Property Systems supplement

Table of contents

Socialist Property and Privatization. 2

Rail Reorganization Act Cases. 11

Banco Nacional de Cuba v. Sabbatino (Supreme Court) 17

Banco Nacional de Cuba v. Sabbatino (on remand) 22

American International Group, Inc. v. Islamic Republic of Iran. 24

Property, Markets, and Capitalism in the Third World. 30

Notes. 34


Socialist Property and Privatization

Andrei A. Baev, Civil Law and the Transformation of State Property in Post-Socialist Economies: Alternatives to Privatization, 12 UCLA Pac. Basin L. J. 131 (1993)

*132 I. INTRODUCTION

* * *

   In socialist countries, which began their post-revolutionary socialist reforms with the country-wide nationalization of private property, the term "ownership" has been assigned a special economic characteristic and a specific legal meaning.   In these countries, the ownership of capital assets is legally vested in "the community."   As a practical matter, this means that ownership rests in the hands of those who enjoy political power.   Property law was replaced by a pervasive system of "entitlement," vested in those who were appointed by the government to make decisions affecting resource use.   Unlike legal property rights, entitlements in a command economy are ambiguous in their content, contain numerous restrictions, and are not freely transferable.

  The term "property of the whole people" does not provide straight and clear answers to the question of "whose is it."   Economic, social and legal "depersonification" of property leads to a situation where there are no subjects (collective and individual) who possess the combined integral interest and valuable characteristics of a owner-proprietor.  

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 II. DECENTRALIZATION AND ITS ROLE IN THE TRANSFORMATION OF A PLANNED ECONOMY INTO A MARKET-ORIENTED SYSTEM

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[T]he roots of centralization lie in state ownership of the basic means of production such as state-owned enterprises, factories, small and large stores, real estate, land, material and natural resources.   This leads to state monopolies over certain productive activities through the economic and political dictates of the Ministries and the Party, as well as government control over production, distribution, exchange, and consumption of commodities.

  The control over production was realized through the Gosplan system (State Planning Agency).   Gosplan not only developed the Soviet economic five-year plans, but also set up operative plans for each year, which provided the Ministries and Government Departments with certain quotas ("showings") for each branch of industry and consumer service.   Ministers and Government Departments were established as governing bodies in different branches of industry, agriculture, consumer services, education, public health, news media, and even in such regulation-resistant areas such as culture, theater, sports and entertainment.   The Ministers and Government Departments developed their own quotas and applied them to state-owned enterprises, factories, and collective farmers.

  The Government authority over distribution was exercised through the Gossnab system (State Supply Agency), which established reciprocal commodity deliveries between enterprises.   Gossnab also instituted control over the supply of material and fuel resources, semi-finished products, spare parts, and equipment.   As a rule, nobody could go over the head of Gossnab and independently maintain direct commercial connections between the enterprises.

  The Government also managed an exchange of commodities through the system of state trade (including State wholesale trade centers and State retail trade stores and shops).   Special warehouses of foodstuffs and commodities were organized which distributed goods through thousands of state-owned grocery stores and department stores.   Everything was run according to the state plan.   The vegetable warehouses sometimes allowed a harvest to rot in the depository in order to avoid violating predetermined state quotas for distribution (which were often treated as administrative ordinances).   On the other hand, the stores refused to accept all lower-priced essential commodities that did not accord with their interests in achieving high sales  quotas.   The warehouses sometimes served local administration as places for storing and accumulating goods for special political events such as election campaigns and holidays, and leading astray inspectors for "the well-being of the people."   Commercial business was generally illegal.   There were well-known provisions of the Criminal, Administrative and Civil Codes which prohibited buying and reselling goods for the purpose of profit.   . . .

  Furthermore, the administrative-command system exercised its control even over the consumption of goods by the population.   Because of shortages in certain kinds of goods, a system of "coupon distribution" was practiced. Specifically, Russian municipalities issued coupons for sugar, butter, sausage, meat, soup, sweets, vodka, alcoholic beverages, cigarettes, gasoline, and other commodities.   According to the Civil Code, passed in 1961, Russian citizens could not possess more than one house or apartment.   Civil Code 1961 stated that such a living space could not exceed 60 square meters, with some exceptions made for large families.   Special administrative restrictions were also imposed on any individual who purchased more than one car for personal purposes.   In 1986 a system of control over personal income was introduced to allow government fiscal organs to demand a declaration of income from anyone making a purchase of more than 10,000 rubles ($1,667 in 1986).

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[I]n the former Soviet Union there was only one airline company, "Aeroflot," one savings bank, "Sberbank," one insurance company, "Gosstrach," one telephone company, one gas company, one electric company, and so on for hundreds of other monopolized industries.   The largest and most powerful monopoly was the state itself.   Indeed, the basis for such a monopoly was state ownership.   As a result, identical prices for the same goods can be found throughout the entire country.   The whole country essentially became a large company with its own subsistence economy. Competition in a market sense did not exist.  "Socialist competition" meant nothing more than a contest to achieve established quotas.

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According to the Foundations of Civil Legislation of the Union of Soviet Socialist Republics, the Civil Code Of RSFSR (1961), and the civil codes of other Soviet republics, citizens could have articles for personal consumption as their "personal property."  [FN44]  Generally speaking, these objects included articles of domestic utility and everyday use.   Until recently it was generally illegal in socialist countries to have in one's personal possession and ownership any means of production, such as land, factories, office buildings, industrial facilities, means of commercial transportation, newspapers, retail stores, and all forms of enterprise or company.   

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 IV. THE ECONOMIC AND LEGAL DEFINITION OF PRIVATIZATION IN LIGHT OF THE POST-SOCIALIST METAMORPHOSIS

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 A. DISTINGUISHING FEATURES OF POST-SOCIALIST PRIVATIZATION

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  The proposals for privatization in post-socialist countries have to contend with some specific constraints present in the economies in which this process has to take place:  namely, the existence of highly distorted product markets, where prices do not generally reflect relative scarcities;  the embryonic competitive environment;  the virtual absence of entrepreneurial culture;  the lack of capital markets and broad-based investor publics;  the absence of a developed banking system;  the weak and undeveloped legal institutions such as mortgages, credit, and suretyship;  the absence of a legal concept of bankruptcy;  the shortage of free domestic capital available for investing; the lack of private sector savings to purchase the firms being privatized;  and the nonconvertible national currency, which obstructs the participation of foreign capital and makes it virtually impossible to adequately estimate firms' market values.

  There is no system of capital credit available for individuals to participate in privatization and raising enough money from savings to purchase companies can be very difficult.   In fact, there is a critical shortage of cash in all of the former Soviet Republics.  

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B. DEFINITION OF PRIVATIZATION:  ECONOMIC AND LEGAL APPROACHES

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[P]rivatization can be initially defined, using an economic point of view, as:  a process of socio-economic transformation of the foundation of socialist centralized economies by means of transferring state assets and state enterprises to the private sector and thereby resulting in fundamental changes in ownership relationships in the spheres of production and distribution of material welfare.   The implication of this seems to be that the purpose of privatization lies in the transfer of assets owned by "the people" to individuals in their capacity as citizens as a means of translating the notional and unenforceable collective "rights" into identifiably specific and transferrable claims on assets.

  From a legal point of view, privatization is the single act of transferring (by the means of buying and selling) the legal title of state property, which was in the possession of state enterprises for restricted purposes of producing certain goods under owner-state control, to individual or associated owners.   Therefore, these individual or associated owners are acquiring, through their own initiative and by contract of sale with the State, certain legal *151 absolute  [FN40] rights of possession:  to use and command said property in accordance with their free will, their own interests, and by their own power over the property.

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VI. THE LEGAL CHARACTER OF REAL ESTATE RIGHTS OF STATE ENTERPRISES ON ASSETS ASSIGNED TO THEM

  The technical legal problems of classifying the legal right of state enterprises to state assets apportioned to them have been discussed in literature for many years. [FN51]  Since this article intends to inquire into possible alternatives to privatization, I cannot ignore this "major question of civil law."

 A. THE RIGHT OF "OPERATIVE MANAGEMENT"

  The legal term "the right of operative management" originated among Soviet scholars of civil law and was adopted by the Soviet Legislature.   The right of operative management has been considered an alternative to the legal right of ownership.   During the Soviet era "the right of operative management" was the "principal form of realization of state ownership," or, in other words, the principal means by which state ownership was exercised.

