United States expressed concern in the brief that the application of Philippine law, as interpreted by the district court, would call into question U.S. banking policies and would require U.S. banks to transfer funds into foreign economies to meet their liabilities when the banks’ assets in those countries had become unavailable because of foreign government action. Moreover, the brief expressed the further concern that, in response to the district court’s decision, U.S. banks would find it prudent to reduce their foreign assets in order to limit their exposures abroad to sovereign risk, thereby putting them at a competitive disadvantage in foreign banking markets and possibly restricting U.S. trade and foreign investment.

Finally, the United States expressed concern that enforcement of foreign laws, such as the economic restriction in the Wells Fargo case, as it was interpreted by the district court, could serve as a guideline for foreign governments that would seek to freeze or restrict the assets of foreign branches of U.S. banks and simultaneously shift the responsibility for meeting related liabilities to the banks’ head offices in the United States. The United States urged the court to recognize that as a matter of U.S. law and policy, in the absence of an explicit guarantee by the head office, the depositor at a foreign branch of a U.S. bank assumes the sovereign risk that the foreign country will restrict repayment and that foreign laws to the contrary should not be enforced by U.S. courts.

The district court issued a second decision in the Wells Fargo case after the court of appeals remanded the case to the district court for additional findings of fact and conclusions of law on four issues.22 In responding to the remand, the district court issued a new decision that reached the same result as its first decision but on a different legal basis.

First, the court of appeals asked whether the parties reached agreement on where the deposits could be repaid, including whether they agreed that the deposits were collectible only in Manila. On remand, the district court drew a distinction between repayment of the debt and collection of the debt, concluding that the telex confirmations of the deposits established an agreement that repayment was to occur in New York. With respect to the issue of where the deposits could be collected, the court concluded that the deposit contracts did not reflect any agreement between the parties, and no term could be implied from custom or usage in the Eurodollar market because interest rates paid on the Philippine deposits were no higher than interest rates paid in other non-U.S. markets. Therefore, according to the court, the parties failed to come to agreement on that question.

Second, the court of appeals asked the essential terms of the agreement between the parties. On remand, the district court responded that the only agreement of the parties relating to collection or repayment was that repayment would occur in New York, suggesting that the court may have confused the clearing of a deposit through New York with its repayment in New York. Third, the court of appeals asked whether Philippine law would preclude or negate an agreement between the parties to have the deposits collectible outside Manila. The district court responded that it knew of no such provision of Philippine law.

The fourth and final question posed by the court of appeals to the district court on remand related to the issue of what law controls the case if there is no controlling Philippine law as to the collectibility of the deposits outside Manila. The district court stated that it had assumed that Philippine law applied to the case in its initial decision but had not found it necessary to decide directly what law applied because of its conclusion that Citibank was liable for the deposits even if Philippine law, including the Standstill Telex and MAAB 47, applied to the case. In response to the invitation of the court of appeals to decide the question of applicable law, however, the district court concluded that New York, and not Philippine, law applied to the case.

The district court reasoned that under both New York and U.S. federal principles of conflicts of laws, the law of the jurisdiction with the greatest interest in, and most significant contacts with, the litigation should be applied to the case. The court further reasoned that New York has an interest in assuring its pre-eminent position as the marketplace for a “plethora” of international transactions. Therefore, the court concluded, the expectations of the parties can best be promoted by applying a uniform rule of New York law where the transactions are denominated in U.S. dollars and are settled through the parties’ New York correspondent banks, and where the defendant is a U.S. bank with headquarters in New York.

The district court conceded that it was not altogether clear what decision New York law would require in the case. It nevertheless concluded, relying on the 1927 decision in Sokoloff and the more recent decisions in Vishipco and Perez v. Chase Manhattan National Bank,23 discussed below, that the parent bank is ultimately liable for the obligations of the foreign branch. The court recognized that under some circumstances a New York court would defer to local law. It gave the example of a situation where a foreign government had confiscated the deposits of the foreign branch of a U.S. bank. There, the court reasoned, the expropriation would constitute a compulsory assignment of the depositor’s rights to the deposit; payment to the government assignee would discharge the debt; and the depository bank would not be liable to repay the deposits.

