This was published in THE LAWYERS REVIEW in 2005.
“ACT OF STATE” DOCTRINE
AND THE MARCOSES’ WEALTH
By:
MANUEL J. LASERNA JR.
In the very recent case of PHILIPPINE NATIONAL BANK v. U.S. DISTRICT COURT OF HAWAII, docketed as No. 04-71843 (D.C. No. MDL-00840-MLR) decided on February 4, 2005, the U.S. 9th Circuit Court of Appeals, issued a writ of mandamus, upon a petition commenced by the Bank, to prevent the U.S. District Court of Hawaii from pursuing contempt and discovery proceedings against the Bank.
The District Court had previously cited the Bank for contempt of court for transferring funds to the Republic of the Philippines pursuant to a prior judgment of the Philippine Supreme Court.
The U.S. 9th Circuit Court of Appeals held that the orders of the U.S. District Court of Hawaii had violated the “act of state” doctrine.
This mandamus petition represented one more chapter in a long-running dispute over the right to the assets of the estate of former Philippine President Ferdinand E. Marcos.
On one side was a class of plaintiffs who obtained a large judgment in the federal district court in Hawaii against the Marcos estate for human rights violations by the Marcos regime. The judgment included an injunction restraining the estate and its agents or aiders and abettors from transferring any of the estate’s assets.
On the other side was the Republic of the Philippines, which independently has sought forfeiture of the Marcos estate’s assets on the ground that they were stolen by Marcos from the Philippine government and its people.
An earlier related case is worth noting, i.e., Credit Suisse v. U.S. Dist. Ct. for the Cent. Dist. Of Cal., 130 F.3d 1342, 1347-48 (9th Cir. 1997). The Swiss assets of the Marcos estate had been frozen by the Swiss government at the request of the Republic of the Philippines, which was seeking to recover them. The class plaintiffs obtained an injunction from the U.S. District Court of Hawaii requiring the Swiss banks to hold the assets for the benefit of the class plaintiffs. In that case, the same U.S. 9th Circuit Court of Appeals issued a writ of mandamus and held that the injunction violated the act of state doctrine, which precludes American courts from declaring “invalid” a foreign sovereign’s official act, that is, the freeze order of the Swiss government.
Thereafter, the Swiss government released the funds frozen in Switzerland for transfer to the Philippine National Bank in escrow pending a determination of proper disposal by a competent court in the Philippines. The Philippine National Bank deposited the funds in Singapore. The Philippine Supreme Court subsequently held that the assets were forfeited to the Republic of the Philippines.
The U.S. District Court of Hawaii then issued the orders that precipitated the present petition for mandamus. The District Court ruled that the Philippine Supreme Court had violated “due process by any standard” and that its judgment was entitled to no deference. It ordered reinstatement of an earlier settlement agreement in the District Court litigation that had been rejected when the Philippine courts refused to approve it and the Republic of the Philippines failed to give its consent to the agreement.
The District Court further ordered “that any such transfer, without first appearing and showing cause in this court as to how such transfer might occur without violating the Court’s injunction shall be considered contempt of the Court’s earlier order. Any and all persons and banking institutions participating in such transfers are hereby notified that such transfer would be considered in contempt of this Court’s injunction”.
The District Court then issued an “Order to Show Cause” against the Philippine National Bank, which was not a party to the litigation in the district court, requiring the Bank to show why it should not be held in contempt for violating the court’s injunction against transfer of assets by the estate.
The Philippine National Bank then filed the present petition for mandamus in the U.S. 9th Circuit Court of Appeals, seeking to restrain the District Court from enforcing its “Order to Show Cause” and from pursuing discovery against the Bank officer.
The Bank asserted that it had transferred nearly all of the funds in issue to the Republic of the Philippines pursuant to the judgment of the Philippine Supreme Court. It contended that the entire proceeding against it for its transfer of funds to the Republic of the Philippines violated the “act of state” doctrine.
DECISION
A. ACT OF STATE DOCTRINE
Every sovereign state is bound to respect the independence of every other sovereign state, and the courts of one country will not sit in judgment on the acts of the government of another, done within its own territory. Redress of grievances by reason of such acts must be obtained through the means open to be availed of by sovereign powers as between themselves. (Underhill v. Hernandez, 168 U.S. 250, 252 [1897]).
The act of state doctrine originally was deemed to arise from international law, but more recently has been viewed as a function of our constitutional separation of powers. (W.S. Kirkpatrick & Co. v. Envtl. Tectonics Corp., Int’l, 493 U.S. 400, 404 [1990]).
