Bancec applied

Introduction

In 1983, the US Supreme Court established guidelines for determining when a judgment against a foreign state is enforceable against its agencies and instrumentalities, or vice versa. Over the past three decades, a series of cases has raised questions about how these guidelines can be applied.

The Bancec guidelines

The Foreign Sovereign Immunities Act (FSIA) provides limited exceptions to a foreign state’s immunity in US courts. One exception allows suit against a foreign state to enforce an arbitral award. The FSIA defines a “foreign state” to encompass a “political subdivision” of a foreign state or “an agency or instrumentality of a foreign state”.

In the seminal 1983 case First National City Bank v Banco Para el Comercio Exterior de Cuba (Bancec), 462 U.S., the Supreme Court (the Court) outlined the principles for determining when a foreign government and its agencies and instrumentalities are sufficiently connected to permit joint enforcement of what otherwise would be distinct legal obligations. In short, the Court found that joint liability can exist when the “agency or instrumentality” is an “alter ego” of a foreign government; or when a principal-agent relationship exists between the foreign government and agency/instrumentality; or when taking a view of them as separate would give rise to fraud or injustice. These can be described as the Bancec guidelines.

To guide the lower courts, the Supreme Court recognized a “presumption” that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated” as separate. The Court further identified the following key features of an instrumentality

• It is created by an enabling statute that prescribes its powers and duties.
• Its board of directors is selected by the foreign state.
• It has the power to hold and sell property.
• It has the ability to sue and be sued.
• It has primary responsibility over its own finances.
• It is run as a distinct economic enterprise.

The Court warned against using a “mechanical formula” for determining whether the presumption of separateness should be overcome. It directed lower courts to consider “piercing the corporate veil”.

Applying the guidelines

Lower courts have had numerous opportunities to apply the Bancec guidelines since 1983. Examples include where a party has secured a judgment against an instrumentality and seeks to recover from the foreign state; where a party has recovered against the state and seeks recovery from an agency or instrumentality; and where a party has prevailed against an agency or instrumentality and seeks to recover from a subsidiary thereof.

Courts have differed on the precise legal framework under which their analysis should fall. Some have applied principalagency law; others have referred more exclusively to corporate alter ego law; and others have considered both. At least one court has acknowledged the potential for “piercing” on the basis of apparent authority.

Typically, cases have presented the following questions for the courts to address:

• Does the government treat the entity’s assets as its own?
• Are the entity’s employees civil servants?
• Does the government appoint or have the right to remove board members?
• Does the government supervise the entity’s day-to-day operations?
• Can the government circumscribe the entity’s activities?
• Does the government deal at arm’s length with the entity?
• Is the government the entity’s only source of business?
• Did the entity undertake the activity that provides the basis for the lawsuit on behalf of the government or at its insistence?

Lower courts have had to consider these questions with the understanding that the “Presumption of independent status is not to be lightly overcome” (Hercaire Int’l, Inc. v Argentina, 821 F.2d 559 (11th Cir. 1987)). Most cases have centered on the following issues:

Ownership

An entity wholly owned by a foreign state has not, in itself, been sufficient to overcome the presumption of separateness. The same goes for when a foreign state has been responsible for appointing the board of directors or officers of the entity. As one court concluded, if these were sufficient, the ‘presumption of separateness… would be an illusion’ (Transamerica Leasing, Inc. v La Republica De Venezuela & Fondo de Inversiones De Venezuela, 200 F.3d 843 (D.C. Cir. 2000).

Level of control

Courts have distinguished between a foreign state’s day-today involvement in the operations of an instrumentality, and the more general control the foreign state has over that entity. In short, courts have looked to whether the level of control exercized over the instrumentality is of the kind typically exerted by a majority shareholder of a private company. Thus, the fact that an instrumentality is required to carry out certain government policies does not automatically render it an alter ego of the foreign state (Seijas v Republic of Argentina & Banco De La Nacion Argentina, 2011 U.S. Dist. LEXIS 31946 (S.D.N.Y. 2011); NML Capital, Ltd. v Republic of Argentina, 2011 U.S. Dist. LEXIS 14795 (S.D.N.Y. 2011)).

