By:
Georges R. Delaume
Washington, D.C.
Banco Central de Reserva del Peru v. The Riggs National Bank of Washington, D.C, 919 F. Supp. 13 (D.D.C. 1994), deals with a novel issue; can a foreign central bank's deposit with an American bank be set off against the central bank's indebtedness, notwithstanding the latter's immunity from attachment and execution under the Foreign Sovereign Immunities Act of 1976 ("FSIA"), 28 U.S.C. § 1611(b)(1). The affirmative answer given to that question in Banco Central ought to provide comfort to the financial community. However, it also raises issues that are not exempt from controversy.
Lenders typically seek to guard their interests against the possible default of the borrower by insisting upon obtaining adequate security for the servicing and ultimate repayment of the loan. This is a consideration which is relevant to all financial operations, regardless of whether they are conducted in a domestic context or take place in an international environment. In the international field, however, lenders are faced with issues which give new dimensions to the problem. Thus, obtaining security over the foreign assets of a borrower, in the form of a pledge of movables or a mortgage or similar lien on immovables may not always afford the lender full satisfaction. In addition to exposing the lender to the possible uncertainties of foreign law and the costs and perils of foreign proceedings, these types of security may in an international setting lose a great deal of effectiveness. In particular, they may fail to protect the lender against currency fluctuations that may adversely affect the quantum of the security or monetary restrictions that may impede transfers of funds.
Under the circumstances, it is understandable that international lenders seek protection in other devices. One of these, much favored because of its simplicity, is to insist that the borrower maintain deposits with the lender which may be set off against the outstanding debt of the borrower.
This was the case in Banco Central. In lending to a number of Peruvian entities wholly owned by the Peruvian government, Riggs insisted upon obtaining: (i) the guarantee of Peru; and (ii) an undertaking by Banco Central to maintain in Washington, D.C., a $2 million deposit until full repayment of the loans.
When the loans became due, Peru requested Riggs to extend the maturity dates and Riggs agreed. However, at some time thereafter, Banco Central instructed Riggs to cancel the deposit. Riggs responded by demanding immediate repayment of the loans by the borrowers and/or Peru as a guarantor. Riggs also executed a set-off by applying the deposit to the obligations of Peru under its guarantee.
Banco Central brought suit requesting recovery of its deposit on the ground that the set-off was improper for a number of reasons. In the first place, it argued that since the monies deposited constituted part of its own assets, they could not be treated as collateral for the debt of other Peruvian borrowers or of Peru itself as a guarantor. There was, thus, no "mutuality" between the deposit, the parties and the debt, which is an essential condition for a bank set-off. The Court disagreed. Referring to the U.S. Supreme Court's decision in First National City Bank v. Banco Para el Comercio Exterior de Cuba, 462 U.S. 611 (1983) ("BANCEC"), the Court acknowledged that the separate juridical personality of Banco Central and the Peruvian borrowers (and Peru as a guarantor) ought to be given "great deference.'' However, also on the basis of BANCEC, the Court recalled that exception may be made to the general rule where it becomes clear that the presumption of separateness does not correspond to reality. This was one example of these situations since it was apparent that, in making the deposit, Banco Central had acted on behalf of Peru. Banco Central could not, therefore, rely on its separate personality to disassociate itself from Peru in order to circumvent the entire purpose of the deposit and guaranty.
Nor could Banco Central find solace in its contention that the deposit violated Peruvian law because under that law its funds could be used only in connection with its activities as a central bank and could not be diverted to other purposes, such as serving as security for loans contracted or guaranteed by other Peruvian public entities. The Court simply ruled that this argument was inadmissible. To hold otherwise would give extraterritorial effect to Peruvian law in regard to a transaction that was clearly intended to have effect in the United States. Since it would be inconsistent with U.S. law not to honor the Riggs set-off, Peruvian law could not shield Banco Central from the consequences of its own actions.
Addressing the last argument based on immunity from attachment and execution under 28 U.S.C. § 1611(b)(1), the Court first noted that the language used in that provision was limitative since it referred only to immunity from attachment and execution and made no reference to set-off (which, one might also add, is nowhere mentioned in the FSIA). Second, the Court emphasized that set-off is fundamentally different from attachment and execution in the sense that these are legal remedies whereas set-off rests in equity.
These are considerations that may significantly enhance the merits of bank deposits as opposed to other types of security arrangements. Set-off provides self-help at a moment's notice, which may be no more than an electronic communication. In contrast, attachment and/or execution require judicial assistance, which may not be forthcoming with all the speed needed to protect the lender's interests.
To be sure, lenders may, as they do routinely, seek protection by means of appropriate waivers of immunity in the loan documents and security arrangements. However, lenders must be aware that, in regard to central banks, the restrictive language of Section 1611 (b)(1) may adversely affect the effectiveness of waivers of immunity from attachment. Indeed, it has been argued that no waiver of attachment would be possible and that waivers must be limited to matters of execution. This is an issue which remains controversial among commentators and cannot be considered as ultimately settled by the single decision on point (Weston Compagnie de Finance et d'Investissement, S.A. v. Republica del Ecuador, 823 F. Supp. 1106 (S.D.N.Y. 1993)).
Pending resolution of that issue, it would be hasty to reconsider the merits of waivers of immunity subscribed by central banks. Nevertheless, nothing may be lost, and lenders may have much to gain, by continuing to adhere to past and current practice regarding central bank's deposits.
