CITIBANK, N.A., PETITIONER V. WELLS FARGO ASIA LIMITED No. 88-1260 In The Supreme Court Of The United States October Term, 1989 On Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Second Circuit Brief For The United States As Amicus Curiae This brief is filed in response to the Court's order inviting the Solicitor General to express the views of the United States. TABLE OF CONTENTS Questions Presented Statement Discussion Conclusion QUESTIONS PRESENTED 1. Whether, contrary to the design of federal banking regulation, a United States bank may be held liable for deposits made with its branch in a foreign country when the foreign government prevents the branch from repaying those deposits. 2. Whether, contrary to federal banking law and policy, the use of standard instructions to route funds through New York bank accounts of foreign depositors constitutes an agreement by United States banks to be liable for deposits in their foreign branches when the deposits are taken or frozen by foreign governments. STATEMENT Petitioner Citibank, N.A. (Citibank) seeks review of a court of appeals' decision holding that Citibank's New York office is obligated to repay two dollar-denominated deposits that respondent Wells Fargo Asia, Ltd. (WFAL) placed with a Citibank branch located in Manila, Republic of the Philippines. The court of appeals concluded that Citibank had agreed to repay the deposits in New York and accordingly rejected Citibank's defense that a Philippine government decree, prohibiting remittance of dollars for repayment of principal on obligations owed to foreign banks, suspended the obligation to repay. See Pet. App. 1a-8a. /1/ 1. Congress has authorized federally chartered national banks, such as Citibank, to establish foreign branches "for the furtherance of the foreign commerce of the United States, and to act if required to do so as the fiscal agents of the United States." See Federal Reserve Act, 12 U.S.C. 601 et seq.; 12 C.F.R. Pt. 211. A national bank wishing to establish a foreign branch must seek permission from the Board of Governors of the Federal Reserve System (Federal Reserve Board) to operate the branch "upon such conditions and under such regulations as may be prescribed by the said board" (12 U.S.C. 601). See 12 C.F.R. 211.3(a). /2/ A foreign branch of a United States bank is subject, of course, to local laws and regulations that may impose additional restrictions on its operations. /3/ Foreign branches attract funds for lending through various means. They generally compete with local banks for business and individual deposits, accepting savings, time, or demand deposits in local currency, allowing withdrawals, and paying interest in accordance with the terms of deposit agreements. Foreign branches may also accept dollar-denominated deposits, which are commonly known as "Eurodollars." /4/ In the case of Eurodollar transactions, the foreign branch may use dollar-denominated deposits to pay off its dollar-denominated obligations, or it may convert dollar-denominated deposits into local currency through the foreign government's central bank, lend the converted funds locally, and then repay the depositor by reconverting local currency into dollars. /5/ A United States bank normally is responsible for the ultimate solvency of its foreign branches, which are "office(s)" of the bank (12 C.F.R. 211.2(h)). See 3 Fed. Res. Bull. 198 (1917); see also Basle Concordat (May 1983), reprinted in 22 Int'l Legal Materials 901 (1983). Nevertheless, the federal government requires that a United States bank "shall conduct the accounts of each foreign branch independently of the accounts of other foreign branches established by it and of its home office" (12 U.S.C. 604). In addition, the federal government has drawn some important distinctions between a United States bank's foreign and domestic deposits. For example, Congress has dictated that federally imposed deposit reserve requirements "shall not apply to deposits payable only outside the States of the United States and the District of Columbia" (12 U.S.C. 461(b)(6)). This exemption, which was codified in 1980, reflects a Federal Reserve Board practice dating back to 1918. See H.R. Rep. No. 263, 96th Cong., 1st Sess. 10 (1979); 125 Cong. Rec. 19,671 (1979); 12 C.F.R. 204.1(c)(5) and 204.128; 35 Fed. Reg. 2768 (1970); 4 Fed. Res. Bull. 1123 (1918). Similarly, for more than 50 years, Congress has exempted from FDIC insurance assessments and coverage deposits "payable only at an office * * * located outside of the States of the United States." 12 U.S.C. 1813(l)(5)(A). And when Congress or the Federal Reserve Board has imposed interest rate, payment, and advertising limitations on deposits, it generally has provided that such limitations do not apply to deposits payable only abroad. See 12 U.S.C. 371a, 371b; 12 C.F.R. 217.1(c)(2); 21 Fed. Res. Bull. 862, 863 (1935). /6/ 2. Citibank currently operates a branch office in Manila, the Republic of the Philippines (Citibank/Manila). Although Citibank/Manila obtains funding from Philippine depositors, it also obtains a portion of the funds needed for lending through Eurodollar deposits. Thus, in June 1983, a Singapore money broker acting on behalf of WFAL, a Singapore bank owned by Wells Fargo Bank, N.A., placed two Eurodollar deposits with Citibank/Manila. The broker telephoned Citibank/Manila and reached an oral agreement as to the amount of the deposits ($1 million each), the interest rate (10%), and the maturity date (December 1983). In accordance with the customs of the Eurodollar market, the parties exchanged brief computer-generated telex messages confirming those terms. The telexes also provided routing instructions for accomplishing transfer of the funds. As in the case of most Eurodollar transactions, the transfer was to be cleared through the parties' correspondent New York City banks. Pet. App. 2a-3a, 15a-16a, 41a-42a, 46a-47a. The deposits proceeded routinely. WFAL, which maintained a correspondent account at the New York City office of Wells Fargo Bank, N.A., instructed that office to transfer $2 million from the WFAL account to Citibank/Manila's correspondent account at the New York City office of Citibank. The