  The "right of operative management" is unique among ownership relationships in both common law and civil law legal systems.   With certain reservations, "the right of operative management" is most closely related to the theory of a "splintered" or "compound-structural" model of ownership (known in the Anglo-Saxon legal system as "fiduciary ownership" or "trust"), despite the fact that the latter has very little in common with the civil law institutions of estate law and ownership in Russia.   These theories belong to different legal systems:  the continental system, derived from Roman civil law, and the Anglo-Saxon common law system.   As a matter of fact, fiduciary ownership or trusts have no direct analogies in Soviet civil law legislation. As is well known, the "fiduciary" model of ownership is trilateral and historically became the traditional ground for dividing the Anglo-Saxon system of law into two branches:  equity (ownership, in this case, was designated as "equitable ownership") and law (accordingly, for the designation of ownership it used the term "legal ownership").

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 According to generally accepted civil theory, the legal term "the right of ownership" includes a well-known triad of ownership powers:  the rights of possession, use, and command of one's belongings.   The economic and legal possibility for an owner to exercise the above-said rights by acting in his own interest is no less important an absolute right of ownership.   The owner's "own interest" became a key element in distinguishing between the absolute right of ownership and the "right of operative management."   The Law of the Russian Federation On Ownership in the  RSFSR (Article 2(2)) stated that "an owner in his own discretion possesses, uses and commands property belonging to him."   In contrast, the holder of the right of operative management exercises its right according to the purposes of its activity, the tasks given by the owner, and the purpose of the assets use.   To put this in practical language, state enterprises could not change their industrial specialization and the specific character of their production without consulting a government ministry, which was virtually impossible;  producers were banned from using their land, real estate, equipment, machines, and other chattels for purposes other than those stated in their charters and local regulations;  state enterprises had to follow government tasks and instructions regarding the use and command of their assets;  state enterprises could not rent or lease their assets without permission from the above-stated ministry; and apparently state enterprises did not have an absolute right to dispose of assets by selling, giving away, or eliminating them.   This was quite an established bureaucratic system for writing off obsolete equipment:  the government could always terminate state enterprises' rights to possess assets by liquidating the enterprises through the abolition, separation, or amalgamation of several different enterprises.   Obviously all of these restrictions are far from our understanding of the owner's "own interest."

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VIII. THE SEARCH FOR ALTERNATIVES AND CURRENT PROBLEMS OF A COMPREHENSIVE PRIVATIZATION PROGRAM

It is becoming clear that privatization cannot be attempted unless other fundamental economic reforms are also being undertaken.   Instead of realizing the initial demonopolization  [FN87] and decentralization of the national economy by taking steps such as eliminating the means of government control, demolishing ministries and agencies, building up a banking system before privatization, [FN88] reforming trade to encourage competition and export, establishing legal incentives for foreign investors, [FN89] liberalizing prices and foreign trade, [FN90] reforming prices and liberalizing the market, proclaiming private ownership of the rights to land, enacting legal reforms to assure proper disclosure, developing bankruptcy, tax and antitrust legislation, [FN91] or enforcing contracts and due process, the Russian President and Parliament, already accustomed to administrative remedies, went ahead and proclaimed yet another government plan--the Program of Privatization. [FN92]  In a certain sense, this program reflects the entire range of opinions about privatization and, accordingly, it includes different approaches to the process of transferring state property to the private sector.

 A. EMPLOYEE OWNERSHIP

  First of all, the purpose of privatization in Russia and other socialist countries is not private ownership, but rather employee ownership.   Employees are the key in this process.   . . .

  The Russian Government created a privatization system that permitted employees of large enterprises to choose one of three options for privatization.   One of these options provides for 25 percent employee ownership of the preferred stock at no charge and the right to buy 10 percent of the common stock on preferential terms.   Additionally, the managers of the enterprise and the administrative officers have the right to buy 5 percent of the common stock, also on favorable terms such as a reduced price (Variant I). A second option allows the employees to buy 51 percent of the ownership (a controlling interest in a corporation) at a price which is 70 percent higher than the nominal value of the said interest (Variant II).   Lastly, a third option offers the employees 20 percent ownership in bankrupt firms, restructured to face value, and an additional 20 percent ownership on preferential terms (Variant III). [FN94]  All three variants provide the employees with significant rights to convert their preferred stock into common stock with the right to vote.   A labor collective also has  the right to establish a special Joint Stock Fund of Employees of The Enterprise (FARP), with a volume of five to ten percent ownership, which has to be reorganized after a public auction.   Stocks of this Fund have to be given away to employees at no charge or at a cut price.

* * *

  First, this model of privatization would sharply limit new public initiative and investment.   Not everybody with money can participate and not every asset can be purchased.   It aggravates the investment climate and binds free capital.   This scheme also imposes various obstacles to foreign participation in Russian privatization. [FN95]

  The second problem is a question of equity and fairness, since this type of transference of assets would benefit only a limited segment of the population (which is already privileged by holding jobs in the largest firms).   . . .

  The third problem concerns the efficiency of self-managed enterprises.  Economic theory suggests that such enterprises will "underinvest and have shorter planning horizons."  [FN97]  Indeed, it would be difficult to attract private investors into acquiring minority stakes in a worker-controlled enterprise since the workers could curtail dividend payments by granting themselves salary increases.   Furthermore, in order to frighten off outside investors from the enterprise and buy it out themselves, the administration of such an enterprise often publicly misrepresents facts regarding the profitability and industrial potential of the enterprise through the mass media.   This is a significant problem since there is no independent auditorial service to verify the advertised information.

  Thus, employee ownership alone can not cure Russia's problems.   Even so, it is still a much better method for solving those problems than the other alternatives.

 B. THE VOUCHER SCHEME

  Another key element of the privatization process so far is that most of the shares currently being auctioned to the public are only sold for privatization vouchers, not cash.   Employees are able to purchase shares for cash, but shares offered at privatization auctions are being sold to everyone else only for vouchers.   By the end of July 1993, a total of 2,700 Russian enterprises have been sold through voucher auctions in Russia.

  Under this program, the bulk of state property in Russia will be privatized by auction in 1993.   The largest part of state assets, or 80 percent of federal property and 45 percent of municipal property, will be sold to private owners only for privatization vouchers. [FN98]  The proportion of municipal businesses whose shares will be available for vouchers may be increased up to 90 percent by a decision of the local legislatures (local Soviets).

  The concept of privatization through vouchers reflects a distribution scheme in which at least some shares of the ownership in state industrial enterprises could be transferred to private citizens for free. [FN99]  According to the recent Edict, "every Russian Federation citizen shall have the right to receive one privatization voucher of equal nominal value of each issue."  [FN100] The nominal value of the 1992 privatization voucher was fixed at 10,000 rubles. [FN101]  It was established that the 1992 privatization vouchers  should remain in effect from December 1, 1992 to December 31, 1993. Organizations and enterprises are prohibited from accepting privatization vouchers as instruments of payment for goods, services or work.   However, privatization vouchers are otherwise negotiable instruments and they may be bought and sold on the market without restriction.

  Free voucher distribution benefits every citizen within the country--partly because the state, according to the Constitution, is not considered to be the actual owner of the enterprises, but only "the exponent of all peoples' will" and the main administrator.

  However, in my opinion, the voucher scheme faces several serious problems of implementation.   First of all, the scheme narrows the chances for investing in privatized enterprises and retards their economic development.   This is due to the President's Decree which set 29 percent as the minimum number of shares of privatized enterprises that can be sold for vouchers.   Again, money would not play a crucial role in the process of buying out enterprises since money can not buy everything in Russia.   Obviously, this will also exacerbate the investment climate and tie up free capital.

  Indeed, the voucher scheme will first affect foreign investors.   In spite of the fact that the provisions in the law generally permit foreign individuals or entities to participate in privatization transactions and use vouchers for this purpose on an equal basis with Russian persons or entities, there are certain provisions in the law which may present practical obstacles to the acquisition of privatization vouchers by foreign investors.   For instance, vouchers can be legally purchased only with rubles, a non-convertible currency.   This process is complicated by the lack of adequate currency regulation over the transfer of large amounts of hard currency in and out of the country and its conversion into rubles.   The privatization program also requires foreign investors to open special bank accounts to "keep" the rubles used in the privatization process.   The unpredictable activity of the Russian Central Bank, galloping inflation, different government and market rates of the ruble, and currency reforms combine to create considerable risk for such investments.   Foreign investors may also be required to obtain permission from the Russian Ministry of Finance to acquire privatization vouchers and licenses from the Central Bank in order to acquire any ruble-denominated securities such as the privatization vouchers.

