Pravin Banker Associates, Ltd. v. Banco Popular Del Peru

Citations: 9 F. Supp. 2d 300; 1998 U.S. Dist. LEXIS 8913; 1998 WL 320389Docket: 93 CIV. 0094 (RWS)

Court: District Court, S.D. New York; June 15, 1998; Federal District Court

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Pravin Banker Associates, Ltd. filed a motion for execution against the obligations of several financial institutions (Merrill Lynch, J.P. Morgan Securities, CS First Boston, Salomon Brothers, and Smith Barney) to satisfy a judgment amounting to $2,133,061.11, plus post-judgment interest, awarded against the Republic of Peru and Banco Popular del Peru. The motion also sought execution of an undertaking backed by National Union Fire Insurance Company, directing it to pay the judgment amount to Pravin's attorneys. The court, presided by District Judge Sweet, denied the motion. 

Pravin, a Delaware corporation with its principal place of business in New York, initiated the action in January 1993. Prior proceedings included a stay on motions for summary judgment and various orders leading to the eventual granting of Pravin's summary judgment regarding the enforcement of the Defendants' obligations under a financing plan and related guaranty. The court entered judgment in Pravin's favor in September 1995, which the Defendants subsequently contested. A later ruling confirmed a sum certain of $2,083,234.61 owed to Pravin, plus interest. The current motion was filed in February 1998, with oral arguments concluded in March 1998. The court assumed familiarity with the facts outlined in previous opinions.

In January 1996, Corporacion Nacional del Desarrollo (CONADE), a Peruvian state-owned enterprise, announced its intent to sell its 28.6% stake in Telefónica via a global stock offering. Telefónica operated under Peruvian corporate law as an independent private corporation providing domestic and long-distance telephone services. CONADE engaged Underwriters for the U.S. stock offering.

On June 21, 1996, during a hearing on Pravin's motion to attach proceeds from the Telefónica sale and a protective order from the Defendants, the Court mandated Peru to notify Pravin when purchase agreements were signed. Subsequently, on July 1, 1996, Pravin sought to attach any property of Peru held by the Underwriters. A hearing on July 2, 1996, led to two orders from Judge John Koeltl: the Attachment Order, granting Pravin's attachment motion, and the Discharge Order, which allowed Peru to discharge the attachment by filing a $2,300,000 undertaking, thereby enabling the Telefónica transaction to proceed without interference.

On the same day, Merrill Lynch and J.P. Morgan, representing the Underwriters, executed irrevocable letters of credit with two London banks, confirmed by Banco de Credito del Peru. These letters required payment upon the presentation of a Demand Certificate and Demand Letter by CONADE. Pravin argued that the Underwriters held control over the Demand Letter, while Defendants contended that the Depositary, Morgan Guaranty, and Banco Weise Ltd in Lima acted independently of the Underwriters.

On July 1, 1996, CONADE finalized a Purchase Agreement for the sale of Class B Shares to the Underwriters, who were obligated to buy the shares contingent upon satisfying approximately 20 conditions precedent outlined in the agreement.

U.S. Representatives held the authority to terminate an agreement if significant adverse changes occurred in Telefónica's earnings, financial markets, or political/economic conditions in Peru, including a notable devaluation of the nuevo sol. On July 1, 1996, Telefónica and Morgan Guaranty entered into a Deposit Agreement, designating Morgan Guaranty as the Depositary for American Depositary Receipts (ADRs), which represented rights to ten Class B Shares each. The Underwriters purchased these Class B Shares from CONADE, which then had the Depositary issue ADRs to investors. On July 8, 1996, CONADE provisionally delivered the Class B Shares to Banco Weise, followed by a Demand Certificate and Demand Letter to Banco de Credito, which subsequently paid around $896 million under the Letters of Credit. The Class B Shares were then transferred to the Underwriters, who sold ADRs in the U.S.

The legal issue under discussion is whether Pravin can attach CONADE’s property to satisfy a debt owed by Peru, given CONADE is a separate entity under Peruvian law. Pravin argues for treating Peru and CONADE as a single entity, referencing a Supreme Court ruling in First Nat'l City Bank v. Banco Para El Comercio Exterior de Cuba, which established that the corporate form may be disregarded to prevent injustice. In that case, the court ruled on the ability of Citibank to offset a liability owed by the Cuban government against debts owed to Bancec, a government-created entity.