correspondent banks then effected the transfer through the use of the New York Clearing House Association's Interbank Payments System (CHIPS), an automated clearing mechanism that, among other things, permits member banks and other participants to credit and debit interbank dollar payments electronically and provides virtually instantaneous transfers of funds. See Pet. App. 16a, 20a, 45a; N.Y. Clearinghouse Ass'n and Inst. of Int'l Bankers Amici Br. at 1-2, 7, 11. /7/ If WFAL's interbank placements had followed the normal pattern for repayment, Citibank/Manila would have collected the necessary dollars -- by completing a "currency swap" with the Philippine Central Bank (see note 7, supra) or from other sources -- and those Eurodollars would have retraced the route through the New York correspondent banks to WFAL. Prior to the time for repayment, however, the Philippine government issued emergency economic regulations that prevented that method of repayment. Specifically, the Philippine Monetary Board issued a Memorandum to Authorized Agent Banks (MAAB 47) requiring that "remittance of foreign exchange for repayment of principal on all foreign obligations due to the foreign banks and/or financial institutions, irrespective of maturity, shall be submitted to the Central Bank * * * for prior approval" (Pet. App. 63a). The Philippine Central Bank interpreted that decree to prohibit Citibank/Manila from repaying WFAL using its Philippine assets, and Citibank/Manila thereafter failed to repay WFAL's deposits at maturity. Id. at 3a-4a, 22a-23a, 30a-31a, 42a, 47a-48a. WFAL commenced this action against Citibank on February 10, 1984, in the United States District Court for the Southern District of New York, to obtain repayment of its Citibank/Manila deposits. /8/ Citibank/Manila obtained permission from the Philippine Central Bank to repay the deposits -- to the extent Citibank/Manila could -- through the use of its non-Philippine dollar-denominated accounts (such as Citibank/Manila's New York account). As a result, Citibank/Manila was able to repay $934,000 of the $2 million owed. In addition, the Philippine Central Bank has permitted Citibank/Manila to reconvert sufficient pesos into dollars to make interest payments on the remaining principal. Wells Fargo seeks return of the unpaid portion of the principal. Pet. App. 4a, 28a-29a, 42a, 48a. WFAL moved for summary judgment, but the district court denied WFAL's motion (Pet. App. 41a-55a), concluding that the case hinged upon the interpretation of the parties' agreement (id. at 50a), which in turn depended upon the meaning of their telex communications "as they were used in the Eurodollar trade" (id. at 54a). The court then held a trial and ruled that Citibank's home office was required to repay the deposits. Id. at 28a-38a. The district court accepted Citibank's "invitation to assume that Philippine law governed this action" (id. at 30a) and, after reviewing the parties' conflicting affidavits concerning the law of that country, "conclude(d) that under Philippine law Citibank's worldwide assets are available for satisfaction of plaintiff's claim" (id. at 35a). /9/ Citibank appealed, arguing that Philippine law, correctly applied, required judgment for Citibank and that the district court's interpretation of Philippine law conflicts with the United States' banking law and policy. The United States also filed an amicus brief urging reversal. The court of appeals heard argument and remanded the case for clarification. Pet. App. 25a-27a. The court of appeals found it "unclear from the district court's (opinion) whether the court found that the parties agreed that the deposits were collectible only at the Manila branch" and whether Philippine law "precludes or negates an agreement between the parties to have the deposits collectible outside of Manila" (id. at 25a-26a). It therefore requested the district court to address four specific questions relevant to that issue. /10/ On remand, the district court provided a brief answer to each of the questions. Pet. App. 12a-24a. The court first addressed whether the parties had reached agreement on the place of repayment of the deposit. The court stated that "it appears to us that repayment and collection describe two distinct concepts" (id. at 14a): Repayment refers to the location where wire transfers effectuating repayment at maturity were to occur. Collection refers to the place or places where plaintiff was entitled to look for satisfaction of its deposits in the event that Citibank should fail to make the required wire transfers at the place of repayment. Ibid. The court then ruled, based on the routing instructions contained in Citibank/Manila's and WFAL's telex confirmations, that the parties had "agree(d) that repayment was to occur in New York" (id. at 16a). It further concluded, however, that the parties had reached no agreement as to where the debt was collectible, reiterating a previous observation that "neither party succeeded in establishing any universal understanding amounting to custom or practice within the banking community which would imply a collection term into the contract" (id. at 17a). /11/ Citibank again appealed, and the United States submitted a letter supporting Citibank's position. The court of appeals nevertheless affirmed the district court's judgment (Pet. App. 1a-8a). The court characterized the dispute as a contract action in which WFAL sought repayment of a debt. The court observed that generally "a creditor may collect or enforce a debt wherever he can obtain jurisdiction over the debtor" (id. at 5a), explaining: "All debts are payable everywhere, unless there be some special limitation or provision in respect to payment; the rule being that debts as such have no locus or situs, but accompany the creditor everywhere, and authorize a demand upon the creditor everywhere." Id. at 5a-6a (quoting Harris v. Balk, 198 U.S. 215, 222-223 (1905), and authorities cited therein (internal quotation marks omitted)). The court further recognized, however, an exception to this general rule: A special limitation has traditionally be recognized under general banking principles. Thus, "'(t)he situs of a bank's debt on