  Secondly, the current system of privatization check cancellation provokes the repeated circulation of vouchers after their primary utilization through check auctions.   Privatization vouchers used as the instrument of payment in purchasing privatization objects are supposed to be redeemed and withdrawn from circulation.   This task, though it offers no technical difficulties in Western countries, is quite serious in Russia.   The critical shortage in telecommunication networks and computerized systems, the federal structure of the country, the complicated administrative divisions, the absence of practical experience, the involvement of the entire country's population, and the huge number of vouchers all combine to make the process of accounting exceedingly complicated.   There are already some cases in which the police have discovered forged vouchers. [FN102]  . . .

  It is also quite possible for entrepreneurs to liquidate the vouchers by exchanging them for cash at the exchange-value rate, which is different from the market value of the voucher, using a "cash scheme."   Because of the fact that cash does not play the most significant role in market circulation in a barter economy, speculative companies can buy up a great number of vouchers for cash and then make an offer to the labor collectives of state enterprises to exchange these vouchers for the state enterprise's quoted production such as metals, gasoline, machinery, or automobiles.   Such transactions distort the market and affect ordinary voucher holders.   Additionally, this "cash scheme" lets state enterprises liquidate their stated capital (which includes basic production assets and floating capital of the enterprise) by exchanging it for vouchers with a certain cash value.   Consequently, state enterprises can legally utilize not only their own  assets, but the property of the state as well.   This is obviously a haven for abuse and bribery.

  To summarize, the voucher scheme involves additional expense, does not give the people a significant share of state ownership, equalizes all citizens with their shares without respect to their age, job position and labor contribution to the divided state property, and, in my opinion, bears more of a political than an economic content.

* * *

[FNd]. Assistant Professor of Law, Sverdlovsk Law Institute, Yekaterinburg, Russia.   J.D. 1989, Sverdlovsk Law Institute.   Master of the Science of Law, 1992, The Urals Academy of Law, Russia.   LL.M student at UCLA Law School, 1993.

[FN40]. There are two major characteristics--"absolute right" and "liability right"--which are used to describe two different legal institutions of civil law:  estate law (including the right of ownership) and liability law (including contracts liabilities and torts).   In contrast to liability law, bearers of which have subjective rights toward certain obliged persons, estate law is an absolute right, which provides to its bearer legal conditions where his rights correspond to obligations of others to refrain from any violation of said rights, which therefore surround the owner with stable legal boundaries.

[FN44]. Grazhdanskii Kodeks RSFSR [GK RSFSR] art. 105 (Russia).

[FN51]. See, e.g., SOVETSKOE I INOSTRANNOE GRAGDANSKOE PRAVO:  PROBLEMI VZAIMODEISTVIJA I RAZVITIA [SOVIET AND FOREIGN CIVIL LAW:  PROBLEMS OF RECIPROCITY AND DEVELOPMENT], (B. Mozolin ed., Nauka 1989), at 212-13 (a survey of foreign literature on this topic).

[FN71]. See, e.g., Maria Y. Kirillova, Osobennosti pravootnoshenii sobstvennosti, [Peculiarities of the Legal Relationships of Ownership], in XXVII SJEZD KPSS I MECHANIZM GRAZHDANSKO-PRAVOVOGO REGULIROVANIA OBSHESTVENNICH OTNOSHENII 73 (Sverdlovskii Juridicheskii Institut ed., 1988).

[FN87]. Some authors believe that successful privatization in the U.K. required the privatized firm to operate in a competitive environment.   See, e.g., JOHN VICKERS AND GEORGE YARROW, PRIVATIZATION:  AN ECONOMIC ANALYSIS (1988);  Stanley Fischer clearly stated that "demonopolization should precede privatization."   FISCHER, supra note 2, at 3.

 [FN88]. See, e.g., LAWRENCE J. BRAINARD, STRATEGIC FOR ECONOMICAL TRANSFORMATION IN EASTERN EUROPE:  THE ROLE OF FINANCIAL REFORM (1990) (on file with the Bankers Trust Company).

 [FN89]. See, e.g., Foreign Participation in Russian Privatization Must Deal With Various Obstacles, 3 RUSSIA AND COMMONWEALTH BUS.L.REP., No. 21, March 9, 1993, available in LEXIS, World Library, ALLWLD file.

 [FN90]. See, e.g., BORENSZTEIN & KUMAR, supra note 2, at 319.

 [FN91]. See, e.g., V.K. Mamutov, Pravovoe obespechenie uslovii dlia razvitia sorevnovania v economike [Legal Guarantees of Conditions for Developing Competition in Economics], 6 GOSUDARSTVO I PRAVO, at 56-64 (1992) (About the developing Russian anti-monopoly legislation).

 [FN92]. Generally speaking, there are annual State Programs of Privatization, which have to be discussed and approved by the Government of the Russian Federation and passed by the Russian Parliament--the Supreme Soviet of the Russian Federation.   The Programs establish methods and scale of privatization including units and enterprises which are subject to compulsory transformation of ownership rights.   For example, according to the State Program of Privatization for 1993 more than 5,000 of the largest state enterprises are subject to privatization through corporatization.

[FN94]. According to Kommersant, labor collectives, as a rule, are expected to prefer to acquire a controlling interest in a corporation:  77.4% of enterprises using the second variant of employment privatization;  21.2%--the first variant;  and only 1.4%, or 78 enterprises, were privatized according to the third variant.   Krugooborot vauchera v prirode, 27 KOMMERSANT, July 5, 1993, at 16.

 [FN95]. See, e.g., Foreign Participation in Russian Privatization Must Deal With Various Obstacles, supra note 89.

 [FN97]. BORENSZTEIN & KUMAR, supra note 2, at 315.

 [FN98]. S. Viktorov, Pravitelstvo postavilo na vaucher [The Government Staked on Voucher], KOMMERSANT, January 27, 1993, at 9.

 [FN99]. The idea of a voucher system appears to have originated in proposals for privatization in Czechoslovakia.   This scheme was also approved in Romania and emulated to some degree in Poland.   For purposes of this article we will concentrate our attention on the Russian model of voucher privatization.

 [FN100]. Edict Enacting Russian Federation System Of Privatization Vouchers, Statute Of Privatization Vouchers, The Russian Federation President's Edict No. 914, art. 2, August 14, 1992.

 [FN101]. See, e.g., BORENSZTEIN & KUMAR, supra note 2, at 308-09.  According to different voucher schemes, the vouchers may or may not have a monetary value or be tradeable between individuals.   In the Czechoslovak initiative, the vouchers were to be denominated in "points" and could only be used to bid for shares in state-supervised auctions of individual state enterprises.   However, the Romanian example evinces that the liquidity value of vouchers would be considerably diminished if they were nontransferable.

 [FN102]. Anastasia Nariskina, Igra s vaucherami:  Vozmozni varianti [Playing with Vouchers:  There Are Variants], 2 MOSCOVSKIE NOVOSTI, Jan. 10, 1993, at 3B.


Rail Reorganization Act Cases

Blanchette v. Connecticut General Insurance Corp., 419 U.S. 102 (1974)

   Mr. Justice BRENNAN delivered the opinion of the Court.

 These direct appeals and the cross-appeal are from a judgment of a three-judge District Court for the Eastern District of Pennsylvania that declared the Regional Rail Reorganization Act of 1973, 87 Stat. 985, 45 U.S.C. s 701 et seq., (1970 ed. Supp. III), unconstitutional in part and enjoined its enforcement.. 383 F.Supp.  510 (1974). We noted probable jurisdiction, 419 U.S. 801. We reverse.

I

    Introduction

 A rail transportation crisis seriously threatening the national welfare was precipitated when eight major railroads in the northeast and midwest region of the country entered reorganization proceedings under s 77 of the Bankruptcy Act, 11 U.S.C. s 205. After interim measures proved to be insufficient,] Congress concluded that solution of the crisis required reorganization of the railroads, stripped of excess facilities, into a single, viable system operated by a private, for-profit corporation. Since such a system cannot be created under s 77 rail reorganization law, and since significant federal financing would be necessary to make such a plan workable, Congress supplemented s 77 with the Rail Act, which became effective on January 2, 1974. The salient features of the Rail Act are:

* * *

  2. Appellant United States Railway Association (USRA) is established as a new Government corporation. USRA must prepare a 'Final System Plan' for restructuring the railroads in reorganization into a 'financially self-sustaining rail service system.' The Final System Plan must provide for transfer of designated rail properties by the railroads in reorganization to a private state-incorporated corporation, Consolidated Rail Corporation (Conrail), in return for securities of Conrail, plus up to $500 million of USRA obligations guaranteed by the United States, and 'the other benefits accruing to such railroad by reason of such transfer.'

