Cuban Creditors, American Debtors: Spreading Risk Allocation in a Communist State

University of Miami Law School Institutional Repository University of Miami Inter-American Law Review 4-1-2005 Cuban Creditors, American Debtors: Spreading Risk Allocation in a Communist State Justin Kaplan Follow this and additional works at: http://repository.law.miami.edu/umialr Part of the International Law Commons Recommended Citation Justin Kaplan, Cuban Creditors, American Debtors: Spreading Risk Allocation in a Communist State, 36 U. Miami Inter-Am. L. Rev. 271 (2005) Available at: http://repository.law.miami.edu/umialr/vol36/iss2/6 This Comment is brought to you for free and open access by Institutional Repository. It has been accepted for inclusion in University of Miami InterAmerican Law Review by an authorized administrator of Institutional Repository. For more information, please contact . COMMENTS Cuban Creditors, American Debtors: Spreading Risk Allocation in a Communist State Justin Kaplan* I. INTRODUCTION In 1959, the political landscape of Cuba and the southeast United States changed forever. Fidel Castro's Soviet-backed communist revolutionaries seized control of the island paradise almost overnight in a relatively short-lived insurrection. Many people lost their lives, and many more lost their property, for in a communist state, private property does not exist.' Not only did the new communist government nationalize tangible property, but Castro's regime also seized notes of debt as well.2 These seizures continue to affect the legal landscape not only of Cuba, but also the United States. Cornelia Hernandez Perez's story is instructive.' In 1958 Cornelia Hernandez Perez's father had on deposit with The First National City Bank of New York (the "Bank") 300,000 Cuban pesos. In or around 1962, while the Bank still owed her father the money, Castro's new communist government nationalized the Bank.4 In doing so, the Cuban government also repatriated all * Juris Doctor Candidate, May 2006, University of Miami School of Law. I would like to thank Professor Anita Ramasastry for her guidance as well as for putting me in contact with Joseph Sommer, Esq., of the Federal Reserve Bank in New York, NY. His insight was truly inspirational and helped to open doors I would have never known existed. 1. Communist states such as Cuba do not recognize the right to trade in private property therefore barring private ownership except by appropriation. See Louis FREDERIC VINDING KRUSE, THE RIGHT OF PROPERTY 9 P. T. Federspiel trans., 1939). 2. See Garcia v. Chase Manhattan Bank, N.A., 735 F.2d 645, 647 (2d Cir. 1984) (describing Cuban Law No. 78). 3. See Hernandez Perez v. Citibank, N.A., 328 F. Supp. 2d 1374 (S.D. Fla. 2004); see also Defendant Citibank's Motion to Dismiss for Failure to State a Claim and for Failure to Join Indispensible Parties and Accompanying Memorandum at Law, Hernandez Perez (No. 04-20910). 4. See Garcia, 735 F.2d at 647 (describing Cuban Law No. 78, which enabled the Cuban Ministry of Recovery of Misappropriated Property to, inter alia, freeze foreign bank accounts). 272 INTER-AMERICAN LAW REVIEW [Vol. 36:2 & 3 foreign and domestic banks. The Cuban branch of the Bank was therefore closed. Cornelia's father died, leaving all of his assets to her mother. Her mother subsequently died and left her estate to Cornelia, still a Cuban citizen, and Cornelia's brother, an American citizen living in Miami, Florida. Cornelia's father's certificate of deposit is alleged to be included in the estate.5 How can Cornelia and her brother retrieve the funds due to them on their father's certificate of deposit? Are they to recover from the Bank or from the Banco Nacional de Cuba?6 Have they simply lost all rights to the funds? The answers to the above questions are far from black and white. Many legal questions come into play,7 particularly: First, where is the situs of the debt? Sec8 ond, does the Act of State Doctrine apply? As it exists today, there is no coherent codification of law that creditors and banks may depend on to determine the correct avenues for handling situations like Cornelia Hernandez-Perez's. If courts compel the banks to honor the debt, they will have to pay the obligation created by the secured transaction twice.' If courts find the banks not liable, people in possession of notes of debt will have lost their money in United States banks, potentially creating a damaging precedent to the lauded protections that American banking laws afford U.S. bank customers. Different courts have 5. See Hernandez Perez, 328 F. Supp. 2d at 1376; see also Defendant Citibank's Motion to Dismiss for Failure to State a Claim and for Failure to Join Indispensible Parties and Accompanying Memorandum at Law at 1-3, supra note 3. 6. American banks that had Cuban branches repatriated ultimately credited the state run bank, Banco Nacional de Cuba, a sum equal to that deposited therein. See, e.g., Garcia, 735 F.2d at 647. 7. This issue is not unlike many other issues in commercial law: how to allocate loss between two parties. The allocation of risk in determining loss allocation in this instance is two-fold: risk of deposit expropriation and risk of asset expropriation. Debt situs and Act of State Doctrine applicability are instructive as to how the above risks can be allocated. 8. The doctrine is best explained by the Supreme Court in Underhill v. Hernandez, 168 U.S. 250, 252 (1897) ("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.") See also Margaret E. Tahyar, The Act of State Doctrine: Resolving Debt Situs Confusion, 86 COLUM. L. REV. 594 (1986) ("The act of state doctrine forecloses United States courts from questioning the validity of a foreign sovereign's acts that occur within its own territory."). 9. When Cuba repatriated all foreign bank assets, debts were included. Thus, the banks remitted funds equal to all debts owed by their branches, effectively paying on the notes. If the banks are found liable on notes by American courts, they would have to pay double on the notes already honored in Cuba. 2005] CUBAN CREDITORS, AMERICAN DEBTORS 273 ruled in favor of both alternatives. The reality is that due to Cuba's taking of branch banks' assets, both the banks and the creditors have been victimized.1" Although the expropriation of Cuban debts occurred almost fifty years ago, it remains a pertinent issue,11 especially considering the current nature of U.S.Cuba relations. This comment will analyze the applicable law as it exists at the time of publication and will attempt to restate what the law should be. In addition, it will propose an equitable solution so persons holding notes of deposit from Cuban branches of American banks will be able (...truncated)