a deposit is considered to be at the branch where the deposit is carried. . . .'" Id. at 6a (quoting Vishipco Line v. Chase Manhattan Bank, N.A., 660 F.2d 854, 862 (2d Cir. 1981) (quoting Heininger, Liability of U.S. Banks for Deposits Placed in Their Foreign Branches, 11 Law & Pol. Int'l Bus. 903, 975 (1979)), cert. denied, 459 U.S. 976 (1982)). The court explained that as a consequence of that special banking exception, a debt on a bank deposit "normally authorizes a demand for the money only at the relevant branch" (Pet. App. 6a). "This normal limitation on the situs of a banking debt is, however, subject to variation by agreement of the parties. If the parties agree that repayment of a deposit in a foreign bank or branch may occur at another location, they authorize demand and collection at that other location" (ibid.). The court of appeals stated that "the district court found that the parties had agreed that repayment was to occur in New York" (Pet. App. 7a), and it concluded that this factual determination "plainly is not clearly erroneous" (ibid.), reasoning that the telex communications specifying that the funds shall be transferred through the parties' correspondent New York banks "amply support the district court's finding that the parties agreed that repayment would be made in New York" (ibid.). It noted that the district court had treated repayment and collection as divisible concepts, but it concluded that the distinction was immaterial because "a debt may be collected wherever it is repayable" (id. at 8a). The court accordingly held that WFAL was "entitled to collect the deposits out of Citibank assets in New York" (ibid.). DISCUSSION Citibank asserts that the court of appeals erred in concluding that the parties had agreed that WFAL's deposits were payable in New York. It urges this Court to review the decision and clarify, as a matter of federal law, that Citibank is not liable for repayment of a foreign branch deposit when a foreign sovereign prevents the foreign branch from making repayment. We believe that Citibank is correct in asserting that the court of appeals misconstrued the parties' deposit agreements. Moreover, that mistake -- though seemingly narrow and factbound -- could have serious consequences for the international banking community. We therefore submit that this Court should grant Citibank's petition for a writ of certiorari with respect to that issue (Question 2). The federal bank regulatory agencies are also concerned that the court of appeals' decision creates serious tension with the federal bank regulatory framework. In our view, however, if this Court interprets the parties' deposit agreements in accordance with established banking law principles, there would be no occasion to address how federal law may affect Citibank's repayment obligations (Question 1). 1. Citibank asserts and WFAL does not dispute that the court of appeals correctly identified several well-established "general banking law principles" governing private disputes between banks and their depositors that are relevant to this case. /12/ Specifically, the court recognized that "(t)he situs of a bank's debt on a deposit is considered to be at the branch where the deposit is carried" and that "(t)he consequence of this limitation is that a debt on a deposit normally authorizes a demand for the money only at the relevant branch" (Pet. App. 6a). /13/ The court mistakenly concluded, however, that the parties had elected to depart from the general rule in this case and agreed, instead, that the deposits were payable in New York. That conclusion is inconsistent with the district court's factual findings concerning the scope of the parties' agreements, and is contrary to the actual operation of the Eurodollar market. Moreover, for the reasons explained below (see pp. 15-17, infra), it raises consequences of sufficient importance to justify this Court's review. a. The court of appeals appears to have misunderstood the district court's distinction between "repayment" and "collection" of a debt and the consequently limited nature of the district court's holding. The district court used the term "repayment" to describe "the location where the wire transfers effectuating repayment at maturity were to occur" (Pet. App. 14a (emphasis added)). It used the term "collection" to describe "the place or places where plaintiff was entitled to look for satisfaction of its deposits in the event that Citibank should fail to make the required wire transfers" (ibid.). Applying those definitions, it concluded that "(t)he only agreement relating to collection or repayment was that repayment would occur in New York" (id. at 18a). See p. 7, supra. The district court's somewhat circular definition of the place of repayment refers simply to the place where the wire transfers would occur. Under that definition, the court's finding of "repayment" in New York is correct but unhelpful -- no one disputes that the transfer of funds between correspondent banks would, by necessity, occur in New York. /14/ The court's definition of "collection," by contrast, refers to the location where WFAL could demand payment in the event the wire transfers did not occur. The court concluded that the parties did not reach agreement on that issue. Pet. App. 17a. Thus, the district court found that the parties had agreed only that WFAL's deposits would be returned (i.e., "repaid") by routing the funds through correspondent New York banks; the parties had reached no agreement as to where the deposits were legally payable (i.e., "collectible"). The court of appeals failed to recognize that distinction and, as a result, effectively nullified the district court's findings. It accepted the district court's finding of an agreement on "repayment" (Pet. App. 7a), but it then gave that finding essentially the same legal consequences that the district court had ascribed to an agreement on "collection" (id. at 7a, 8a). The court of appeals' conclusion -- that the parties had agreed the deposit was legally payable in New York -- cannot be reconciled with the district court's finding that the parties' "only agreement" (id. at 18a) related to "the location where the wire transfers