* * *

  5. Although railroads in reorganization subject to the Act are free to abandon service and dispose as they wish of any rail properties not designated for transfer under the Final System Plan, until that Plan becomes effective none 'may discontinue service or abandon any line of railroad . . . unless . . . authorized to do so by (USRA) and unless no affected State or local or regional transportation authority reasonably opposes such action . . ..'

II

Proceedings in the District Court

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[The District Court declared the Rail Reorganization Act null and void as contravening the Fifth Amendment]

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III

    The Issues for Decision

 The major issues dividing the parties are (1) whether an action at law in the Court of Claims under the Tucker Act, 28 U.S.C. s 1491, will be available to recover any deficiency of constitutional dimension in the compensation provided under the Rail Act for either the alleged 'erosion taking' or the alleged 'conveyance taking,' and (2) if the Tucker Act remedy is available, whether it is an adequate remedy.

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IV

A

The Alleged 'Erosion Taking'

 The appellants argued that the case involved no 'erosion taking' because of the general rule that if the railroad 'be taken to have granted to the public an interest in the use of the railroad it may withdraw its grant by discontinuing the use when that use can be kept up only at a loss,' is qualified by the requirement that a railroad estate suffer interim losses for a reasonable period pending good-faith efforts to develop a feasible reorganization plan if the public interest in continued  rail service justifies the requirement. . . .

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B

    Availability of the Tucker Act Remedy for Any 'Erosion Taking'

 The Tucker Act, 28 U.S.C. s 1491, provides in pertinent part:

'The Court of Claims shall have jurisdiction to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department, or upon any express or implied contract *126 with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.'

 A claim founded upon a taking of property for public use by operation of the Rail Act without just compensation in violation of the Fifth Amendment plainly would fall within the literal words of 'any claim against the United States founded . . . upon the Constitution . . ..'

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  We . . . hold that the Tucker Act remedy is not barred by the Rail Act but is available to provide just compensation for any 'erosion taking' effected by the Rail Act.

V

A

The Alleged 'Conveyance Taking'

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  Briefly, the challenges to the final-conveyance provisions assert that the Rail Act is basically an eminent domain statute and, because compensation is not in cash but largely in stock of an unproved entity, will necessarily work an unconstitutional taking.

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C

Adequacy of the Tucker Act Remedy for 'Conveyance Taking'

Primarily, it is contended that the Tucker Act remedy is inadequate because the 'conveyance taking' is an exercise of the eminent domain power and therefore requires full cash payment for the rail properties. Since our reasons  supporting the availability of the Tucker Act remedy assume that the basic compensation scheme of the Act is valid but could result in payment of less than the constitutional minimum, it might indeed be inconsistent with the Rail Act to suppose that a Tucker Act suit would lie for the entire value, in cash, of the rail properties.

  This argument fails, however, for two reasons. First, it is extremely questionable whether, even if the Rail Act were on its face an acquisition of private property for public use, the entire value of the property acquired would have to be paid in cash. More important, we believe that there is nothing in the Act fundamentally at odds with the expressed purpose of Congress to supplement the reorganization laws . . . . The Rail Act is valid as a reorganization statute.

  No decision of this Court holds that compensation other than money is an inadequate form of compensation under eminent domain statutes. . . . The clear implication of other decisions is that consideration other than cash--for example, any special benefits [FN38] to a property owner's remaining properties--may be counted in the determination of just compensation.  . . .

 FN38. The special-benefits rule of compensation may later have direct relevance to the Penn Central reorganization. The Act provides that determination of the fairness and equity of the terms of the transfer should take into account 'securities and other benefits' (emphasis added) provided to the railroad estate. s 303(c)(2). See also s 206(d)(1). The parties here disagree about what 'other benefits' may be under the Act, and the extent to which any such may be counted as constitutional consideration. In particular, there is a dispute over whether the sums up to $250,000,000 in benefits to be paid Conrail as reimbursement for certain labor expenses are 'other benefits' to be counted in evaluating the exchange.

  We need not, however, determine whether compensation in the form of securities  would be constitutional if the Rail Act were merely an eminent domain statute; for the arguments in favor of this construction have no merit.

 * * *

 We are not to be understood to intimate that the Rail Act proceeding could not result in a compensable taking. We hold only that, since the Rail Act does not on its face exceed the broad scope of congressional power under the Bankruptcy Clause, Congress has not formulated an unconstitutional reorganization plan in compelling a reorganization wherein the compensation to appellees consists of Conrail and USRA securities and other benefits 'so long as the creditor gets  all the value of his lien and his share of any free assets.'

* * *

The remaining contentions regarding the validity of the final-conveyance provisions require little discussion in view of the availability of a Tucker Act suit.

 The first contention is that, even if considered as a reorganization statute, the Rail Act fails to assure that creditors will receive the full value of their liens in stock or securities. However, we have already held that, because of the possibility that the Rail Act will work a taking, there must be assurance of consideration equal to any constitutional shortfall, and that a Tucker Act remedy is available to provide that assurance. Thus, the value of  the stocks and securities provided under the act is backed up by what is essentially a guarantee of cash payment for any lack of fairness and equity of constitutional dimensions.

 Similarly, the availability of the Tucker Act cures what might otherwise be a troublesome problem of procedural due process. The Tucker Act assures that the railroad estates and the creditors will eventually be made whole for the assets conveyed. Complainants evidence no interest in retaining their property for longer than the Rail Act requires. Indeed, their position is really that they want to be free to dispose of it sooner. Thus, there is no interest asserted in retaining the properties themselves; the only interest is in making sure that creditors receive fair compensation for those properties. On the other hand, the procedural sequence is vital to accomplishing the goals of the Act. If judicial review of the terms of the transfer was required before the conveyance could occur, the conveyance might well come too late to resolve the rail transportation crisis. As long as creditors are assured fair value, with interest, for their properties, the Constitution requires nothing more.

* * *

 Reversed.

   Mr. Justice DOUGLAS, dissenting.

* * *

  Article I, s 10, of the Constitution bars the States from passing a law  'impairing the Obligation of Contracts.' Though the Federal Government is not so enjoined, it is restrained by the Fifth Amendment which provides that no person can be deprived of 'property' without 'due process of law.' I assume it is conceded that Congress, apart from the bankruptcy power in Art. I, s 8, may not impair the obligation of contracts without violating the Due Process Clause. But '(t)he bankruptcy power, like the other great substantive powers of Congress, is subject to the Fifth Amendment.'

* * *

I

 The property is 'taken for public use' within the meaning of the Fifth Amendment. First is the mandate of Congress. The Rail Act provides for an obligatory transfer of the assets of these companies to Conrail. The creditors, the trustees, the stockholders, the reorganization judge have no other option. [A]ll the parties concede, that Conrail, though dubbed 'a for-profit corporation,' shows no prospect of being an enterprise operating on a profitable basis. Penn Central losses between June 21, 1970, and December 31, 1973, were $851 million, and the Reorganization Court, whose judgment we are not reviewing, found that reorganization on an income basis was not possible. The values that ride on today's decisions are therefore not based on the prospect of future profitable operations. [FN9] The only consideration in the framework of the Act which provides 'just compensation' for the taking is in the form of 'securities' of Conrail. If those 'securities' are common stock, they will have value only insofar as Conrail will be a viable entity which generates income in excess of costs and fixed charges. If the trustees under s 77 cannot make ends meet, there is no reason to expect that Conrail can.

 The common stock of Conrail is plainly only token payment. . . . Value of any substantial amount cannot be attributed to the common stock of Conrail, because most of the problems of the existing roads will be inherited by Conrail and its prospects of generating income in excess of costs and fixed charges are, if not nil, remote. It would be irony to call entry of a deficiency judgment against Conrail adequate to make up any deficiency. For that judgment would only eat away at any value which the common stock of Conrail had.

* * *

II

 The Court relies, as do all parties who seek to sustain the statute, on the assumed availability of a suit in  the Court of Claims under the Tucker Act, 28 U.S.C. s 1491, to recover any shortfall between fair liquidation value and the compensation the bankrupt roads receive under the Rail Act.

* * *

 To hold that a Tucker Act remedy is available is, first, to leave just compensation of security holders to wholly speculative chances that Congress might grant it and, second, to deprive Congress of that opportunity to choose, since the bankrupt estates would be permitted to obtain a deficiency judgment against the United States after proceedings under the Rail Act have been exhausted.

* * *

[T]he implication of depriving the courts of a 'key to the federal Treasury' is powerful, and the reference to 'assess(ing) Congress for the money' equally so, since that is in practical terms what the Court of Claims does. For me, the import of the words is clear: there was to be no possibility that an aggrieved party was to have recourse against the United States in such a way as to circumvent the limitations on federal funds embodied in the Rail Act.

