In proceeding to attach
defendants’ assets in U.S. banks, Second Circuit upholds post-judgment
attachments, ruling that government-owned Indonesian entity had waived
sovereign immunity from attachment under FSIA and that New York choice-of-law
principles lead to application of Indonesian property laws as construed by
Indonesian government
In November 1994, Karaha Bodas
Company, L.L.C. (KBC) and Perusahaan Pertambangan Minyak Dan Gas Bumi Negara
(Pertamina) executed a Joint Operation Contract (JOC) and an Energy Sales
Contract (ESC) to develop geothermal energy extraction in the Karaha area of
West Java. In both contracts, Pertamina purportedly waived “any ... right of
immunity (sovereign or otherwise) which it or its assets now has or may acquire
in the future...” and also “consent[ed] in respect of the enforcement of any
judgment against it ...”
The JOC and the ESC specified
that Indonesian law would apply to contract disputes. They also provided that a
tribunal set up under the Arbitral Rules of the United Nations Commission on
International Trade Law (UNCITRAL) would resolve these controversies. Neither
contract contained any language relating to KBC’s right to attach any
particular assets in case of a contract breach or default.
During 1997-98, an Indonesian
fiscal crisis eventually led the government to cancel KBC’s projects in Karaha.
KBC later filed for arbitration against Pertamina in Geneva, Switzerland,
alleging that the government had breached both geothermal energy contracts. The
Swiss arbitral panel ruled that KBC had been “prevented from pursuing the
performance of the binding contracts that it relie[d] upon for reasons beyond
its control ... [and] should not bear the consequences thereof.”
The arbitrators then awarded KBC
$111.1 million in damages for lost investments and $150 million in lost
profits. The Supreme Court of Switzerland dismissed Pertamina’s later appeal.
An Indonesian court, however, purported to enjoin KBC from trying to enforce
its Swiss judgment anywhere in the world and threatened to fine it $500,000 per
diem for violations.
KBC next sought to enforce its
award in a Texas federal court pursuant to the 1958 Convention on the
Recognition and Enforcement of Foreign Arbitral Awards [21 U.S.T. 2517;
T.I.A.S. 6997; 330 U.N.T.S. 3]. In December 2001, the district court awarded
KBC $261.1 million plus interest. The court also authorized KBC to register the
new judgment in the Delaware, New York, and California federal courts pursuant
to 28 U.S.C. Section 1963. Additionally, it granted KBC an ex parte writ of
garnishment against the Bank of America.
KBC then presented the new
judgment to a New York federal court. That court issued an ex parte writ of
execution, an order to show cause and restraining notices. KBC served these on
the Bank of America and on other concerned banks. As trustee of the accounts
containing funds from the sale of liquefied natural gas (LNG), the Bank of
America credits all LNG revenues from a particular project to a general account
that operates pursuant to Trustee and Paying Agent Agreements (TPAAs). The
TPAAs contained choice-of-law clauses purporting to make New York law
applicable.
In opposing KBC’s order to show
cause for a writ of execution, Pertamina claimed that none of the restrained
accounts contained Pertamina’s property. The district court decided that the
relevant Indonesian law vested ownership of all but five percent of the funds
(the Retention) in the Republic of Indonesia. Pertamina and the Ministry of
Finance of the Republic of Indonesia (the Ministry) appealed this decision. The
U.S. Court of Appeals for the Second Circuit affirms.
The Court first clarifies the
appellate issues. “The question on appeal is the ownership of the funds in the
Bank of America trust accounts, which derive from sales of Indonesian liquefied
natural gas (LNG), and whether such funds can be attached under New York law,
as applicable pursuant to the Foreign Sovereign Immunities Act of 1976...
(FSIA).” [75]
The Court applies 28 U.S.C.
Section 1610(b) of the FSIA to decide whether Pertamina has waived its
immunity. “Pertamina, through its use of the trust funds to channel LNG
revenues, engages in commerce in New York. Under 28 U.S.C. Section 1610(b),
Pertamina has thus waived its sovereign immunity from attachment in United
States courts.” [83]
Because Pertamina is now liable
just as an individual would be liable, the Court next decides that New York
procedural law applies. In attachment proceedings involving foreign states,
federal courts apply Fed. R. Civ. P. 69(a), and it requires the application of
the enforcement procedures of the state where the federal court sits.
To decide ownership of the
disputed funds, the Court then analyzes whether it should apply the substantive
property law of New York or that of Indonesia, mainly Article 5(2) of
Government Regulation 41 of 1982. In cases of true conflict, New York choice-of-law
doctrine requires that it determine whether to apply New York or Indonesian
substantive law by doing an “interests analysis.”
This process examines the
pertinent laws and policies of both jurisdictions. “The law of the jurisdiction
having the greatest interest in the litigation [is] applied and ... the facts
or contacts which obtain significance in defining State interests are those
which relate to the purpose of the particular law in conflict. [Cites]” [85]
The Court principally decides
that no substantial conflict exists. “The Republic of Indonesia and the State
of New York apply the same general rules to property disputes. The Republic of
Indonesia offers the only specific rules -- Indonesian statutes and regulations
-- that determine the respective rights of Pertamina and the Republic of
Indonesia in the disputed funds. New York law directs us to apply these
Indonesian statutes and regulations.” [85-86]
The Court next examines both New
York law and Indonesian law to resolve the question of ownership of the funds.