effectuating repayment at maturity were to occur" (id. at 14a). /15/ The court of appeals' error has crucial significance. /16/ There is no question that Citibank/Manila was the "branch where the deposit is carried" (Pet. App. 6a). If there was no agreement altering the general legal rule that "a debt on a deposit normally authorizes a demand for the money only at the relevant branch" (ibid.), then general banking law principles would dictate that WFAL's deposits are legally payable only at Citibank/Manila. The question in this case would then be whether Citibank/Manila has committed an actionable breach of the deposit agreements by wrongfully refusing payment at that location. See United States v. First Nat'l City Bank, 379 U.S. 378, 405 n.27 (1965) (Harlan, J., dissenting). /17/ b. The court of appeals' result is not only contrary to the district court's findings, but it is also fundamentally inconsistent with the federal regulatory framework and the actual operation of the Eurodollar market. This case involves two routine Eurodollar deposits. See Pet. App. 42a. Eurodollar deposits have certain distinctive characteristics. Of particular relevance here, a Eurodollar deposit is universally regarded as legally payable only outside the United States. As we have explained, United States bank deposits are generally subject to reserve requirements and deposit insurance assessments. See p. 3, supra. However, Congress and the Federal Reserve Board have exempted from those requirements bank deposits that are "payable only" outside the United States. See 12 U.S.C. 461(b)(6); 12 U.S.C. 1813(l)(5)(A); 12 C.F.R. 204.1(c)(5) and 204.128. Financial institutions that accept deposits qualifying for those prescribed exemptions can realize substantial savings in acquiring funds. See R. Dale, The Regulation of International Banking 12-13 (1986). The foreign branches of United States banks realize those savings (and are thereby able to offer higher interest rates and compete with foreign banks) by accepting Eurodollar deposits that are legally "payable only" at the foreign branch. The federal government's regulatory exemptions, which provide a "forceful stimulus" and "the basic inducement" for U.S. banks to participate in the Eurodollar market (id. at 12, 14, 23), also set forth a necessary condition for that participation: the foreign branch deposit must be "payable only" abroad. /18/ The testimony offered at trial indicates that WFAL's deposits met that condition. WFAL placed its deposits with Citibank/Manila through the standard methods that are routinely employed in Eurodollar transactions. See Pet. App. 45a. /19/ Citibank's and WFAL's respective experts disagreed on a number of matters, but they agreed that the difference between the rate of interest paid on the WFAL deposits (10%) and the lower rate that would be paid on a deposit placed with Citibank's New York office was attributable, at least in part, to the fact that the WFAL deposits were not subject to domestic reserve and insurance requirements. /20/ As we have just explained, this would be true only if -- as both of the commercially sophisticated parties must have understood -- the WFAL deposits were "payable only" outside of the United States. See 12 U.S.C. 461(b)(6); 12 U.S.C. 1813(l)(5)(A). c. The court of appeals' conclusion that Citibank and WFAL had reached agreement that WFAL's deposits were payable in New York is inconsistent with the district court's findings, the actual operation of the Eurodollar market, and the testimony at trial. Moreover, the United States and other parties that have a significant interest in the safe and sound operation of the Eurodollar market agree that the court of appeals has made a serious mistake with potentially far-reaching consequences. The federal bank regulatory agencies administering the statutes that have, in essence, created the Eurodollar market -- including the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency -- are in agreement that WFAL's deposits have their situs at Citibank/Manila. The New York Clearing House Association, which clears approximately $750 billion in interbank payments each day, and the Institute of International Bankers, whose membership includes 230 banks from more than 50 countries, have reached the same conclusion. See N.Y. Clearing House Ass'n and Inst. of Int'l Bankers Amici Br. The Federal Reserve Bank of New York, which administers reserve requirements for New York banks, filed an amicus curiae brief in the court of appeals that supports that view as well. See Pet. 14. In short, the court of appeals' decision is manifestly inconsistent with the settled understandings of Eurodollar market participants. d. Although this Court normally would not reexamine a court of appeals' interpretation of a contractual agreement, such review, in our view, is warranted here. As an initial matter, Congress has determined that disputes "arising out of transactions involving international or foreign banking" are sufficiently important and have a sufficient nexus to federal interests to be "deemed" federal questions for purposes of federal court jurisdiction. See 12 U.S.C. 632. See note 8, supra. This Court may therefore properly exercise its jurisdiction, in an appropriate case, to assure that the courts of appeals have correctly decided such questions. We believe that the practical consequences of the court of appeals' error warrant the Court's intervention in this instance. In holding that the parties reached agreement that the deposits were payable in New York, the court of appeals relied exclusively on the same standard routing instructions, contained in the parties' telex confirmations, that are routinely employed in the Eurodollar market for clearing billions of dollars of deposits through correspondent New York banks every day. See Pet. App. 7a. The court of appeals' decision would effectively repudiate the established market understanding that those standard routing instructions do not affect the situs of Eurodollar deposits. Thus, the decision would have international repercussions and would call into question the situs of hundreds of billions of dollar-denominated deposits -- and their consequent