Appointment of government officials

When directors or officers appointed by the foreign state are also government officials, this does not automatically confer alter ego status on the instrumentality. Even if the decision by the foreign state to appoint a member of management is “political”, this has been found insufficient to prove that the foreign state has the requisite level of day-to-day control over the instrumentality (Gen. Star Nat’l Insu. Co. v Asigurarilor de Stat, Carom, S.A., 713 F. Supp. 2d 267 (S.D.N.Y. 2010); BCI Aircraft Leasing, Inc. v Republic of Ghana, 2006 WL 2989291 (N.D. Ill. 2006); (First Inv. Corp. v Fujian Mawei Shipbuilding, Ltd., 858 F. Supp. 2d 658 (E.D. La. 2012)). However, some courts have found extensive intermingling of officers and directors to be highly probative of alter ego status (U.S. Fid. & Guar. Co. v Braspetro Oil Servs. Co., 1999 WL 307666, at *9 (S.D.N.Y. 1999) aff’d, 199 F.3d 94 (2d Cir. 1999)).

Type of involvement

A foreign state can inject capital into an entity, cover its debts, and engage in the full-scale financial rescue of that entity, without courts viewing the entity as an alter ego. This is because these actions are consistent with the actions of a majority shareholder of a private company (Transamerica Leasing, Inc.; BCI Aircraft Leasing, Inc.; Gen. Star Nat’l Ins. Co.). However, while the day-to-day control typical of a controlling shareholder has been found insufficient to support alter ego status, courts have rarely found alter ego status without it. For example, in Braspetro Oil Servs., in affirming the lower court’s conclusion that one instrumentality of the state of Brazil was an alter ego of another, the appellate court placed heavy reliance on the fact that the “parent” instrumentality “controlled the day-to-day operations” of the subsidiary.

In McKesson Corp. v Islamic Republic of Iran, 52 F.3d 346 (D.C. Cir. 1995), the appellate court concluded that Iran was liable for the actions of its instrumentality (a state-owned dairy) because the Iranian government controlled the dairy’s ‘routine business decisions’. However, the government also designed and guided the dairy’s corporate policy.

An appellate court allowed the enforcement of an arbitral award against Yemen and one of its instrumentalities, noting that the instrumentality had failed to adduce evidence of its incorporation, existence of board members, whether its employees were public servants, and whether it had control of its own finances (S&R Davis Int’l, Inc. v Republic of Yemen, 218 F.3d 1292 (11th Cir. 2000)). The instrumentality also had directly ordered the action giving rise to the arbitral award, thus ‘[becoming] more of a managing partner over’ the entity.

Contract details and foreign court decisions

In Servaas Inc. v Republic of Iraq, 686 F. Supp. 2d 346 (S.D.N.Y. 2010), a lower court enforced a judgment against Iraq that had been secured against one of its instrumentalities because the contract at issue had been approved by the government; certain agreements defined the instrumentality as within the State of Iraq; and the agreement was signed in the name of Iraq by individuals from the instrumentality. Similarly, in allowing enforcement of a judgment entered against the Democratic Republic of Congo against a state-owned oil company, a lower court relied in part on various foreign court decisions that had concluded that the oil company was an alter ego of the state (Kensington Int’l Ltd. v Republic of Congo, 2007 U.S. Dist. LEXIS 25282 (S.D.N.Y. 2007).

Fraud and injustice

Although a finding of alter ego status is an important factor determining joint liability, it can be bypassed altogether if a court feels that fraud or injustice would result by failing to find joint liability. In one instance, a court allowed enforcement of an arbitral award because the foreign state, as majority owner of the instrumentality, had engaged in “intentionally bleeding” the instrumentality in order to thwart recovery (Bridas S.A.P.I.C. v Government of Turkmenistan, 447 F.3d 411 (5th Cir. 2006)). The court rested its conclusion on the grounds that this type of conduct was “a classic ground for piercing the corporate veil”.