“Under New York law, the party who possesses property is presumed to be the
party who owns it. [Cite] When a party holds funds in a bank account,
possession is established, and the presumption of ownership follows. [Cites].
Similarly, the Indonesian Civil Code provides that ‘whoever is in control of
movable goods ... shall be deemed to be the owner of such goods,’ [Cite], and
the phrase ‘movable goods’ includes cash held in bank accounts, [Cite].”
“Pertamina possesses the disputed
funds. Under both New York and Indonesian law, we therefore proceed from the
presumption that Pertamina owns the disputed funds. It is clear, however, that
this presumption may be rebutted by evidence that the Republic of Indonesia
actually controlled the disputed funds, or that Pertamina merely held the funds
for the Republic of Indonesia, in the manner of a trustee. [Cites] Under New
York law, then, the property rights are determined by the underlying
relationship between Pertamina and the Republic of Indonesia.” [86]
Assuming arguendo that the two
systems of law might conflict, the Court determines that, in any event,
Indonesia has a greater interest in having its law applied than does New York.
“In the case at bar, Indonesian law sets forth a set of rules specifically
resolving the ownership and disposition of the particular funds in dispute.
[Cites] More generally, Indonesian laws also reflect a significant national
interest in the eventual fate of funds from LNG exploitation...”
“And, unlike New York’s
interests, Indonesia’s interests implicate the particular circumstances at
issue: the use of an Indonesian governmental instrumentality to generate funds
in order to maintain satisfactory foreign exchange reserves.” [87]
KBC argues (1) that Pertamina
owns the funds even as a matter of Indonesian law and (2) that KBC is entitled
to attach the funds regardless of their legal ownership because it had relied
upon Pertamina’s ownership of those funds. The Court rejects both arguments.
The Court of Appeals concludes that, under Indonesian law, all of the disputed
funds except for the Retention belong to the Republic of Indonesia.
The Court then spurns KBC’s
reliance argument. “KBC has not elicited evidence from which a court could
conclude that KBC actually relied upon any representation that Pertamina made
about KBC’s ability to recover from the disputed funds in the event of default.
... The geothermal energy contracts contain no reference to Pertamina’s
obligations to make funds available in the event of default, nor do they make
any mention of LNG revenues.”
“Neither Pertamina’s separate
legal status nor its previous title to the LNG supports the notion that
Pertamina represented that it owned the disputed funds, or that the funds were
available to KBC to satisfy a default. None of Pertamina’s representations and
actions, as reflected in the record, support the inference that Pertamina had
an ownership interest in the disputed funds. To the contrary, Pertamina seems
to have been entirely forthright about its lack of ownership rights. ...”
In the Court’s view, any reliance
by KBC on these facts would have bordered on gullibility. “Other sophisticated
commercial counter-parties [have] expressly sought contractual mechanisms to
guarantee recovery without reliance on the accessibility of Pertamina’s assets.
... We would think that KBC, no less than others, could have arranged similar
protections.”
“Having failed to bargain for
such protection before the fact and having failed to identify any actual
reliance, KBC now asks us in effect to rearrange nunc pro tunc the relations of
Pertamina and the Republic of Indonesia in KBC’s favor. In these circumstances,
we see no reason why a sophisticated commercial entity should not be required
to abide by the consequences of its bargain.” [90]
With respect to proving foreign
law under F. R. Civ. P. 44.1, the Court notes that Indonesia’s interpretation
of its Government Regulation 41 should bear more weight than KBC’s
interpretation. “We also agree with other Courts of Appeals that have suggested
that a foreign sovereign’s views regarding its own laws merit -- although they
do not command -- some degree of deference. [Cites] ...”
“Where a choice between two
interpretations of ambiguous foreign law rests finely balanced, the support of
a foreign sovereign for one interpretation furnishes legitimate assistance in
the resolution of interpretive dilemmas. ... We thus conclude that Pertamina
does not own any portion of the disputed funds, with the exception of the
Retention.” [92]
The Court ultimately rejects
Pertamina’s argument that it does not own the Retention. “While Pertamina may
be under an obligation to transfer the Retention to the Ministry’s account in
New York, this fact does not alter the extant allocation of ownership
interests. Pertamina has not identified any Indonesian statute or regulation
that grants the Republic of Indonesia ownership rights in the Retention ... As
property within Pertamina’s control, which only Pertamina controls, the
Retention is validly subject to attachment. ...Because this is not an appeal
from a final judgment, proceedings in the district court will presumably move
on to other matters.” [92-93]
Citation: Karaha Bodas
Company, L.L.C., v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 313
F.3d 70 (2d Cir. 2002), as amended January 2, 2003.
**** Mr. Richard Ehrlich is a specialist in Corporate, Estate and Personal Financial Planning in Florida. In the course of his career, he has prepared hundreds of estate plans and helped hundreds of small businesses navigate the various issues involving insurance, retirement and employee retention. He has helped numerous families deal with the difficulties of taking care of elderly relatives and assisted with all of their long-term planning and long-term care needs. Finally, he has helped investors with their losses in unsuitable investments. LinkedIn Profile: https://www.linkedin.com/in/richard-ehrlich-777b513/; Attorney Profile: http://www.eldercounsel.com/profile/richard-ehrlich-ehrlich-law-center-pa/; Attorney Profile: https://solomonlawguild.com/richard-ehrlich%2C-esq; Attorney News: https://attorneygazette.com/richard-ehrlich%2C-esq#c35a1098-f039-43ab-b0dc-06cff6dabf61