exemption from federal reserve requirements -- that have been or will be placed in accordance with standard market practices. /21/ This uncertainty, which has not yet been fully felt, would impose serious burdens on the Eurodollar market, which plays a central role in international finance. /22/ Eurodollar transaction confirmations are not governed by formal rules or regulations. They have evolved as a product of international banking practice in a world-wide exchange that transfers massive obligations virtually instantaneously, with minimal negotiation and documentation, among thousands of participants. /23/ The Eurodollar market participants had a clear understanding, prior to the court of appeals' ruling, that routing instructions do not alter the situs of the debt. The court of appeals' decision would cast world-wide uncertainty on that settled understanding. We have serious concerns whether the bank regulatory agencies or any individual market participant could effectively resolve, as a prospective matter, the confusion that the court of appeals' decision would produce. But even if that were possible, the court of appeals' interim disruption of settled rules could result in an unjust redistribution of millions of dollars among market participants that reasonably relied on settled practices. /24/ We submit that, given the practical importance of the court of appeals' error, review by this Court is warranted. /25/ 2. Citibank also urges that this Court grant review to articulate a federal rule that, in the absence of an express agreement to the contrary, a United States bank should not be held to guarantee against the risk of foreign sovereign action that prevents its foreign branch from repaying deposits. Pet. 10. The federal banking agencies have long premised their regulations on an understanding that a depositor who opens a foreign branch account assumes the risk that the foreign government may restrict his right to repayment. Citibank is correct that a contrary understanding would create a serious tension with federal reserve and deposit insurance requirements. /26/ We submit, however, that at this juncture the Court need not articulate a federal rule governing these matters. The court of appeals' mistaken conclusion that the parties had agreed that WFAL deposits were payable in New York pretermitted that court's consideration of Citibank's various assignments of district court error. If this Court agrees that the court of appeals erred in finding an agreement, the case should be remanded to allow the court of appeals to complete its normal review functions, which are likely to eliminate any occasion to address the need for a federal rule. a. Citibank argued below that the WFAL deposits are governed by the law of their situs, viz., Philippine law, and that the Philippine government's decree prohibiting "remittance of foreign exchange" (Pet. App. 63a) at the place where the accounts were legally payable suspended the contractual obligation to repay WFAL's dollar-denominated deposits. Citibank asserted that the Eurodollar deposit agreements constituted a contract for payment upon maturity at the Citibank/Manila branch and that if the branch wrongfully refused payment at that location, WFAL might have a cause of action for breach of contract. /27/ Citibank further contended, however, that since the Philippine decree prohibited repayment at the place where the deposits were legally payable, WFAL's demand had not been wrongfully refused and there accordingly was no actionable breach of contract under Philippine law. See Citibank, N.A. C.A. Br. at 17-18, 19-26. /28/ b. The court of appeals did not address these arguments, and it would be obligated to address them on remand. Indeed, we believe that these arguments have substantial force. It is widely recognized that a foreign sovereign has broad authority to affect debtor-creditor relationships involving debts payable within its jurisdiction. /29/ Indeed, WFAL itself concedes that "sovereign action at a branch will sometimes terminate the depositor's right to be paid" (Br. in Opp. 7). Thus, it is fair to say that both Citibank and WFAL voluntarily assumed a risk that the Philippine government might alter the terms for repayment of a debt made payable within its territory. If the court of appeals ultimately concludes that this dispute is controlled by Philippine law and that the Philippine repayment moratorium involved in this case excused Citibank/Manila's failure to repay the deposits, there would be no occasion to address whether "federal banking law and policy require that a U.S. bank not be liable" (Pet. 10). Since there is a significant possibility that the court of appeals could resolve this case in Citibank's favor based on Philippine law, we submit that Citibank's suggestions that federal law may preempt otherwise applicable law or that federal common law should be fashioned to displace that law are not yet squarely presented. Federal preemption and federal common law come into play only if there is a conflict between federal law or policy and otherwise applicable law. See Boyle v. United Technologies Corp., 108 S. Ct. 2510, 2515 (1988). Obviously, if the court of appeals determines on remand that Philippine law exempts Citibank from liability, there would be no conflict with the federal interests that Citibank cites. /30/ We therefore submit that there is no occasion for this Court to address that question in this proceeding. CONCLUSION The petition for a writ of certiorari should be granted with respect to Question 2. Respectfully submitted. KENNETH W. STARR Solicitor General STUART M. GERSON Assistant Attorney General THOMAS W. MERRILL Deputy Solicitor General JEFFREY P. MINEAR Assistant to the Solicitor General ABRAHAM D. SOFAER Legal Adviser Department of State EDITH E. HOLIDAY General Counsel Department of the Treasury J. VIRGIL MATTINGLY General Counsel Board of Governors of the Federal Reserve System MARK I. ROSEN Deputy General Counsel Federal Deposit Insurance Corporation ROBERT B. SERINO Acting Chief Counsel Office of the Comptroller of the Currency NOVEMBER 1989 /1/ Citibank also has filed a petition for a writ of certiorari seeking review of a