The court distinguished the situation in the Wells Fargo case, in which the foreign government had “merely” conditioned repayment on obtaining approval for repayment of the deposits from a government agency. The court said that Citibank had not satisfied its good-faith obligation to seek the Philippine Government’s consent to use assets booked at Citibank’s non-Philippine offices to repay Wells Fargo Asia’s deposits in the Philip pines. Therefore the court concluded that Citibank’s defense of impossibility in the face of the Standstill Telex and MAAB 47 failed to excuse it from liability for repayment of the deposits.

After looking at the case a second time, the court of appeals affirmed the district court’s decision. Before discussing that decision, it is appropriate to look at examples of the varied and seemingly irreconcilable precedents faced by the Second Circuit. Two cases are sufficient to illustrate the difficulties. Both cases involve deposits made at Cuban branches of U.S. banks at the time of the Cuban revolution.

The case of Garcia v. Chase Manhattan Bank24 (“Garcia”) involved a certificate of deposit purchased in pesos by Cuban residents at the Cuban branch of a U.S. bank. The deposits were later expropriated by the new revolutionary government. The U.S. Court of Appeals for the Second Circuit in New York found that the bank was liable for repayment in New York despite the expropriation by the Cuban Government. That decision was based upon the factual findings of a jury that the deposit agreement was varied by oral representations made by officers of the Cuban branch of the bank to the effect that the certificate of deposit was guaranteed by the bank’s main office in New York and that the depositors could be repaid by presenting the certificate at any branch of the bank worldwide. Thus, the court enforced the deposit agreement in accordance with its terms, which included the bank’s assumption of sovereign risk as a result of the oral representations of its agents.

In the same year that the Garcia case was decided—1984—the New York Court of Appeals, the highest court of the State of New York, reached a different result when presented with similar facts in the case of Perez v. Chase Manhattan Bank, N.A. (“Perez”). The case involved a claim against the head office of a U.S. bank for repayment of five certificates of deposit purchased during the revolution in 1958 from a Cuban branch of the bank. The depositor claimed that the U.S. bank’s local branch employee had assured her that the certificates could be redeemed wherever the bank had an office and particularly in the United States. The certificates specified no place of payment and provided only that payment would be made in “moneda national” or national currency.

In February 1959, U.S. banks operating in Cuba were told by the new revolutionary government to freeze bank accounts belonging to certain former government officials and their families; and in September 1959, they were ordered to close such accounts, including the depositor’s, and remit the proceeds to the new government. The court applied the act of state doctrine to find that the bank was not liable for the deposits.

Under the act of state doctrine, U.S. courts decline to judge actions taken by a foreign sovereign with respect to the property located within its territory.25 Thus, the court of appeals first had to consider whether the five certificates of deposit at issue in the case were located within the borders of Cuba. The court stated that for purposes of the act of state doctrine, a debt is located within a foreign state when that state has the power to enforce or collect it. Because the U.S. bank was operating a branch in Cuba, the court found that the debt was located there, even though it could have been collected at any branch of the bank worldwide. The court concluded that where a bank has paid over the full amount of its debt pursuant to the direction of the Cuban Government, which for purposes of the act of state doctrine is beyond the court’s review, the bank is relieved of liability in any subsequent demand by the depositor for the funds.

The court determined that the fact that the debt was not exclusively payable in Cuba, and could have been paid outside the country, did not affect this result. It reasoned that because the debt constituted a single obligation, even though it had multiple situs for repayment, payment at one of the locations extinguished the debt at all locations. According to the court in Perez, the bank’s debt was satisfied when payment was made to the Cuban Government in response to confiscation of the accounts. Under the act of state doctrine, the court would not look behind the Cuban Government’s action in confiscating the debt. It would also not hold the bank liable for a second time.

On remand, the district court in the Wells Fargo case cited Perez for the proposition that a parent bank is ultimately liable for the obligations of a foreign branch, but the Perez case involved an explicit guarantee of payment outside Cuba. No such explicit guarantee existed in Wells Fargo.