So viewed, the doctrine reflects “ ‘the strong sense of the Judicial Branch that its engagement in the task of passing on the validity of foreign acts of state may hinder’ the conduct of foreign affairs.” (Id., quoting Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 423 [1964]).
The District Court’s orders in issue violated this principal. In order to obtain assets from the Philippine National Bank, or to hold the Bank in contempt for the transfer of those assets to the Republic of the Philippines, the District court necessarily (and expressly) held invalid the forfeiture judgment of the Philippine Supreme Court.
The U.S. 9th Circuit Court of Appeals concluded that this action of the District Court violated the act of state doctrine.
The class plaintiffs in the district court argued that the act of state doctrine is directed at the executive and legislative branches of foreign governments and did not apply to judicial decisions.
Although the act of state doctrine is normally inapplicable to court judgments arising from private litigation, there is no inflexible rule preventing a judgment sought by a foreign government from qualifying as an act of state. (Liu v. Republic of China, 892 F.2d 1419, 1433-34 & n.2 (9th Cir. 1989), citing RESTATEMENT [SECOND] OF FOREIGN RELATIONS OF THE UNITED STATES § 41 cmt. d [1965])
“A judgment of a court may be an act of state.” (Id.).
There was no question that the judgment of the Philippine Supreme Court gave effect to the public interest of the Philippine Government. The forfeiture action was not a mere dispute between private parties; it was an action initiated by the Philippine Government pursuant to its “statutory mandate to recover property allegedly stolen from the treasury.” (In re Estate of Ferdinand Marcos Human Rights Litig., 94 F.3d at 546).
The U.S. 9th Circuit Court of Appeals had earlier characterized the collection efforts of the Republic of the Philippines to be governmental. (Id.).
The subject matter of the forfeiture action thus qualified for treatment as an act of state.
The class plaintiffs next argued that the act of state doctrine was “inapplicable because the judgment of the Philippine Supreme Court did not concern matters within its own territory”.
The U.S. 9th Circuit Court of Appeals held that, “generally, the act of state doctrine applies to official acts of foreign sovereigns “performed within their own territory.” (Credit Suisse, 130 F.3d at 1346). The act of the Philippine Supreme Court was not wholly external, however. Its judgment, which the district court declared invalid, was issued in the Philippines and much of its force upon the Philippine National Bank arose from the fact that the Bank is a Philippine corporation. (Callejo v. Bancomer, S.A, 764 F.2d 1101, 1121-25 (5th Cir. 1985, discussing differing theories of situs of intangibles).
The Appeals Court further held that “even if we assume for purposes of decision that the assets were located in Singapore, we conclude that this fact does not preclude treatment of the Philippine judgment as an act of state in the extraordinary circumstances of this case.”
(NOTE: [1] Certain portions of the funds held in another bank in Singapore were not transferred because the bank refused to release the funds and instead filed an interpleader action in Singapore. [2] The class plaintiffs cited Hilao v. Estate of Marcos, 95 F.3d 848, 851 (9th Cir. 1996), for the proposition that the locus of a bank deposit is the branch where the deposit is made. Hilao, however, was applying a California statute that specified the place and manner of levying execution; it did not purport to state a general rule for determining the locus of bank accounts).
The act of state doctrine is “to be applied pragmatically and flexibly, with reference to its underlying considerations.” (Tchacosh Co. v. Rockwell Int’l Corp., 766 F.2d 1333, 1337 (9th Cir. 1985).
Thus, even when an act of a foreign state affects property outside of its territory, “the considerations underlying the act of state doctrine may still be present.” (Callejo, 764 F.2d at 1121 n.29).
Because the Republic of the Philippines’ “interest in the enforcement of its laws does not end at its borders,” the fact that the escrow funds were deposited in Singapore does not preclude the application of the act of state doctrine. (Id.).
The underlying governmental interest of the Republic supports treatment of the judgment as an act of state.
It is important to keep in mind that the Republic of the Philippines did not simply intrude into Singapore in exercising its forfeiture jurisdiction. The presence of the assets in Singapore was a direct result of events that were the subject of the decision in Credit Suisse, supra, where the U.S. 9th Circuit Court of Appeals upheld as an act of state a freeze order by the Swiss government, enacted in anticipation of the request of the Philippine government, to preserve the Philippine government’s claims against the very assets in issue today. (Credit Suisse, 130 F.3d at 1346-47).