decision of the United States Court of Appeals for the Sixth Circuit holding that Citibank's New York office is obligated to repay a savings account, denominated in piasters, that a Vietnamese citizen placed with a Citibank branch formerly operated in Saigon, Republic of Vietnam. See Citibank, N.A. v. Trinh, No. 88-1031. The Solicitor General has filed a separate brief setting forth the United States' views in that case. /2/ The Federal Reserve Board also approves the establishment of foreign branches of state-chartered banks that are members of the Federal Reserve System (12 U.S.C. 321). In addition, the Federal Deposit Insurance Act requires state-chartered banks that are not members of the Federal Reserve System to seek approval from the Federal Deposit Insurance Corporation (FDIC) before establishing foreign branches (12 U.S.C. 1828(d)(2)). /3/ The major industrial nations have formulated general guidelines describing the regulatory responsibilities of the home country and the host country. See Basle Concordat (May 1983), reprinted in 22 Int'l Legal Materials 901 (1983). See also Trinh Pet. App. 68a-73a (excerpts). /4/ Although European banks originated the practice of accepting dollar-denominated deposits, the term "Eurodollars" describes dollar-denominated deposits payable anywhere outside of the United States. See notes 18-19, infra. /5/ Foreign branches generally solicit Eurodollar deposits from financial institutions located throughout the world that seek short-term investment of idle dollar-denominated funds. Financial institutions may participate directly in the worldwide "Eurodollar market" or they may employ international money brokers to place their funds. /6/ The Federal Reserve Board informs us that, as of December 31, 1988, 171 federally chartered banks maintained more than 878 foreign branches and that, as of December 31, 1987, the deposits booked at those foreign branches amounted to more than $240 billion. /7/ The correspondent banks typically use CHIPS to transfer funds from a foreign branch's New York account to the foreign branch. For example, once WFAL's funds had been electronically credited to Citibank/Manila's New York account, Citibank/Manila could enter into a "currency swap" agreement with the Philippine Central Bank to exchange the dollars for pesos at a specified rate and to re-exchange pesos for dollars at a specified rate and date in the future. To clear that transaction, Citibank/Manila's correspondent bank would transfer the dollars from Citibank/Manila's New York account through CHIPS to the Philippine Central Bank's correspondent New York account. The Philippine Central Bank would then credit pesos to Citibank/Manila's account with the Philippine Central Bank in Manila. Citibank informs us that such a transaction took place in this case. /8/ WFAL's complaint invoked the court's jurisdiction based on diversity of citizenship (28 U.S.C. 1332) and on a provision of federal banking law providing that "all suits of a civil nature at common law or in equity to which any corporation organized under the laws of the United States shall be a party, arising out of transactions involving international or foreign banking, * * * shall be deemed to arise under the laws of the United States, and the district courts of the United States shall have original jurisdiction of all such suits * * *" (12 U.S.C. 632). See Pet. App. 19a. /9/ The court determined that its reliance on Philippine law "renders irrelevant most of the questions the parties have disputed before us" (Pet. App. 35a). It nevertheless observed that neither party had established a relevant Eurodollar trade "custom or practice" that resolved the matter (id. at 35a-36a). It also "accepted -- for the purposes of this lawsuit -- the proposition that the deposits were payable only in Manila" (id. at 36a), but concluded that its resolution of the dispute rendered that question moot (ibid.). /10/ The court specifically asked: (a) Whether the parties agreed as to where the debt could be repaid, including whether they agreed that the deposits were collectible only in Manila. (b) If there was an agreement, what were its essential terms? (c) Whether Philippine law * * * precludes or negates an agreement between the parties to have the deposits collectible outside of Manila. (d) If there is no controlling Philippine law referred to in (c) above, what law does control? Pet. App. 26a. /11/ In answer to the court of appeals' second and third questions, the district court stated that the parties agreed only that repayment would occur in New York (Pet. App. 18a) and that Philippine law apparently would not preclude or negate an agreement between the parties to have the deposits collectible outside Manila (ibid.). In answer to the fourth question, the court reasoned that, given the need for uniform banking rules, the parties' contacts with New York, and the fact that Eurodollar transactions are customarily cleared in New York, New York law should govern the question of collection (id. at 18a-24a). Applying New York law, the court concluded that "Citibank is liable for the debt of its Manila branch and plaintiff is entitled to look to Citibank's worldwide assets for satisfaction of its deposits" (id. at 24a). /12/ The court's reference to "general banking law principles" describes, of course, established tenets of banking law that are so widely accepted that they have become the "law merchant" in most jurisdictions. In this country, our federal system has generally relied on the collective voices of the States to articulate and harmonize these principles (see, e.g., National Bank v. Commonwealth, 76 U.S. (9 Wall.) 353, 362 (1869)), while foreign countries are most likely to speak with a single voice. As a practical matter, the "general banking law principles" developed in major commercial nations, such as the United States and England, frequently gain universal acceptance. The principles that we describe herein govern private disputes between banks and their depositors and do not necessarily apply to government enforcement actions. See, e.g., United States v. National Bank of Commerce, 472 U.S. 713, 726-733 (1985). /13/ "It has long been accepted that a