In its amicus brief, the United States expressed concern that double liability could be imposed upon a U.S. bank, regardless of whether the reason for such liability is expropriation of a foreign branch’s assets, as in the Trinh case, or the unavailability of the assets to meet branch liabilities because of an exchange restriction issued by a foreign government, as in the Wells Fargo case.

The district court found, in its second decision, that Citibank did not discharge its good-faith obligation to seek the Philippine Government’s approval to use assets located outside the Philippines to meet Philippine liabilities. However, the United States argued in its brief that a U.S. bank should not be held liable for deposits in a foreign branch when the assets of that branch have been frozen by the action of a foreign government and that an interpretation of Philippine law requiring that assets located outside the Philippines be transferred into the country in order to meet local liabilities would be contrary to the law and policy of the United States.

In affirming the second decision of the district court in Wells Fargo, the U.S. Court of Appeals for the Second Circuit recognized a principle of decision that seems to be in conflict with the result reached in the Trinh case. The court in Wells Fargo stated:

A special limitation has traditionally been recognized under general banking law principles. Thus, “‘[t]he situs of a bank’s debt on a deposit is considered to be at the branch where the deposit is carried.…’” [Citations omitted.] The consequence of this limitation is that a debt on a deposit normally authorizes a demand for the money only at the relevant branch.26

In contrast to this rule, the court in Trinh recognized a demand for the Saigon deposit at the head office of the U.S. bank in New York.

The rule in Wells Fargo establishing a limitation on the situs of a banking debt could be varied by agreement of the parties, according to the court, which held that the district court was not clearly erroneous in finding an agreement to repay the deposits in New York. That finding was based on telex confirmations of the deposits, which are evidently like those generally used in the industry to provide clearing instructions for dollar deposits through the New York offices of multinational banks. The telex confirmations in the Wells Fargo case referred to remitting dollars “through Citibank New York” and did not refer to “payment at Citibank New York.” Thus, while the Wells Fargo court recognized a rule of decision like that advocated by the United States in its amicus brief, it misread the agreement applicable to the deposits and applied the rule in such a way that standard-form telex confirmations requiring foreign interbank deposits denominated in dollars to be cleared through New York were read to require the head offices of U.S. banks to insure foreign depositors against sovereign risk.

It is unclear that U.S. banks, acting alone or in conceit, can deal with the potential for sovereign risk raised by the decision of the appellate court in Wells Fargo. Telex confirmations are, by practice, brief, and some foreign banks are unwilling to accept variations in the traditional telex confirmations at issue in that case. As a result, there is no clear approach by which a U.S. bank can, by contract, protect itself from sovereign risk on foreign depositors.

The issue presented by both the Trinh and Wells Fargo cases is quite straightforward: Should the head offices of U.S. banks be liable for foreign deposits when related assets are unavailable to meet liabilities because of sovereign government action barring access to the assets?

In the Trinh case, the United States took the position that the district court had rewritten the contract of the parties, which clearly placed the risk of an action in the nature of force majeure on the depositor. While the result may be difficult to understand in the face of contractual provisions shifting the risk of sovereign government action to the depositor, the courts in Trinh may have been sympathetic to the claims of an individual depositor against a large multinational bank that employed a printed form for the deposit agreement.

In some jurisdictions, under limited circumstances, U.S. law recognizes as a defense to a claim of nonperformance under a contract the argument that the contract constitutes a “contract of adhesion” because it does not reflect the intention of the less powerful of the two parties to the contract.27 There is no suggestion in the Trinh decisions, however, that either of the courts or the plaintiff was relying on such a legal argument.

The position of the United States—advocating enforcement of the deposit agreement in accordance with its terms—makes sense in economic terms for two reasons. First, it is not practical for a bank to negotiate different terms for each savings account, particularly if the bank is a large multinational bank that has many thousands of accounts. Second, banking organizations, whether from the United States or other countries, must be able to predict the potential risks of their operations and be able to limit those risks by contract; otherwise, there is a danger that commercial banks will be less willing to perform the role of financial intermediary that is so essential to the smooth functioning of the international payments system.