* * *

  The Court of Claims is without power to enforce its judgments. While those amounting to less than $100,000 are paid from a general appropriation, the payment of judgments exceeding this sum require special action by Congress. Ordinarily, of course, Congress pays these  judgments as a matter of routine. But this is an exceptional case, involving the possibility of judgments in the billions of dollars.

 The construction the Court gives the Rail Act today will amaze the legislators who drafted and voted for this statute. I cannot believe that Congress would have enacted this law had it been told that in the end it might have to dig into taxpayers' pockets not for the one billion appropriated but for unknown billions--perhaps 10 or 12 billion--for 'just compensation' for property it authorized to be 'taken.'

* * *


Banco Nacional de Cuba v. Sabbatino (Supreme Court)

Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964)

   Mr. Justice HARLAN delivered the opinion of the Court.

* * *

I.

 In February and July of 1960, respondent Farr, Whitlock & Co., an American commodity broker, contracted to purchase Cuban sugar, free alongside the steamer, from a wholly owned subsidiary of Compania Azucarera Vertientes-Camaguey de Cuba (C.A.V.), a corporation organized under Cuban law whose capital stock was owned principally by United States residents.  Farr, Whitlock agreed to pay for the sugar in New York upon presentation of the shipping documents and a sight draft.

 On July 6, 1960, the Congress of the United States amended the Sugar Act of 1948 to permit a presidentially directed reduction of the sugar quota for Cuba. On the same day President Eisenhower exercised the granted power. The day of the congressional enactment, the Cuban Council of Ministers adopted 'Law No. 851,' which characterized this reduction in the Cuban sugar quota as an act of 'aggression, for political purposes' on the part of the United States, justifying the taking of countermeasures by Cuba. The law gave the Cuban President and Prime Minister discretionary power to nationalize by forced expropriation property or enterprises in which American nationals had an interest. [FN3]  Our State Department has described the Cuban law as 'manifestly in violation of those principles  of international law which have long been accepted by the free countries of the West. It is in its essence discriminatory, arbitrary and confiscatory.'

FN3. 'WHEREAS, the attitude assumed by the government and the Legislative Power of the United States of North America, which constitutes an aggression, for political purposes, against the basic interests of the Cuban economy . . . forces the Revolutionary Government to adopt, without hesitation, all and whatever measures it may deem appropriate or desirable for the due defense of the national sovereignty and protection of our economic development process.

* * *

'Now, THEREFORE: In pursuance of the powers vested in it, the Council of Ministers has resolved to enact and promulgate the following.

'LAW No. 851 'ARTICLE 1.  Full authority is hereby conferred upon the President and the Prime Minister of the Republic in order that, acting jointly through appropriate resolutions whenever they shall deem it advisable or desirable for the protection of the national interests, they may proceed to nationalize, through forced expropriations, the properties or enterprises owned by physical and corporate persons who are nationals of the United States of North America, or of the enterprises in which such physical and corporate persons have an interest, even though they be organized under the Cuban laws.' Record, at 98--99.

[Under the authority of this law, the Cuban Government expropriated sugar covered by the contract between Farr, Whitlock and C.A.V. In order to obtain release of the sugar, Farr, Whitlock, entered into contracts with the Banco Para el Comercio Exterior de Cuba, an instrumentality of the Cuban Government. C.A.V. and the Cuban Government asserted conflicting ownership interests in the sugar. Farr, Whitlock was served with a state court order freezing the proceeds from sale of the sugar.  The Cuban National Bank then sued for the proceeds in federal court, claiming that title to the sugar had passed to it under the expropriation decree.]

Proceeding on the basis that a taking invalid under international law does not convey good title, the District Court found the Cuban expropriation decree to violate such law in three  separate respects: it was motivated by a retaliatory and not a public purpose; it discriminated against American nationals; and it failed to provide adequate compensation. Summary judgment against petitioner was accordingly granted.

  The Court of Appeals, affirmed the decision on similar grounds. . . .  For reasons to follow we decide that the judgment below must be reversed.

* * *

      III.

* * *

   In these circumstances the question whether the rights acquired by Cuba are enforceable in our courts depends . . . upon the act of state doctrine discussed in the succeeding sections of this opinion.  

      IV.

 The classic American statement of the act of state doctrine, which appears to have taken root in England as early as 1674, and began to emerge in the jurisprudence of this country in the late eighteenth and early nineteenth centuries, is found in Underhill v. Hernandez, 168 U.S. 250, p. 252, where Chief Justice Fuller said for a unanimous Court:

'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.'

* * *

 None of this Court's subsequent cases in which the act of state doctrine was directly or peripherally involved manifest any retreat from Underhill.    On the contrary in two of these cases, Oetjen and Ricaud, the doctrine as announced in Underhill was reaffirmed in unequivocal terms.

 Oetjen involved a seizure of hides from a Mexican citizen as a military levy by General Villa, acting for the forces of General Carranza, whose government was recognized by this country subsequent to the trial but prior to decision by this Court.  The hides were sold to a Texas corporation which shipped them to the United States and assigned them to defendant.  As assignee of the original owner, plaintiff replevied the hides, claiming that they had been seized in violation of the Hague Conventions.  In affirming a judgment for defendant, the Court . . . described the designation of the sovereign as a political question to be determined by the legislative and executive departments rather than the judicial department, invoked the established rule that such recognition operates retroactively to validate past acts, and found the basic tenet of Underhill to be applicable to the case before it.

* * *

 In Ricaud the facts were similar--another general of the Carranza forces seized lead bullion as a military levy--except that the property taken belonged to an American citizen.  The Court found Underhill, American Benana, and Oetjen controlling.  . . .

  To the same effect is the language of Mr. Justice Cardozo in the Shapleigh case, supra, where, in commenting on the validity of a Mexican land expropriation, he said, 'The question is not here whether the proceeding was so conducted as to be a wrong to our nationals under the doctrines of international law, though valid under the law of the situs of the land.  For wrongs of that order the remedy to be followed is along the channels of diplomacy.'

* * *

The outcome of this case, therefore, turns upon whether any of the contentions urged by respondents against the application of the act of state doctrine in the premises is acceptable: (1) that the doctrine does not apply to acts of state which violate international law, as is claimed to be the case here; (2) that the doctrine is inapplicable unless the Executive specifically interposes it in a particular case; and (3) that, in any event, the doctrine may not be invoked by a foreign government plaintiff in our courts.

* * *

VI.

 [R]ather than laying down or reaffirming an inflexible and all-encompassing rule in this case, we decide only that the (Judicial Branch) will not examine the validity of a taking of property within its own territory by a foreign sovereign government, extant and recognized by this country at the time of suit, in the absence of a treaty or other unambiguous agreement regarding controlling legal principles, even if the complaint alleges that the taking violates customary international law.

 There are few if any issues in international law today on which opinion seems to be so divided as the limitations on a state's power to expropriate the property of aliens.  There is, of course, authority, in international judicial and arbitral   decisions, in the expressions of national governments,  and among commentators  for the view that a taking is improper under international law if it is not for a public purpose, is discriminatory, or is without provision for prompt, adequate, and effective compensation.  However, Communist countries, although they have in fact provided a degree of compensation after diplomatic efforts, commonly recognize no obligation on the part of the taking country.    Certain representatives of the newly independent and underdeveloped countries  have questioned whether rules of state responsibility toward aliens can bind nations that have not consented to them  and it is argued that the traditionally articulated standards governing expropriation of property reflect 'imperialist' interests and are inappropriate to the circumstances of emergent states.

 The disagreement as to relevant international law standards reflects an even more basic divergence between the national interests of capital importing and capital exporting nations and between the social ideologies of those countries that favor state control of a considerable portion of the means of production and those that adhere to a free enterprise system.  It is difficult to imagine the courts of this country embarking on adjudication in an area which touches more sensitively the practical and ideological goals of the various members of the community of nations.  

  The possible adverse consequences of a conclusion to the contrary of that implicit in these cases in highlighted by contrasting the practices of the political branch with the limitations of the judicial process in matters of this kind.  Following an expropriation of any significance, the Executive engages in diplomacy aimed to assure that United States citizens who are harmed are compensated fairly.  Representing all claimants of this country, it will often be able, either by bilateral or multilateral talks, by submission to the United Nations, or by the employment of economic and political sanctions, to achieve some degree of general redress. Judicial determinations of invalidity of title can, on the other hand, have only an occasional impact, since they depend on the fortuitous circumstance of the property in question being brought into this country.  Such decisions would, if the acts involved  were declared invalid, often be likely to give offense to the expropriating country; since the concept of territorial sovereignty is so deep seated, any state may resent the refusal of the courts of another sovereign to accord validity to acts within its territorial borders.  Piecemeal dispositions of this sort involving the probability of affront to another state could seriously interfere with negotiations being carried on by the Executive Branch and might prevent or render less favorable the terms of an agreement that could otherwise be reached.  Relations with third countries which have engaged in similar expropriations would not be immune from effect.