bank that accepts a deposit at one branch is not liable to return the deposit or to honor a check drawn against it at another branch. To this extent, branches of a bank are treated as 'separate entities' and not simply as 'teller's windows' of the home office." Heininger, supra, 11 Law & Pol. Int'l Bus. at 930-931 (footnote omitted). See, e.g., Vishipco Line v. Chase Manhattan Bank, N.A., 660 F.2d at 862 (citing Heininger); Det Bergenske Dampskibsselskab v. Sabre Shipping Corp., 341 F.2d 50, 53 (2d Cir. 1965); United States v. First Nat'l City Bank, 321 F.2d 14, 19-20 (2d Cir. 1963), aff'd en banc, 325 F.2d 1020 (1964), rev'd on other grounds, 379 U.S. 378 (1965); McCloskey v. Chase Manhattan Bank, 11 N.Y.2d 936, 183 N.E. 2d 227, 228 N.Y.S.2d 825 (1962); Bluebird Undergarment Corp. v. Gomez, 139 Misc. 742, 744, 249 N.Y.S. 319, 321 (City Ct. 1931). England and other common law jurisdictions have long recognized that rule. See, e.g., Joachimson v. Swiss Bank Corp., (1921) 3 K.B. 110, 127 ("promise to repay is to repay at the branch of the bank where the account is kept"); Clare & Co. v. Dresdner Bank, (1915) 2 K.B. 576, 578 ("no obligation on a bank to pay in one country a debt due to a customer on current account in another country"). The civil law countries seem to follow that rule as well. See Dame Ba Tu Thu Van v. Banque National de Paris, Tribunal de grande instance de Paris, 9eme Chambre (Mar. 8 1985), and Dame Thi to Tam et autres v. Banque Francaise Commerciale, Tribunal de grande instance de Paris, 9eme Chambre (Mar. 12 1985), reported in Recueil Dalloz Sirey 500-501 (1985). We discuss at note 17, infra, the consequences of a branch's failure to pay on demand at the location where the payment is due. /14/ As the New York Clearing House Association and the Institute of International Bankers explain in their amici curiae brief, there is no other feasible way to settle such transactions (Br. 7-9). See also Pet. App. 20a ("Eurodollar transactions denominated in U.S. dollars customarily are cleared in New York"); id. at 45a. /15/ The court of appeals stated (Pet. App. 7a) that the district court's factual finding concerning repayment was not "clearly erroneous" (Fed. R. Civ. P. 52(a)), citing the district court's reliance on the parties' telex confirmations setting forth the routing instructions between the correspondent banks. See Pet. App. 16a-17a. However, the district court's exclusive reliance on those telexes simply underscores that it was addressing only the question of where the wire transfers would occur and not where the deposits were legally payable. See Callejo v. Bancomer, S.A., 764 F.2d 1101, 1124-1125 (5th Cir. 1985) (distinguishing between "remittances" and "payments"); Braka v. Bancomer, S.N.C., 762 F.2d 222, 224 (2d Cir. 1985) (accord). /16/ The court itself found the existence of an agreement essential to its holding. It noted that amici (including the United States) had expressed a "'policy interest in the principle that, in the absence of agreement to the contrary, a U.S. bank should not bear the risk that a foreign government will impose restrictions on the deposits of its foreign branches'" (Pet. App. 8a) and specifically stated that "(o)ur affirmance in the present case is based on the district court's finding of just such an agreement" (ibid.). /17/ If the branch wrongfully refuses to repay the deposit on demand, the depositor may have a cause of action against the home office for the branch's breach of the deposit agreement. Heininger, supra, 11 Law & Pol. Int'l Bus. at 926. See, e.g., First Nat'l City Bank, 321 F.2d at 20; see also 379 U.S. at 380-381. As Justice Harlan explained with respect to the Uruguayan account involved in that case: The bank account is a contract for payment on demand at the Montevideo branch. If demand were wrongfully refused, a cause of action for the breach of contract would be created on which (the depositor) could sue in New York. Thus, analytically, it is not the account itself which would become payable in New York, but damages for breach of the contract to pay on demand in Montevideo. 379 U.S. at 405 n.27. Similarly, the question in this case is whether Citibank/Manila has wrongfully refused to repay in light of the terms of the deposit agreements and the repayment restrictions imposed by Philippine law. /18/ Indeed, commentators discussing the Eurodollar market generally define Eurodollars as dollar-denominated deposits that have their situs outside the United States. See, e.g., E. Roussakis, Commercial Banking in an Era of Deregulation 188 (1984) ("Eurodollars are deposits denominated in U.S. dollars and held by banks located outside the United States, including foreign branches of U.S. banks."); P. Oppenheim, International Banking 146 (3d ed. 1978) ("A loan in Eurodollars may be made to any borrower outside the United States. The loan must be made by a banking office also outside the United States."); S. Robinson, Multinational Banking 162 (1972) ("(A) Eurodollar represents a debt denominated in U.S. currency owed by a banking institution located outside the United States as a result of a dollar on deposit in that institution."); M. Friedman, The Euro-Dollar Market: Some First Principles, in The Eurodollar 272, 275 (H. Prochnow ed. 1970) ("(Eurodollars) are deposit liabilities, denominated in dollars, of banks outside the United States. * * * (T)hey are obligations of banking offices located outside the U.S."); Harfield, International Money Management: The Eurodollar, 89 Banking L. J. 579, 585 (1972) ("Let me remind you of the critical definition of the Eurodollar. It is an obligation undertaken by an institution outside of the United States to make payment, outside of the United States, of a United States dollar."). WFAL's expert witness, Professor Gunter Dufey, agreed that "(a) Eurodollar deposit is a time deposit denominated in U.S. dollars in a bank or bank branch located outside the United States" (Tr. 632). /19/ WFAL's counsel stated at the outset of the trial that "these are very standard transactions" (Tr. 6). Citibank's executive vice-president and chief financial officer, Donald Howard, and WFAL's expert witness, Professor Dufey, described the