The Wells Fargo case presents the contractual issue from a different perspective. Wells Fargo Asia argued that if Citibank was concerned about the potential risks raised by a decision holding its head office liable, then it could specifically limit those risks by contract, either through agreement applicable to individual deposits or by means of general rules and conditions sent to Citibank’s customers that are applicable to all accounts. Citibank’s response was that the interbank deposit market is largely non-documentary and the agreements, as in the Wells Fargo case, are typically oral, with only the briefest form of computer-generated written telex confirmations. Therefore, according to Citibank, it is simply not practical to require that all possible risks be foreseen and, where necessary, shifted by contract. Moreover, it argued, to make such changes unilaterally by contract, when other banking institutions are unwilling to make them, would greatly disadvantage the competitive position of the banking institution that was alone in changing the documentation for interbank deposits. Even so, Citibank has asserted that it has made efforts to vary its interbank deposit agreements, but those have been rejected by other banks that will accept no variations in the standard confirmations.

Finally, Citibank has contended, a requirement that the parties foresee and address by contract all possible risks is not legally necessary. The parties to a contract should be able to rely on applicable local law to determine the nature of the risks that each party bears. Citibank filed extensive materials in the court of appeals in the form of legal opinions by the senior lawyer of the Central Bank of the Philippines and an outside Philippine attorney to support its contention that the district court misinterpreted Philippine law. According to Citibank, these materials clearly demonstrate that Philippine law, in particular with respect to the Standstill Telex and MAAB 47, temporarily suspended the obligation of Citibank Manila to repay the deposits and did not impose on Citibank the obligation to bring assets from outside the Philippines to meet Philippine liabilities. In its second decision, the court of appeals effectively sidestepped the issue of the effect of the Philippine Government’s exchange restrictions by holding that the clearing instructions contained in the telex confirmations for the deposits amounted to agreement by Citibank to repay the deposits in New York and not the Philippines.

These cases suggest that U.S. courts have found ways to impose liability on the head offices of U.S. depository institutions for foreign deposits—even when action by a sovereign government has made the related local assets unavailable to fund repayment—either by not enforcing an applicable contract in accordance with its terms, as in Trinh, or by misreading a contract, as in Wells Fargo, to find the situs of the debt in the United States. The U.S. Government noted in its amicus brief in Wells Fargo that the case implicates “the application of federal banking law to issues affecting this country’s relationships with other members of the international banking community.... [and] [i]n [such] instances, our federal system may require application of federal common law rules....”28 Such an approach may ultimately be required to achieve a uniform rule of decision in the cases that enables banking institutions to predict and to contract around sovereign risk.

In its two briefs as amicus curiae in the courts of appeals in the Trinh and Wells Fargo cases, the United States strongly stated its policy that U.S. banks should be free to serve important functions as financial intermediaries in the international markets without fear of double liability from the actions of foreign sovereigns in expropriating and freezing assets in foreign branches and from the decisions of U.S. courts in holding the banks liable to depositors for sovereign risk, regardless of the applicable contract. If these cases are not ultimately overturned, multinational U.S. banks face substantial uncertainties in dealing with sovereign risk abroad that will be difficult for any one bank, or any group of U.S. banks, to resolve by contract.

Addendum

In 1990, the U.S. Supreme Court refused to review the decision of the U.S. Court of Appeals for the Sixth Circuit in the Trinh case, but agreed to review the decision of the U.S. Court of Appeals for the Second Circuit in Wells Fargo. On May 29, 1990, the Supreme Court vacated and remanded the Wells Fargo decision, 110 S. Ct. 2034 (May 29, 1990). The Court decided that the factual premise on which the Second Circuit relied in deciding the case—that the parties agreed that the deposits would be repaid in New York, based upon the telex instructions clearing them through New York accounts of the two banks—contradicted the factual determinations made by the district court that the parties failed to reach agreement on the issue of where the deposits could be collected. The Supreme Court further remanded the case to the court of appeals to determine which law applies to the case and the content of that law. As of January 1991, the case was still pending in the Second Circuit.