Indeed, the Philippine National Bank argued that the District Court’s orders violated the mandate of the U.S. 9th Circuit Court of Appeals in Credit Suisse, supra, “directing the District Court to refrain from taking any further action” with regard to assets of the Marcos estate “held or claimed to be held by the [Swiss] Banks.” (Id. at 1348).
The District Court held that the mandate of the U.S. 9th Circuit Court of Appeals did not apply to the assets “once they left the hands of the Swiss banks”. The Appeals Court sidetracked the issue by holding that there was no necessity to decide the correctness of that ruling “because we conclude that, in these circumstances, the Philippine forfeiture judgment is an act of state”. It noted that “the Swiss government did not repudiate its freeze order, and the Swiss banks did not transfer the funds in the ordinary course of business”.
The Swiss banks delivered the funds into escrow with the approval of the Swiss courts in order to permit the very adjudication of the Philippine courts that the district court considered invalid. To permit the District Court to frustrate the procedure chosen by the Swiss and Philippine Governments to adjudicate the entitlement of the Republic of the Philippines to these assets would largely nullify the effect of the decision of the Appeals Court in Credit Suisse, supra.
In these unusual circumstances, the Appeals Court held that “the choice of a Singapore locus for the escrow of funds (was not) fatal to the treatment of the Philippine Supreme Court’s judgment as an act of state”.
B. MANDAMUS
On the issue of the propriety of a writ of mandamus, the U.s. 9th Circuit Court of Appeals concluded that the District Court’s error qualified for correction by a writ of mandamus. In so ruling, the Appeals Court considered the factors set forth in Bauman v. U.S. Dist. Ct., 557 F.2d 650 (9th Cir. 1977):
(1) The party seeking the writ has no other adequate means, such as a direct appeal, to attain the relief he or she desires.
(2) The petitioner will be damaged or prejudiced in a way not correctable on appeal.
(3) The district court’s order is clearly erroneous as a matter of law.
(4) The district court’s order is an oft-repeated error, or manifests a persistent disregard of the federal rules.
(5) The district court’s order raises new and important problems, or issues of law of first impression.
None of these guidelines is determinative and all five guidelines need not be satisfied at once for a writ to issue. (citing Credit Suisse, 130 F.3d at 1345). Rarely will all the five guidelines point in the same direction or even be relevant to the particular inquiry.
With regard to the first two factors, the Appeals Court concluded that the District Court’s error was not sufficiently correctable on appeal. No appeal would lie unless a contempt order is issued and sanctions have been imposed. (citing Estate of Domingo v. Republic of the Philippines, 808 F.2d 1349, 1350 (9th Cir. 1987). The Bank had made a sufficient showing that subjecting its US-based officers to cross-examination and discovery procedures would place them and the Bank “in danger of violating Philippine bank secrecy laws”.
Requiring the Bank “to choose between being in contempt of court and violating Philippine laws clearly constitutes severe prejudice that could not be remedied on direct appeal.” (citing Credit Suisse, 130 F.3d at 1346).
As for the third Bauman factor, the Appeals Court held that its discussion of the act of state doctrine had made clear that the District Court’s orders were erroneous as a matter of law. In addition, the District Court was attempting to apply its injunction against transfer of assets to the Philippine National Bank as an aider and abettor or agent of the estate of Marcos. But the Bank could hardly have been acting as an aider and abettor or agent of the estate when it transferred assets to the Republic of the Philippines pursuant to the forfeiture judgment of the Philippine Supreme Court, entered over the opposition of the Marcos estate.
In fine, the U.S. 9th Circuit Court of Appeals granted the Philippine National Bank’s petition and vacated the orders of the U.S. District Court of Hawaii, dated February 25, 2004 (to the Philippine National Bank to show cause), and April 8, 2004 (to the Bank to produce its employee, Rogel L. Zenarosa, for a deposition). It further directed the District Court to refrain from any further action against the Philippine National Bank in this action or any other action involving any of the funds that were the subject of the decision of the Philippine Supreme Court dated July 15, 2003. The Appeals Court retained jurisdiction over the District Court litigation to the extent that it involved any action against the Philippine National Bank.
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The foregoing legal article was originally published in THE LAWYERS REVIEW, February 2005 issue.
The full text of the foregoing decision is available at http://caselaw.lp.findlaw.com/data2/circs/9th/0471843p.pdf. (visited February 5, 2005).