* * *

  Another serious consequence of the exception pressed by respondents would be to render uncertain titles in foreign commerce, with the possible consequence of altering the flow of international trade.  If the attitude of the  United States courts were unclear, one buying expropriated goods would not know if he could safely import them into this country.  Even were takings known to be invalid, one would have difficulty determining after goods had changed hands several times whether the particular articles in question were the product of an ineffective state act.

  Against the force of such considerations, we find respondents' countervailing arguments quite unpersuasive.  Their basic contention is that United States courts could make a significant contribution to the growth of international law, a contribution whose importance, it is said, would be magnified by the relative paucity of decisional law by international bodies.  But given the fluidity of present world conditions, the effectiveness of such a patchwork approach toward the formulation of an acceptable body of law concerning state responsibility for expropriations is, to say the least, highly conjectural. Moreover, it rests upon the sanguine presupposition that the decisions of the courts of the world's major capital exporting country and principal exponent of the free  enterprise system  would be accepted as disinterested expressions of sound legal principle by those adhering to widely different ideologies.

* * *

The judgment of the Court of Appeals is reversed and the case is remanded to the District Court for proceedings consistent with this opinion.  It is so ordered.

   Mr. Justice WHITE, dissenting.

 I am dismayed that the Court has, with one broad stroke, declared the ascertainment and application of international law beyond the competence of the courts of the United States in a large and important category of cases.  I am also disappointed in the Court's declaration that the acts of a sovereign state with regard to the property of aliens within its borders are beyond the reach of international law in the courts of this country.  . . ..

   I do not believe that the act of state doctrine, as judicially fashioned in this Court, and the reasons underlying it, require American courts to decide cases in disregard of international law and of the rights of litigants to a full determination on the merits.

* * *

I would not conclude that a confiscatory taking which discriminates against nationals of another country to retaliate against the government of that country falls within that area of issues in international law 'on which opinion  seems to be so divided.' Nor would I assume, as the ironclad rule of the Court necessarily implies, that there is not likely to be a consensus among nations in this area, as for example upon the illegality of discriminatory takings of alien property based upon race, religion or nationality.  But most of all I would not declare that even if there were a clear consensus in the international community, the courts must close their eyes to a lawless act and validate the transgression by rendering judgment for the foreign state at its own request.  This is an unfortunate declaration for this Court to make.  It is of course, wholly inconsistent with the premise from which the Court starts, and, under it, banishment of international law from the courts is complete and final in cases like this.  I cannot so cavalierly ignore the obligations of a court to dispense justice to the litigants before it.

* * *


Banco Nacional de Cuba v. Sabbatino (on remand)

Banco Nacional de Cuba v. Farr, 383 F.2d 166 (2d Cir. 1967)

  Before WATERMAN, MOORE and HAYS, Circuit Judges.

   WATERMAN, Circuit Judge:

* * *

While the proceedings relative to the entry of judgment on remand were pending the Hickenlooper Amendment was enacted into law on October 7, 1964.  It provided:

  “Notwithstanding any other provision of law, no court in the United States shall decline on the ground of the federal act of state doctrine to make a determination on the merits giving effect to the principles of international law in a case in which a claim of title or other right is asserted by any party including a foreign state (or a party claiming through such state) based upon (*172 or traced through) a confiscation or other taking after January 1, 1959, by an act of that state in violation of the principles of international law, including the principles of compensation and the other standards set out in this subsection . . . .”

* * *

  The district court in a scholarly and well-reasoned opinion held that the Hickenlooper Amendment applied to the case at bar, that the Amendment was constitutional, and that it was bound by our prior determination, that the expropriation by the Cuban government violated international law.  The same issues are raised before us, and in disposing of them we reach the same result the lower court reached, adopting as our own much of the discussion and points made by the learned judge below.

 I.  The Applicability of the Hickenlooper Amendment

* * *

The Senate Report stated:

 The amendment is intended to reverse in part the recent decision of the Supreme Court in Banco de Nacional de Cuba v. Sabbatino.  The act of state doctrine has been applied by U.S. courts to determine that the actions of a foreign sovereign cannot be challenged in private litigation.  The Supreme Court extended this doctrine in the Sabbatino decision so as to preclude U.S. courts from inquiring into acts of foreign states, even though these acts had been denounced by the State Department as contrary to international law.

* * *

 Thus we hold that Congress intended that the Hickenlooper Amendment should apply to cases pending at the time of its enactment, including this case.

* * *

 Here it is clear from the resolution of expropriation that the property of C.A.V. was expropriated because it was largely owned by 'nationals of the United States of North America,' and it is interesting to note that the resolution makes no mention whatever of the nationality of the corporation. . . .

* * *

 Inasmuch as we thus reaffirm our previous holding that the Cuban taking is invalid under international law, we hold that there is no basis for appellant's assertion of title to the bills of lading involved in this case and its assertion that the proceeds of the sale of the sugar were tortiously converted by defendant. Appellant's claim must fail.

 Affirmed.


American International Group, Inc. v. Islamic Republic of Iran

American International Group, Inc. v. Islamic Republic of Iran, 657 F.2d 430 (D.C. Cir. 1981)

   Opinion for the Court filed by Circuit Judge McGOWAN.

  Separate Statement filed by Circuit Judge McGOWAN, in which Senior District Judge JAMESON concurs.

  Separate Statement filed by Circuit Judge MIKVA.

  McGOWAN, Circuit Judge:

* * *

I

 The events following the seizure of the American Embassy in Teheran on November 4, 1979, are too familiar to require any extended recounting here.  It will suffice for the purposes of this case to note that the capture of the embassy and the taking of its personnel as hostages created a foreign policy crisis of the gravest proportions.  While the Government of the United States moved on many fronts to secure the hostages' release, it is the legal measures taken by the President that chiefly concern us.

[President Carter and President Reagan blocked removal or transfer of Iranian assets in the United States except according to the terms of licenses accompanying the blocking order or later issued pursuant to it  Among other things, the Presidential orders suspended all legal proceedings against Iran in the regular courts and required that they be presented to an arbitration tribunal establishment by agreement between the governments of the United States and Iran, as part of a deal for release of hostages. The plaintiffs had sued Iran and several of it government intrumentalities in federal district court.]

In the Declaration of the Government of the Democratic and Popular Republic of Algeria (hereafter referred to as Declaration I), the United States agreed to "restore the financial position of Iran, in so far as possible, to that which existed prior to November 14, 1979."  The parties also declared that their purpose was to

terminate all litigation as between the Government of each party and the nationals of the other, and to bring about the settlement and termination of all such claims through binding arbitration .... (T)he United States agrees to terminate all legal proceedings in United States courts involving claims of United States persons and institutions against Iran.., to nullify all attachments and judgments obtained therein, to prohibit all further litigation based on such claims, and to bring about the termination of such claims through binding arbitration.

  Declaration I, General Principle B.

 As part of that agreement the United States promised to transfer all Iranian assets in this country, including those restrained by writs of attachment and preliminary  injunctions, within six months of the agreement's effective date, or July 19, 1981

The agreement creates the Iran-United States Claim Tribunal, comprising at least nine members, one-third of whom will be selected by the United States, one-third by Iran, and the remainder to be chosen by the other members.    The tribunal has exclusive jurisdiction over all claims against the government of Iran other than those relating to the seizure of the embassy and the capture of the hostages, those arising from actions of Iranians not attributable to their government, id., and those arising from "binding" contracts specifying Iran as the forum for dispute resolution.

  The agreements include a number of provisions designed to make arbitration a meaningful remedy.  The Tribunal is to conduct its proceedings in accordance with the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL), and to "decide all cases on the basis of respect for law, applying such choice of law rules and principles of commercial and international law as the Tribunal determines to be applicable...."  Any award the Tribunal renders "shall be enforceable ... in the courts of any nation in accordance with its laws."

 When the Iranian assets now restrained in the United States are released, Iran will deposit $1 billion in a security account in the Algerian Central Bank to be used in satisfying awards rendered against Iran by the Tribunal.  Whenever the balance in that account falls below $500 million, Iran will deposit fresh funds until a $500 million balance is again achieved.  Id.