Bancec initiated a lawsuit regarding a letter of credit, prompting Citibank to counterclaim for the right to offset the value of assets it had seized. The Supreme Court emphasized that foreign sovereigns and government corporations should generally enjoy limited liability similar to private corporations, to prevent uncertainty in extending credit to government instrumentalities. However, the Court acknowledged that this presumption could be overcome in cases of significant control by the sovereign or if applying the separate legal entity principle would result in fraud or injustice. The Court determined that allowing Citibank’s setoff was equitable, as the entities liable for the expropriation of Citibank’s assets were the only beneficiaries of Bancec's recovery, which had been transferred to Banco Nacional de Cuba or Cuba itself after Bancec's dissolution. Thus, denying Citibank's counterclaim would unjustly benefit Cuba, which would otherwise evade accountability for the asset seizure.

The Second Circuit's ruling in Banco Nacional de Cuba v. Chemical Bank New York Trust Co. reinforced the principle that the independence of government instrumentalities should not be breached lightly. In that case, Chemical's counterclaim against Banco Nacional was rejected due to distinct facts, including that the assets in question were not originally Chemical's, that the claim was based on a loan violation rather than international law, and that Banco Nacional had no role in the expropriation. The court noted that there was no evidence of Banco Nacional being an alter ego of Cuba, distinguishing it from the circumstances in First National where the injustices warranted a different outcome. The current case similarly lacks evidence of injustices compelling a breach of limited liability principles.

CONADE's property is not subject to Peru's liability from its failure to pay on bonds, as there are no allegations suggesting that Peru transferred Telefónica stock to CONADE to evade legal obligations. Peru has not initiated any legal action to assert its rights while avoiding consequences. Pravin argues that equity requires CONADE's property to be treated as Peru's because CONADE acted merely as a "conduit" for Peru's privatization efforts, supported by four points: Peru made the decision to sell the Telefónica shares; the sale proceeds were deposited quickly into the Peruvian treasury; CONADE's role was passive; and CONADE was set to be liquidated with assets transferred to Peru's Ministry of Commerce. These arguments present two theories: one asserting that Peru benefited directly from CONADE's property, and the other claiming that Peru controlled the transaction, making CONADE an alter ego of Peru.

The Second Circuit previously rejected a similar benefit argument in Banco Nacional, stating that allowing setoff based solely on government instrumentalities could create a precedent that would hinder foreign entities from collecting debts. Pravin's claim that Peru dominated CONADE lacks case law to support bypassing the corporate form based on Peru's involvement in the stock sale. Cited precedents, such as Chase Manhattan Bank, involved direct schemes to defraud creditors, which is not applicable here, as there is no evidence of Peru establishing CONADE for fraudulent purposes. Furthermore, in United States Barite Corp., the court ruled that a subsidiary is not bound by a parent’s agreements if it is not considered an alter ego, reinforcing that Peru's oversight in privatization is typical for a majority shareholder and insufficient to disregard the corporate structure.

In De Letelier v. Republic of Chile, the court ruled that the assets of a wholly owned national airline of Chile could not be attached to satisfy a judgment against the sovereign, despite the airline's assets being under Chile's control. The court noted that Chile had the authority to dissolve the airline and take over its assets, and that the airline was utilized in a conspiracy related to the judgment. In Minpeco, the court stated that Peru's involvement in significant policy decisions of a wholly owned corporation has limited legal implications, even though a sole shareholder typically has a strong interest in major corporate decisions. 

In Banco Central de Reserva del Peru v. Riggs Nat'l Bank, the court allowed a setoff against a deposit from the Banco Central de Reserva (BCR) due to Peru's unconditional guarantee of loans made to its wholly owned entities, emphasizing that mutuality existed which justified the setoff to prevent fraud or injustice. However, there was no evidence that Pravin negotiated for assets of CONADE to secure Peru's debt. Accepting Pravin's argument would create a rigid rule preventing government instrumentalities from selling property without risk of attachment for sovereign debts, which the court rejected. The court upheld CONADE's separate legal status, stating that its property cannot be attached to satisfy Peru’s debt. Consequently, Pravin's motion was denied, and the Attachment Order was vacated.

In February 1994, as part of Peru's privatization efforts, CONADE sold controlling interests in Entel Perú S.A. and Compaña Peruana de Teléfonos S.A. through a public bid to Telefónica Internacional de España, S.A. By December 1996, the companies were merged into Telefónica. By the end of 1995, Telefónica Internacional owned 35% of Telefónica as Class A-1 Shares, granting majority board appointment rights, while 36.4% of Telefónica's shares were publicly held as Class B Shares on the Lima Stock Exchange, and CONADE held a 28.6% interest in Class B Shares. The Court determined that CONADE is a distinct legal entity, preventing its property from being used to satisfy a judgment against Peru. Consequently, the Court did not need to consider Peru's arguments regarding the absence of attachable property in New York and the issue of whether Peru waived its immunity under the Foreign Sovereign Immunities Act. Additionally, the Court dismissed Bancec's argument against the counterclaim based on a claim transfer to another Cuban agency, ruling the transfer was an abuse of the corporate form intended to gain litigation advantage.