Throwback Thursday: Forty Years of the Bancec Test
February 16, 2023
The Supreme Court’s 1983 decision in First National City Bank v. Banco Para El Comercio Exterior de Cuba was saddled with a cumbersome mouthful of a title, one confusingly similar to a 1972 opinion in another important case, First National City Bank v. Banco Nacional de Cuba. Fortunately, the 1983 decision was quickly dubbed Bancec, an abbreviated reference to the plaintiff, Banco Para El Comercio Exterior de Cuba, a bank established by the government of Cuba in 1960 as a separate corporate entity to serve as a credit institution for foreign trade.
Even with its breezy short title, Bancec lacks the academic cachet of another case involving banks, disputed sugar, and the Cuban revolution – Banco Nacional de Cuba v. Sabbatino. The Sabbatino opinion articulated and justified the act of state doctrine as post-Erie pre-emptive federal common law and has rightfully earned its place as an “old chestnut” in the canon of foreign relations and federal courts cases alike. The Bancec opinion seems far more quotidian, yet the case has broad and growing significance in many areas of transnational litigation, including the ever-important relationship between states and state-owned enterprises, the development of federal common law after the enactment of the Foreign Sovereign Immunities Act (FSIA) in 1976, and constitutional issues related to foreign states.
The Bancec Case
First National City Bank (Citibank) issued a letter of credit to Bancec related to a contract for the delivery of sugar to a buyer in the United States. After it issued the letter, Citibank’s assets in Cuba were nationalized by the Cuban Government. When Citibank refused to honor the letter of credit, Bancec sued in U.S. federal court and then was promptly dissolved by the Cuban government, with its interest in the suit eventually assigned to a different state-owned company. Citibank counterclaimed, asserting a right to “set off” or deduct the value of its assets that were seized by Cuba from the amount it owed Bancec. Doing so would mean, however, that Bancec was in effect being held liable for the debts of the Cuban government itself, even though Bancec was a separate corporate entity with a juridical status under Cuban law distinct from Cuba and from Cuba’s central bank.
Bancec argued that the FSIA prohibited holding it liable for the actions of the Cuban government. The statute does distinguish between states and their separately incorporated agencies and instrumentalities, but it does not supply rules of substantive liability. Having rejected Bancec’s FSIA argument, the Court turned to choice of law. Bancec argued for Cuban law, for New York law, or for international law; Citibank for federal common law. Drawing on U.S. corporate conflict of laws principles, the Court reasoned that because the issues involved the rights of third parties, the law of the state of incorporation (Cuba) need not apply, especially because giving “conclusive effect” to the foreign domestic law “would permit the state to violate with impunity the rights of third parties under international law while effectively insulating itself from liability in foreign courts.” Relying on Sabbatino’s adoption of federal common law and on the legislative history of the FSIA, the Court also rejected New York law. It cited the need for national uniformity on matters “concerning the rule governing the attribution of liability among entities of a foreign state” and accordingly adopted a federal common law rule “informed both by international law principles and by articulated congressional policies.”
The Court concluded that government instrumentalities incorporated as juridical entities distinct from their sovereign should normally be treated as such, but that the presumption of separate treatment can be overcome in cases of extensive control or where separate treatment would result in fraud and injustice. In this case, if Cuba or the Cuban central bank were the plaintiffs, they would be subject to the set-off through Citibank’s counterclaim under the FSIA. Shielding Bancec from the counterclaim would have the unjust effect of benefiting only Cuba and Banco Nacional (not any third parties) and would create undesirable incentives to circumvent foreign sovereign immunity in future situations. The Court therefore permitted the set off.
The Separate Legal Status of State-Owned Enterprises
One reason for Bancec’s continued importance is the amount of business conducted (and assets held) by separately incorporated but state-owned enterprises that wind up being the subject of litigation in the United States. Courts have applied Bancec to many cases over the past four decades and have developed a set of five factors to implement the test: the level of economic control exercised by the government; whether the entity’s profits go to the government; the control that government officials exercise; whether the government is the real beneficiary of the entity’s conduct; and whether separate identities would entitle the foreign state to benefits in United States courts while avoiding its obligations.
As just one example, Crystallex, a Canadian mining company, won a $1.2 billion arbitral award against Venezuela which it sought to enforce against Venezuela’s national oil company, Petróleos de Venezuela (and the shares it holds in U.S. oil companies). The Third Circuit affirmed a district court decision to disregard the separate corporate status of Petróleos, finding that Venezuela exercised extensive control over it and that recognizing their separate legal identities would work a “fraud or injustice.” For a description – and partial criticism – of many other cases applying Bancec, see TLB author Mark Weidemaier’s article Piercing the Sovereign Veil.
Congressional Action on the Bancec test
The exceptions notwithstanding, the general presumption of separate juridical status announced in Bancec continues to limit litigation (and the enforcement of judgments) against foreign sovereign entities and their agencies and instrumentalities. Many plaintiffs have won judgments against foreign states for terrorism-related conduct under exceptions to the FSIA, for example, but executing on those judgments has proven difficult, in part because the entities with assets in the United States are often not the state itself. Congress accordingly abrogated the Bancec test through an amendment to the FSIA (codified at 28 U.S.C § 1610(g)) so that some judgments against state sponsors of terrorism (under 28 U.S.C. § 1605A) can be satisfied against their agencies and instrumentalities, so long as an exception to immunity applies.
Federal Common Law
Litigation involving foreign states and their agencies and instrumentalities is governed in many respects by the FSIA. The statute does not cover every issue that arises in litigation related to foreign governments, however, including the immunity of foreign governmental officials and heads of state, perhaps the immunity of state-owned enterprises from criminal prosecution, and the act of state doctrine. The Supreme Court’s reasoning in Bancec is relevant to issues that arise in these other areas in several ways.
First, the Bancec opinion supports the application of federal common law (not executive branch control) in all of these areas. The opinion reasons, for example, that when it enacted the FSIA, “Congress expressly acknowledged ‘the importance of developing a uniform body of law’ concerning the amenability of a foreign sovereign to suit in United States courts.” That reasoning supported the development of federal common law in Bancec (and future cases), but it applies equally to the issues raised in foreign official immunity and in criminal cases not governed by the FSIA, and even (if less clearly) to act of state doctrine issues. Second, as I argued here, that same language suggests that federal common law in all of these situations is best understood as closely connected to (and justified by) the statutory framework put in place by the FSIA. Third, Bancec suggests that federal common law issues that arise in all these areas should be resolved with reference to the FSIA, reasoning that applies in the pending Supreme Court case Halkbank v. United States.
The Bancec test has swerved out of its lane to cover other unresolved issues in litigation against foreign sovereigns, including whether the actions of a corporation should be attributed to a foreign state for the purposes of making immunity determinations under the FSIA. Lower courts have also turned Bancec into a constitutional test. Following unfortunate dicta by the Supreme Court, courts of appeal have held that foreign states lack due process rights in personal jurisdiction cases. Foreign corporations, by contrast, do have due process rights. Because the reasoning that foreign states are not “persons” entitled to due process is not supported by constitutional history or doctrine, there is no principled way to determine whether a state-owned enterprise is a “person.” So, courts have applied Bancec, even though the test says nothing about “persons” and has nothing to do with the Constitution. This unfortunate application of Bancec can be corrected by holding that foreign states are, like foreign corporations, persons entitled to due process rights.
Forty years on, the sometimes-overlooked Bancec opinion continues to resolve litigation involving billions of dollars, clarify the basis and scope of the federal common law of foreign relations, and be applied to determine issues of immunity under the FSIA. It has even (unfortunately) become constitutional law.