* * *

III

 The power of the President of the United States to settle the private claims of American citizens against foreign countries by executive agreement must be reconciled with the constitutional scheme of separated powers.  This task is especially vital when those citizens have sought to invoke the aid of the judicial branch by filling complaints and receiving preliminary relief.  Our inquiry begins, although it does not end, with the cases that have held that the President does have some power to conclude an executive agreement with a foreign sovereign without obtaining the advice and consent of two-thirds of the Senate.

 In United States v. Belmont, 301 U.S. 324,  the Soviet Union, by an executive agreement known as the Litvinov Assignment, transferred its claims against Russian nationals to the United States, including claims to a bank account in New York containing funds the Soviet Union had purported to nationalize in 1918.  When the United States sued for the money, the District Court held that the nationalization decree constituted a confiscation violative of the public policy of the State of New York and accordingly dismissed the suit..

 Justice Sutherland, writing for the Court, held for the United States on the grounds that the public policy of New York State could not "prevail against the international compact."  Taking notice of the coincidence of the executive agreement with the President's decision  to recognize the Communist regime in Russia, the court said that these events "validate(d) ... all acts of the Soviet Government here."  Justice Sutherland went on to categorize the recognition and the agreement as part of one transaction. Id.

The more crucial aspect of the case, the recognition of Russia's extraterritorial nationalization, could be read as based upon the President's decision to recognize the Communist regime combined with an expansive application of the act of state doctrine.  See 301 U.S. at 327-30, 57 S.Ct. at 759-61.

  The legal effect of the Litvinov Assignment was again before the Supreme Court in United States v. Pink, 315 U.S. 203 (1942). In Pink, the Court held that the claims of alien creditors to those assets could not prevail against the interest asserted by the United States.  Facing the question of presidential authority to validate the Russian nationalization decrees, Justice Douglas, delivering the Court's opinion, wrote: "The powers of the President in the conduct of foreign relations include the power, without consent of the Senate, to determine the public policy of the United States with respect to the Russian nationalization decrees."  The Court felt that this power was a necessary incident of the President's plenary power to recognize foreign sovereigns.

* * *

V

 We speak next to the President's authority to suspend the claims of appellees against Iran.  Before discussing the constitutionality vel non of the executive's actions, we think it of considerable value to determine precisely what the executive seeks to accomplish, because in considering whether the President has acted constitutionally, it is most helpful to ascertain what he did.

 Executive Order 12294, issued by President Reagan on February 24, 1981 ordered "(a)ll claims which may be presented to the ... Claims Tribunal ... suspended...." We note that the President did not order the litigation suspended, or the power of the courts to consider the claims suspended. Instead, he acted with respect to the claims only.  We read this as an effort to modify not the jurisdiction of the courts, but the substantive rule of law they are to apply.  If constitutional, the Executive Order creates  the situation in which appellees, in the words of Fed.R.Civ.P. 12(b)(6), have "fail(ed) to state a claim upon which relief can be granted."

* * *

 Justice Frankfurter, concurring in Pink, was willing to endorse a view of the President's claim settlement power generous enough to encompass the case before us.  He stated, "That the President's control of foreign relations includes the settlement of claims is indisputable."  United States v. Pink, 315 U.S. 203, 240 (1942) (Frankfurter, J., concurring).  Similarly, Judge Learned Hand said

The constitutional power of the President extends to the settlement of mutual claims between a foreign government and the United States, at least when it is an incident to the recognition of that government; and it would be unreasonable to circumscribe it to such controversies.  The continued mutual amity between the nation and other powers again and again depends upon a satisfactory compromise of mutual claims; the necessary power to make such compromises has existed from the earliest times and been exercised by the foreign offices of all civilized nations.

  Ozanic v. United States, 188 F.2d 228, 231 (2d Cir. 1951) (footnote omitted).

 Of especial significance in this "zone of twilight" is the record of the Congress's actions when it disapproves of a claims settlement embodied in an executive agreement.  For example, when the President settled over $105 million in claims against Czechoslovakia for $20.5 million, Lillich, supra, at 839- 40, conditional on Congress's granting Czechoslovakia most-favored-nation status, Congress moved quickly to demonstrate its displeasure with the settlement by passing a law requiring its renegotiation, id. at 841-42, and refusing to grant most-favored-nation status.

* * *

VI

 The last contention raised by the appellees is that, if the President did have the power to suspend their claims and void their attachments, then such actions constitute a taking of their property for which just compensation must be paid.  Although the Supreme Court has never found an executive settlement of private claims to constitute a compensable taking, the Court of Claims has continually implied that in a proper case it would consider cancellation of private claims by settlement to be such a taking, see Aris Gloves, Inc. v. United States, 420 F.2d 1386, 1391, 1396 (Nichols, J., concurring) (Ct.Cl.1970); Gray v. United States, 21 Ct.Cl. 340, 392-93   (1886).  Without deciding that issue, we hold that (1) the applicability of the Taking Clause to the claims suspension is an issue not yet ripe for review and (2) the vacation of the restraints was not a taking.

   In looking at the claims suspension as a possible taking, we first note that we do not have any assurance that the claimants will suffer any loss. Although their claims for judicial relief have been suspended, they have been remitted to a forum apparently capable of granting meaningful relief.  There are a number of possible outcomes.  Some claimants may prevail before the arbitration panel and thus incur no loss.  Others who either do not succeed of the merits or perhaps are unable to satisfy their awards may proceed along one of two routes: (1) they may attempt to seek relief from the stay and revival of their claims or (2) they may attempt to seek relief from the United States before the Court of Claims under the Tucker Act.

 Appellees aver that this Court must rule on the availability vel non of a Tucker Act remedy at this time, citing the Regional Rail Reorganization Act Cases, 419 U.S. 102 (1974), as controlling authority.  . . .

 The "erosion taking" does not provide adequate precedent for appellees' request because the probability of losses to be incurred by the railroads was a demonstrated fact, not speculation.  Justice Brennan, conceding that there had been no "definitive determination" that the feared erosion would reach a level constituting a taking, nevertheless adverted to record evidence leading to the almost inescapable conclusion that compelled operation of the Penn Central lines would constitute a taking: (1) the District Court's finding that the lines could not be operated on a profitable basis and (2) the parties' stipulation that the Penn Central had lost $851 million in less than three years.  Id. at 124, 95 S.Ct. at 349.  We have no similar facts before us that would lead us to find a taking.  We have no reason to believe that the arbitration panel will not render meaningful relief.  We have no reason to believe that the $1 billion security fund will not cover all meritorious claims.  We have no reason to believe that the Iranians will not replenish the fund as they have agreed to do.  We have no reason to believe that if they do not replenish the fund, then the prevailing claimants will be unable to obtain worldwide enforcement of any award according to the terms of the declarations.  Finally, and by no means of least importance, we have no assurance that the appellees' claims are meritorious, and thus that executive action has taken anything of value.

  Turning to the conveyance taking issue of the railroad cases, we again find a situation dissimilar to that before us.  The Court chose to reach the Tucker Act remedy because, among other reasons, "there is no better time to decide the constitutionality of the Act's mandatory conveyance scheme to minimize or prevent irreparable injury."  In these cases, however, we think there is a better time: when and if the United States moves to dismiss the claims in District Court.  The parties have not irretrievably lost their judicial remedies;  rather, those remedies have been suspended pending arbitration.

  Before the doors of the court are forever closed to these appellees and those similarly situated, we presume that they will be able to argue that such relief as may be realized through arbitration has failed to make them whole and therefore that dismissal of their claims would constitute a compensable taking.  At that time the District Court will be able to determine whether any taking has in fact occurred and, if so, what should be done.  The District Court, of course, may, before reaching any taking question, demand that the claimants prove that they would succeed on the merits, and that the judicial relief sought was not barred by act of state, sovereign immunity or other doctrines.

 Therefore, we decline to rule on whether the suspension of the claim would, if later determined to be a taking, entitle the appellees to relief under the Tucker Act.  We wish to emphasize, however, that we expect that they would be able to raise such a claim after the arbitration had run its course.  The above discussion has also demonstrated that any determination of whether suspension of the claims constitutes a compensable taking is premature, because this Court is wholly without warrant in fact to conclude that appellees are likely to suffer any compensable loss.

  We think that vacation of the attachments is not a taking for which just compensation must be paid.  Revocation of a license to attach, explicitly made revocable, cannot be considered a taking, because those claimants proceeding under such license had no entitlement to the attachments that would constitute property capable of being taken.

