THE LEGAL ADVISER DEPARTMENT OF STATE WASHINGTON
November 17, 1970
Honorable E. Robert Seaver
Clerk of the Court
United States Supreme Court
Dear Mr. Seaver:
The case of First National City Bank v. Banco Nacional de Cuba is before the Supreme Court on petition for a writ of certiorari, No. 846 filed October 13, 1970. The case involves a claim by Banco Nacional for excess collateral it had pledged with City Bank to secure a loan and a counterclaim by City Bank, up to the amount claimed by Banco Nacional, based upon Cuba's expropriation, without compensation, of property of City Bank in Cuba in 1960. The Court of Appeals for the Second Circuit held that the exception to the Act of State doctrine created by 22 U.S.C. § 2370(e) (2)2 did not apply to City Bank's claim against Cuba and that the Act of State doctrine, as expressed by the Supreme Court in Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 [84 S.Ct. 923, 11 L.Ed.2d 804] (1964), barred adjudication of City Bank's counterclaim.
The Department of State believes this second holding involves matters of importance to the foreign policy interests of the United States and requests that our views be conveyed to the Supreme Court. The Executive's role in suggesting that the act of state doctrine should not be applied with respect to a certain case or class of cases has been recognized both by the Department of State and in court decisions. This role, the so-called Bernstein exception to the act of state doctrine as applied by United States courts, was first clearly established in Bernstein v. N.V. Nederlandsche Amerikaansche, Etc., 210 F.2d 375 (2nd Cir. 1954), where the court reversed its earlier holding, 173 F.2d 71 (2nd Cir. 1949), that the act of state doctrine precluded the court's adjudication of the validity of certain acts of the (Nazi) German Government. The basis for this reversal was a statement by Jack B. Tate, Acting Legal Adviser, Department of State, indicating that "The policy of the Executive, with respect to claims asserted in the United States for restitution of such property (or compensation in lieu thereof) lost through force, coercion or duress as a result of Nazi persecution in Germany, is to relieve American courts from any restraint upon the exercise of their jurisdiction to pass upon the validity of the acts of Nazi officials." 210 F.2d at 376. Thus the Executive had indicated that the act of state doctrine need not be applied in a certain class of cases; the applicability of the statement was not limited to the Bernstein case.
In Banco Nacional de Cuba v. Sabbatino, supra, the Supreme Court held that the act of state doctrine precluded the examination of the validity of the act of a foreign sovereign within its own territory, even where that act was allegedly a violation of international law. 376 U.S. at 436-37 [84 S.Ct. 923]. The ruling was based on the Court's recognition of the Executive's prerogatives in the area of foreign affairs; it found the act of state doctrine "arising out of the basic relationships between branches of government in a separation of powers." Id. at 423. However, the Court specifically avoided ruling on the validity of the Bernstein exception. Id. at 436. While the Department of State in the past has generally supported the applicability of the act of state doctrine, it has never argued or implied that there should be no exceptions to the doctrine. In its Sabbatino brief, for example, it did not argue for or against the Bernstein principle; rather it assumed that judicial consideration of an act of state would be permissible when the Executive so indicated, and argued simply that the exchange of letters relied on by the lower courts in Sabbatino constituted "no such expression e." Brief of the United States, page 11.
Recent events, in our view, make appropriate a determination by the Department of State that the act of state doctrine need not be applied when it is raised to bar adjudication of a counterclaim or setoff when (a) the foreign state's claim arises from a relationship between the parties existing when the act of state occurred; (b) the amount of the relief to be granted is limited to the amount of the foreign state's claim; and (c) the foreign policy interests of the United States do not require application of the doctrine.
The 1960's have seen a great increase in expropriations by foreign governments of property belonging to United States citizens. Many corporations whose properties are expropriated, financial institutions for example, are vulnerable to suits in our courts by foreign governments as plaintiff, for the purpose of recovering deposits or sums owed them in the United States without taking into account the institutions' counterclaims for their assets expropriated in the foreign country. The basic considerations of fairness and equity suggesting that the act of state doctrine not be applied in this class of cases, unless the foreign policy interests of the United States so require in a particular case, were reflected in National City Bank [of New York] v. Republic of China, 348 U. S. 356 [75 S. Ct. 423, 99 L.Ed. 389] (1956), in which the Supreme Court held that the protection of sovereign immunity is waived when a foreign sovereign enters a U.S. court as plaintiff. While the Court did not deal with the act of state doctrine, the basic premise of that case — that a sovereign entering court as plaintiff opens itself to counterclaims, up to the amount of the original claim, which could be brought against it by that defendant were the sovereign an ordinary plaintiff — is applicable by analogy to the situation presented in the present case.
In this case, the Cuban government's claim arose from a banking relationship with the defendant existing at the time the act of state — expropriation of defendant's Cuban property — occurred, and defendant's counterclaim is limited to the amount of the Cuban government's claim. We find, moreover, that the foreign policy interests of the United States do not require the application of the act of state doctrine to bar adjudication of the validity of a defendant's counterclaim or set-off against the Government of Cuba in these circumstances. The Department of State believes that the act of state doctrine should not be applied to bar consideration of a defendant's counterclaim or set-off against the Government of Cuba in this or like cases.
Sincerely yours,
JOHN R. STEVENSON.
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