transaction of Eurodollar placements in general terms that mirror the steps followed here. See Tr. 448-455, 474-478. Professor Dufey also acknowledged that "a dollar deposit with a Manila branch of Citibank is a Eurodollar deposit" (Tr. 638-639). /20/ That view was expressed by Donald Howard (Tr. 443-444, 452), Serge Ballenger, a French bank executive (Tr. 863-864), and Ian Giddy, a business professor (Tr. 1032, 1088-1089) who testified on Citibank's behalf concerning international banking practices. The view was also expressed by WFAL's counsel in his opening statement (id. at 63) and by Professor Dufey (Tr. 598, 601, 640, 704-706), who testified on WFAL's behalf. /21/ As WFAL itself explained at the outset of the trial, "since these are standard transactions, (the case) will have considerable precedential value in the business sense, in the business world, among bankers * * * however a judge finds the understanding to be" (Tr. 6). /22/ The full effect of the court of appeals' decision is not yet apparent because the international banking community is awaiting this Court's action on Citibank's petition for a writ of certiorari. /23/ A Citibank witness explained: This is a high-volume business, huge numbers of transactions, huge amounts of moneys moving very quickly each day. They're not long, negotiated contracts. It is telex, confirmation. It is a very efficient, factory operation. There is a practice * * * that surrounds this, that grows up with it. That's, as I say, what I've related today, is the way we understand the market and the way we've always operated. Tr. 1087 (Rodney B. Wagner, vice chairman of the Credit Policy Committee of Morgan Guaranty Company). /24/ Citibank indicates that there are approximately $300 million in outstanding Eurodollar deposits booked at the Citibank/Manila branch. Pet. 6. See Tr. 911-912. /25/ WFAL says little in support of the court of appeals' conclusion that the telex routing instructions rendered the deposits payable in New York. Instead, WFAL urges this Court to deny Citibank's petition for a writ of certiorari based on grounds set forth in the district court's opinions. See, e.g., Br. in Opp. 7. We do not believe that such action would be appropriate in this case. The court of appeals' only basis for affirmance of the district court's decision warrants correction. The court of appeals did not pass on Citibank's other challenges to the district court's decision, which -- as we explain below -- would be subject to resolution on remand. /26/ See, e.g., 12 C.F.R. 204.128(c) ("A customer who makes a deposit that is payable solely at a foreign branch of the depository institution assumes whatever risk may exist that the foreign country in which a branch is located might impose restrictions on withdrawals."); 35 Fed. Reg. 2768 (1970) (accord); 4 Fed. Res. Bull. 1123 (1918) (foreign branches "are necessarily subject in their local operations to the laws of various sovereignties, and it was, therefore, necessary to vest in the Federal Reserve Board some discretion as to the restrictions to be imposed upon the operations of foreign branches in order that the interests of the parent bank may be safeguarded and the creditors in this country might be protected"). /27/ As we explain in note 17, supra, "analytically, it is not the account itself which would become payable in New York, but damages for breach of the contract to pay on demand (at the branch)." United States v. First Nat'l City Bank, 379 U.S. at 405 n.27 (Harlan, J. dissenting). /28/ Citibank also argued that "even if" the district court had correctly interpreted Philippine law in its first opinion, that interpretation should not be given effect because, among other matters, it would conflict with United States' banking law and policy. Citibank, N.A. C.A. Br. at 18, 31-42. When the district court ruled on limited remand that New York law applied, Citibank filed a letter brief disputing that contention, renewing its previous arguments, and asserting that, in any event, the same result would obtain under New York law. See Letter Br. of Citibank, N.A. Following Limited Remand (May 2, 1988). /29/ United States courts recognize that a sovereign generally has jurisdiction to prescribe law with respect to conduct that takes place, and the status of persons or interests in things present, within its territory. See Restatement (Third) of the Foreign Relations Law of the United States Section 403 (1987). Cf. Shaffer v. Heitner, 433 U.S. 186, 218 (1977) (Stevens, J. concurring) ("If I visit another State, or acquire real estate or open a bank account in it, I knowingly assume some risk that the State will exercise its power over my property or my person while there."). Thus, the Second Circuit has held that the act of state doctrine generally requires U.S. courts to refrain from questioning the foreign sovereign's actions with respect to bank deposits that have their situs within the foreign territory. Compare Braka v. Bancomer, S.N.C., 762 F.2d 222 (1985) (holding that the act of state doctrine bars consideration of a claim for repayment of a bank deposit because the situs of the defendant's obligations was in Mexico) with Allied Bank International v. Banco Credito Agricola de Cartago, 757 F.2d 516 (1985) (holding that the act of state doctrine did not preclude creditors from recovering on a debt that had a situs in New York). See also Garcia v. Chase Manhattan Bank, N.A., 735 F.2d 645, 650 n.5 (2d Cir. 1984) ("where a foreign government has both the parties and the res before it and alters their relationship thereto, our courts realize that there is little that they can do to change the legal relationship"); Note, The Act of State Doctrine: Resolving Debt Situs Confusion, 86 Colum. L. Rev. 594, 612, 614-616 (1986) ("foreign sovereign can reasonably expect dominion over a contract that is to be performed within its territory"). /30/ The government's amicus curiae brief in the court of appeals, which suggested that Philippine law may be "inconsistent with U.S. law and policy" (Br. i, 12) and that "our federal system may require application of federal common law rules" (id. at 11 n.7), gave insufficient attention to this consideration.