COMMENT

EUGENE A. LUDWIG

Ms. Tigert’s comprehensive and excellent presentation limits the need for extensive comment. Nonetheless, it occurs to me to raise two issues: one at a micro level, and the other at a macro level, of analysis.

First the micro issue. Listening to Ms. Tigert’s presentation, one at first wonders how in the world the lower federal courts in Trinh and Wells Fargo could have come to a conclusion different from the administration’s position. Indeed, why have several federal courts failed to follow the administration’s current position? For example, the Vishipco and Garcia cases present many of the same policy considerations as presented in Trinh and Wells Fargo. I think the answer to this question lies neither in any fundamentally different view of the policy considerations nor in any subtle or intricate legal analysis. Rather, I think the answer lies in the court’s assessment of the equities presented in the individual cases.

More specifically, I think the courts were primarily motivated by two equitable considerations. First, particularly in the Trinh case, I believe that the court did not believe that the elder Mr. Trinh was given sufficient warning that ultimately his deposit would not be paid in the United States. Indeed, one could go further and say that the court might well have suspected that the elder Trinh was given, explicitly or implicitly, the same kind of sales pitch, you might call it, when he deposited his money with Citibank’s branch, that Mr. Perez Dominguez was given before he deposited his money in the Garcia case—that money being deposited in the Chase Manhattan Bank branch in Cuba would be payable at any Chase branch in the United States or abroad. Implicitly, Citibank invited Mr. Trinh to deposit his money with a foreign multinational bank, and not with a local bank in Saigon, because he could collect his funds at any of its multinational offices all over the world. Admittedly, there is nothing explicit to this effect in the court findings, but reading the opinion, it seems that the court is saying that there is no very clear and explicit statement by Citibank that the bank somehow will not honor the deposit throughout its worldwide banking network.

In addition, it would seem that the court suggests a little more clearly that the bank was, in a sense, playing fast and loose—that is, the bank was being a little cavalier with Mr. Trinh’s money when the bank closed its offices and handed over the keys to the U.S. Embassy without ever announcing that fact to the depositing public, which would have given depositors a chance to withdraw their funds from Citibank. This appears to have been another motivating factor behind the court’s decision.

I am not saying that the court concluded that the Trinh case involved a contract of adhesion in a strictly legal sense; I am saying that absent a clear and explicit statement by the bank to Trinh that he was at risk, the courts’ sympathies were with Trinh, and much of the court’s analysis in the Trinh case is mere window dressing—that is, in my view the court has an analysis of impressive dimension but did not really decide the case on the basis of a legal analysis. The legal analysis in the Wells Fargo case, as Ms. Tigert pointed out, is, in a number of ways, confusing; and, indeed, between the first opinion and the second opinion the court jumped from application of one law to application of the other and yet decided the case the same way.

Second, I believe the courts suspected, in both Trinh and Wells Fargo, that while the banks would have had the courts believe that 100 percent of the foreign branch assets were subject to expropriation or freeze, respectively—that is, while the bank put forth the position that what happened was that 100 percent of the assets of the branches were expropriated or frozen, substantially less than 100 percent of the assets were actually affected. I believe that each court suspected that the bank was trying to have it both ways: taking a significant number of the assets back to the home office and, at the same time, refusing to pay depositors. Certainly, in both the Trinh and Wells Fargo cases, the bank suffered asset losses. However, it is just not clear that the losses were incurred on a one-for-one basis. Indeed, one would have expected in both cases that the branches would lend much of their asset bases back to their home offices or affiliates.

Here again, the courts did not emphasize this basis for decision, but rather, in my view, dressed their decisions up in legal theory when, in fact, equitable, and not legal, considerations were their primary motivating factors.