  The sequence of events is not in dispute: the President suspended the right to restrain Iranian assets; he then issued a revocable general license permitting pre-judgment restraints; under that license appellees received such restraints.  Assuming for the moment that a writ of attachment or similar court order may be under some circumstances a property interest, we fail to grasp how such interest obtained only by grace of a revocable license can be thought of as property.  The holders of the interests had no reasonable expectation that, against the factual backdrop of an unresolved international crisis, the President would not revoke what he had granted.  They make no claim that the executive led them to believe that their attachments were secure.  Without a reasonable expectation that their restraints were protected, the appellees cannot claim any property interest in those restraints.  If so, the President took nothing on January 19.

 The cases establish that revocable permits granted with respect to other types of property do not establish an entitlement which, if taken by the government, requires compensation.  In Acton v. United States, 401 F.2d 896, 899 (9th Cir. 1968), the Ninth Circuit held that government revocation of a revocable permit to prospect for uranium on public lands was not a taking because "a license does not  constitute property for which the Government is liable upon condemnation."  The Acton court relied upon United States v. Petty Motor Co., 327 U.S. 372 (1946), in which the Supreme Court held that government condemnation of a leasehold terminable by condemnation was not a compensable taking.  The Court explained: "With this (termination) clause ... the tenant has no right which persists beyond the taking and can be entitled to nothing."  327 U.S. at 376.

 We think appellees were in the same position.  They lacked any reasonable basis on which to arrive at the sense of legally-protected possession, or entitlement, that forms the basis of property rights.  . . .  We do not subscribe to the doctrine that what the government gives, the government may take away, regardless of the expectations it has engendered.  We only say that in the context of an expressly-revocable license, the appellees cannot assert a reasonable expectation of interests created under its provisions, and thus do not enjoy any property rights with respect to those interests.

VII

 We have concluded that the request of the United States to remand these cases with instructions to vacate the attachments and all other preliminary and provisional remedies and to stay any further progress in the litigation should be granted, but that its request to instruct the District Court to vacate the orders of partial summary judgment in Nos. 80-1779 and 80-1891 should be denied. . . . .

  It is so ordered.

  McGOWAN, Circuit Judge, separate statement in which JAMESON, Circuit Judge, joins [omitted]:

END OF DOCUMENT


Property, Markets, and Capitalism in the Third World

Hernando deSoto, a Peruvian economist, has attracted considerable attention in the public policy and development communities with his book, The Mystery of Capital:  Why Capitalism Triumphs in the West and Fails Everywhere Else.[1]  deSoto describes and resolves a number of “mysteries.”  Why is it, he asks, that despite substantial entrepreneurial energy, the existence of abundant natural resources, and excess labor, developing countries such as Egypt, Peru, Columbia, Ukraine, Kosovo and others, seem unable to make the transition to prosperous market economies.  The answer, he argues, is that they “hold …resources in defective forms:  houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them.”  Because property rights are not adequately documented, they cannot “readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.”[2]  In contrast, western nations have sophisticated legal infrastructures that permit property to be turned into capital.

Because property-law systems in developing countries are so cumbersome as to be dysfunctional, economic activity is driven into an informal, extra legal sector.  deSoto documents the barriers.  In Peru, for example, he and his research team opened a small garment workshop as an experiment to see what was required that could create a new, and entirely legal, business.  Although the shop was organized to operate with only one worker, it took 289 days and legal costs 31 times the minimum monthly wage to register the business.  To obtain authority to build a house on state owned land took 6 years and 11 months, and 207 administrative steps in 52 governmental offices.  Obtaining legal title to the land took 728 steps.[3]  Someone in the Philippines who wants to formalize informal urban property must follow 168 steps over a period of 13-25 years.  Someone in Egypt who wants to obtain access to desert land for construction purposes must follow 77 steps with 31 different governmental entities over a period of 6 to 14 years.  In Haiti it takes 111 steps and 4,112 days to obtain a five-year lease contract.[4]  Few people have the resources or the patience to navigate their way through such a labyrinth.  Accordingly they “live and work outside the official law, using their own informally binding arrangements to protect and mobilize their assets.”[5]  But they do not retreat into idleness.

“Undercapitalized sectors throughout the third world and in former communist countries buzz with hard work and ingenuity.  Street-side cottage industries have sprung up everywhere, manufacturing anything from clothing and footwear to imitation Cartier watches and Vuitton bags.  There are workshops that build and rebuild machinery, cars, even buses.  The new urban poor have created entire industries in neighborhoods that have to operate on clandestine connections to electricity and water.”[6]

The cost of relying on these informal arrangements is undercapitalization.  Entrepreneurs cannot pledge their assets to obtain money from investors because the assets have no legal status.  “A legal failure that prevents enterprising people from negotiating with strangers defeats the division of labor and fastens would-be entrepreneurs to smaller circles of specialization and low productivity.”[7]

deSoto’s views are consistent with those of other development economists, such as Dani Rodrik,[8] who present empirical evidence that the main determinant of economic progress in developing countries is the “acquisition of high-quality institutions.”[9]

deSoto contrasts these circumstances with those prevailing in the west where

“Every asset—every piece of land, every house, every chattel—is formally fixed and updated records governed by rules contained in the property system.  Every increment in production, every new building, product, or commercially valuable thing is someone’s formal property.  Even if assets belong to a corporation, real people still own them indirectly, through titles certifying that they own the corporation as ‘shareholders.’”[10]

Relying on informal extended-family, clan, and ethnic-group muscle to protect assets increases the likelihood of interethnic conflict as in the Balkans.

deSoto argues that property systems in the west have six characteristics that allow assets to generate capital:

  1. They fix the economic value of assets
  2. They integrate disbursed information into one system
  3. They make people accountable.
  4. They make assets fungible
  5. They allow people to network
  6. They protect transactions.[11]

Part of the problem, he argues, is insufficient consciousness about transitions in western societies, especially in the United States, from informal systems to organize economic activity into more formal arrangements.  As he explains the American West was settled mostly by squatters who lacked clear title and who protected the fruits of their labor with fists and guns wielded by their extended families and networks of friends.[12]

The problem in developing countries is, with a few exceptions such as Somalia, where there is no government at all, not the absence of formal property-law systems on paper; the problem is lack of accessibility to those systems. 

He argues that the solution is as much political as legal.  Policymakers in developing countries and in the international community which seeks to assist them must move beyond concern with macro policies and generalized commitments to rule of law and markets.  They must concern themselves with the details of how property-law systems work.  They must reduce the transaction cost for poor people to participate in the formal legal system.  They also must adopt property-law doctrines that permit entrepreneurial energy exerted by those now in the informal sector to be turned into formal property rights, which will require mechanisms to resolve in a reasonably certain way competing claims by those who work the land against those who own it under existing formal property doctrines.

It is far from clear exactly how this can be done in a way that does not increase political instability.  There are, however, some interesting models in U.S. property law such as the doctrines of adverse possession and easement by prescription, which turn potentially productive conduct into legal rights, even at the expense of those with competing prior legal rights. 

deSoto’s insights should shape the perspectives of any student of American property law.  They should encourage attention to those features of the American property system that facilitate low-cost access to the property-law system, to features that enhance certainty of title, and to features that facilitate creation of property rights for someone who starts out property less but invests his or her labor in creating value.[13]


Notes

A. Consider what steps would be necessary to implement deSoto’s prescription in any particular state. The state would need to:

1.      Set up a land registration system, and a system for registering other property interests such as mortgages and security interests in personalty;

2.      Reduce the regulatory burden of starting businesses and transferring assets;

3.      Nationalize property formally belonging to owners not actually engaged in productive use of the property;

4.      Distribute (privatize) this property so as to create ownership interests in those engaged in productive activity.

B. Suppose that Fidel Castro has died and that the international community is engaged in transforming Cuba into a modern state, with democratic political institutions and market-oriented economic institutions. You have been asked by the American Bar Association to develop a strategy for reforming Cuba’s regime for property. What would your strategy be?



[1] Hernando deSoto, The Mystery of Capital:  Why Capitalism Triumphs in the West and Fails Everywhere Else (2000).

[2] deSoto at 6.

[3] deSoto at 19-20.

[4] deSoto at 18-27.

[5] deSoto at 21.

[6] deSoto at 28.

[7] deSoto at 71.

[8] See http://www.ksg.harvard.edu/rodrick.

[9] Dani Rodrik, Growth Strategies (April 2003).

[10] deSoto at 48.

[11] deSoto at 49-62.

[12] deSoto at 116-148.

[13] Adverse possession and easements by prescription are not the only examples of rewards for work by the propertyless.  The field of intellectual property is an even stronger example.