Document Type

Article

Publication Date

2-4-1991

Abstract

Defendant-appellant Republic of Palau ("Palau") appeals from a judgment in the amount of $45,953,703 entered in the United States District Court for the Southern District of New York (Sweet, J.) in favor of plaintiffs-appellees Morgan Guaranty Trust Company of New York, Morgan Grenfell & Co., Limited, The Bank of Tokyo Limited, The Governor and Company of the Bank of Scotland and Orion Royal Bank Limited ("the Banks") following a non-jury trial. The Banks were the guarantors of certain loans made to Palau, a trust territory of the United States, for the construction of an electric power plant and fuel storage facility. Upon Palau's default, the Banks repaid the loans as required by their undertakings and then commenced this action in the New York State Supreme Court to recoup their losses. Claiming to be a foreign state within the meaning of the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. § 1603(a) (1988), Palau removed the action to the Southern District by invoking the provisions of 28 U.S.C. § 1441(d) (1988), which allows the removal of "[a]ny civil 1238*1238 action brought in a State court against a foreign state as defined in 1603(a)."

A motion by the Banks to remand the action to the state court from which it was removed, on the ground that Palau was not a sovereign state, was denied by the district court in an Opinion providing an extensive analysis of Palau's status. The court concluded that:

Palau has been exercising sovereign powers pursuant to its Constitution adopted in January, 1981, and possesses the attributes of sovereignty which entitle it to the status of "foreign state" pursuant to 28 U.S.C. § 1330, 1441(d). The United States and Palau have commenced a new era of Free Association which effectively terminates the Trusteeship regime, triggering the need to accord Palau the dignity of an equal sovereign and implicating the uniformity and sensitivity goals behind the FSIA. The concept of "de facto" sovereignty, of course, presumes that some further acts are required before complete unfettered sovereignty can be claimed. To ignore Palau's exercise of substantial sovereignty and the effective disintegration of the Trusteeship in favor of formalist indicia of international independence would defeat the concept of de facto sovereignty.

Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 639 F.Supp. 706, 716 (S.D.N.Y.1986).

The district court thereafter denied a motion by the Banks for summary judgment on their loan guarantee claims and dismissed the two counterclaims interposed by Palau. Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 657 F.Supp. 1475 (S.D.N.Y.1987). Later, a motion by Palau to dismiss the action on the basis of a Joint Resolution of Congress purporting to confer sovereign immunity upon Palau for the purposes of the action was rejected. Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 680 F.Supp. 99 (S.D.N.Y.1988). After trial, the district court issued an Opinion that concluded as follows: "Since the Guarantors have established their prima facie case and Palau has failed to establish its affirmative defense[s] of sovereign immunity, misrepresentation, and mistake, the relief sought in the complaint will be granted." Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 693 F.Supp. 1479, 1499 (S.D.N.Y.1988). Upon a motion made after entry of judgment, the court reconsidered and adhered to its Opinion, refused to vacate the judgment, rejected a request for judgment dismissing the complaint and granted a stay of enforcement of the judgment upon the filing of a supersedeas bond "in the amount of all the interest payments due since default." Morgan Guar. Trust, 702 F.Supp. 60, 66 (S.D.N.Y.1988).

We disagree with the district court's conclusion that Palau is a foreign state within the meaning of the FSIA. Accordingly, we find that there was no basis for the exercise of removal jurisdiction in this case and that the district court therefore erred in denying the Banks' motion to remand the action to the New York Supreme Court.

Comments

924 F.2d 1237 (1991)

MORGAN GUARANTY TRUST COMPANY OF NEW YORK, Morgan Grenfell & Co., Limited, The Bank of Tokyo Limited, The Governor and Company of the Bank of Scotland and Orion Royal Bank, Limited, Plaintiffs-Appellees,

v.

REPUBLIC OF PALAU, Defendant-Appellant.

No. 1427, Docket 89-7096.

United States Court of Appeals, Second Circuit.

Argued August 15, 1990.

Decided February 4, 1991

New York Law School location: File #1031, Box #126

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