I think what probably happened in the case of the Citibank office in Saigon, and to a lesser extent in Manila, is that what got expropriated or frozen were the physical assets which made up very little in terms of the value of the branches. Possibly some of the negotiable instruments in the Saigon branch’s safe were also expropriated, although I suspect very strongly that even the negotiable instruments and the gold or whatever else it actually held in its safe were taken back to New York. Moreover, the claims on the bank branch in Saigon were probably lent by the branch to one of Citibank’s other offices, which, in turn, placed the money in the Euromarkets or re-lent it somewhere in the United States; thus, when the expropriated Saigon branch was ultimately taken over by the revolutionary government of Vietnam, it was not able to go to the Euromarkets and claim the assets.

Now that I have presented this micro analysis, I would like to make certain comments on a more macro level. The courts’ discomfort with the bank’s position in both cases does not necessarily lead to the conclusion that the courts believed the banks should bear the risk of a freeze or of an expropriation in all cases. However, their decisions do suggest that the courts believe that the banks should bear the risk of loss unless depositors are informed—clearly, explicitly, and in a noncontradictory fashion—that they will have to bear it.

Thus, in one sense the administration and the Trinh and Wells Fargo courts agree. First, I believe all agreed that these disputes were essentially contract disputes and, second, that the banks should be able to avoid liability through contract. Where the administration and the courts seem to disagree is over who should bear the burden of ambiguity. I do not believe that the resolution of this policy question is obvious. Nor do I think that this policy question can be appropriately resolved by merely looking to legal precedents. Indeed, it is difficult to see any consistent resolution coming out of the courts, so long as they continue to use choice of law as the focus for their decisions. Rather, I would suggest that the methodology used to resolve the issue should be based on an examination of all facts and circumstances of international banking undertaken with the goal of assessing risk on the basis of a minimum loss to both the banks and the depositors.

For those of you who would like to tie my suggestions to a particular jurisprudential approach, one might say it is a combination of the methodologies pioneered by Professor Myers McDougal and Dean Guido Calibrisi, both of Yale Law School. I would also characterize my approach as trying to eat my cake and have it, too.

If we use this methodology to resolve the dispute, I believe it would lead us to the conclusion that the depositor should be favored in a case of real ambiguity. I am led to this conclusion because I believe that the banks are best placed to assess the risks involved in doing business in a particular country and to insure against these risks by making appropriate decisions about how their assets are held and how they contract with depositors. That is to say, if the liability of having to pay is imposed on the banks, which are better able, in most cases, to assess the risks than the depositors, they will take actions with respect to asset locations and will explicitly and clearly inform the depositors whenever their deposits with the bank are at risk in cases of expropriation and freeze. They are better placed to do that than the depositors are. (Indeed, it is worth noting that it is the bank, and not the depositors, that controls the deposit contract in most cases.)

Now I admit that in the Wells Fargo case, the positions of depositor and banker, as between Wells Fargo and Citibank, are more difficult to assess. Wells Fargo is a sophisticated institution. I would only argue that as between the two, Citibank in Manila is probably better placed than Wells Fargo in Singapore to make the assessment. Moreover, I would also try to defend this position by stating that one has to find a clear and easy line of demarcation; if one were to try to make it fairer, one gets into complexities that no decision maker would want to deal with.

Accordingly, I am persuaded that if the courts place the burden of liability on the banks, the banks will take actions that will minimize future losses for both themselves and their depositors. Banks will be led to signal a potentially unstable situation by taking explicit actions such as the ones mentioned above.

I will conclude with one final thought. To effectuate the preferred result I have suggested above—or, indeed, the opposite result—it would be helpful to all bankers and all depositors if this issue of ambiguity were, itself, to result in an unambiguous rule worldwide. In this regard, I would suggest that rather than leave this question to be resolved by the courts on a case-by-case basis, it would be advisable to resolve this question by international convention. No matter how the ambiguity is resolved, losses for both parties are likely to be minimized if the law is made clear, on a universal basis, for all banks and all depositors.

*

This paper does not represent the official views of the Board of Governors or any other part of the Federal Reserve System or the U.S. Government, except to the extent it describes formal positions taken by the U.S. Government in litigation before U.S. courts.