Congressional Power to Provide for the Vesting of Iranian Deposits in Foreign Branches of United States Banks ( 1980 )

Congressional Power to Provide for the Vesting of Iranian
Deposits in Foreign Branches of United States Banks
Congress has the pow er under Article I, § 8 of the Constitution to authorize the peace­
time vesting of assets of a foreign governm ent in the control of foreign branches of
Am erican-owned and incorporated banks, at least insofar as such pow er may be
enforced by courts of the United States.
The Just Compensation Clause o f the Fifth Amendment does not prohibit the United
States from effecting uncompensated seizures o f the assets of foreign nations.
While United States courts will ordinarily make every effort to construe statutes to
accord with our treaty obligations and general international law principles, Congress
may, by clearly expressing its intent to do so, legislate in derogation of international
law or contrary to prior treaty obligations. Therefore, a United States court would
likely enforce a vesting order directed at overseas deposits of a foreign governm ent
that was clearly authorized by Congress notwithstanding contrary treaties or principles
of international law.
Congress could provide for the seizure in this country o f Iran’s overseas deposits by
permitting vesting orders to be served against the New York office of the banks
involved; however, foreign courts may refuse to give effect to what would appear to
be the United States’ uncompensated extraterritorial appropriation of non-enemy assets
in any suit brought by Iran to recover its deposits.
September 16, 1980
MEMORANDUM OPINION FOR THE ATTORNEY GENERAL
This memorandum considers Congress’ power to provide for the
vesting by the United States of currently blocked Iranian U.S. dollar
deposits 1 in the foreign branches of United States banks. We analyze,
first, Congress’ power per se to authorize such a seizure, and second,
the problems that Congress would face in providing for the vesting of
the Iranian deposits in a feasible and effective manner. We believe
Congress has the power to authorize this vesting, but that the vesting
of Iran’s deposits might ultimately subject the United States to liability
under the Fifth Amendment for compensating the banks if they are
successfully sued by Iran in foreign courts.
1 F or convenience, we refer in this mem orandum to the governm ent of Iran, its instrumentalities
and controlled entities, and the Central Bank of Iran, collectively, as "Iran," and the interest o f the
governm ent of Iran in the deposits o f any of these entities as "Iran's deposits." Unless otherw ise
specified, we intend the term "Iran's deposits" to refer to Iran’s U.S. dollar deposits in the foreign
branches of U.S. banks.
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I.
In response to events in Iran, the President, on November 14, 1979,
issued Executive Order No. 12,170, 3 C.F.R. 457 (1979), declaring a
national emergency and ordering the blocking of:
all property and interests in property of the Government
of Iran, its instrumentalities and controlled entities and the
Central Bank of Iran which are or become subject to the
jurisdiction of the United States or which are in or come
within the possession or control of persons subject to the
jurisdiction of the United States.
Within hours of the President’s order, the Department of the Treasury
issued implementing regulations, the Iranian Assets Control Regula­
tions, 44 Fed. Reg. 65,956 (1979), to be codified at 31 C.F.R. § 535,
blocking the transfer to Iran of any property covered by Executive
Order No. 12,170. These assets include deposits of dollars in the foreign
branches of U.S. banks, principally in London and Paris.
Whether Congress has the legislative power per se to provide for the
United States to “vest” or seize these blocked overseas deposits de­
pends on three elements: congressional power to legislate concerning
the subject matter; Congress’ power to regulate the behavior of the
foreign branches of U.S. banks; and the absence of any constitutional
prohibition against this vesting. If these elements obtain, then Congress
would have authority to provide for the vesting of Iran’s deposits, at
least as that authority can be recognized and would be enforced by
U.S. courts.
We do not think a serious question exists as to Congress’ constitu­
tional power to legislate with respect to the assets of a foreign govern­
ment in the control of U.S. persons. The constitutionality of the only
legislative vesting authority now extant—war-time vesting authority
under the Trading with the Enemy Act (TWEA), 50 U.S.C. App. § 1 et
seq.—has been upheld as part of Congress’ powers with respect to the
conduct of war, Stoehr v. Wallace, 255 U.S. 239 (1921), and we are
aware of no judicial decision that specifies a particular source of con­
gressional power to authorize the vesting of non-enemy assets in peace­
time. The United States has, however, apparently without judicial chal­
lenge, vested a steel mill belonging to Czechoslovakia, a country with
which we were not at war, in order to settle claims against that
country. International Claims Settlement Act of 1949, 22 U.S.C.
§§ 1642-1642p. In addition, Congress has provided authority since 1933
that would permit at least the freezing of foreign non-enemy assets in
national emergencies other than war, e.g., International Emergency
Economic Powers Act (IEEPA), 50 U.S.C. § 1701-1706 (Supp. I 1977).
Such legislation—which would seemingly have to rest on legislative
subject-matter authority sufficient to encompass legislation authorizing
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the seizure of those same assets—has been upheld in the courts. See
Nielsen v. Secretary of the Treasury, 424 F.2d 833 (D.C. Cir. 1970), and
Sordino v. Federal Reserve Bank of New York, 361 F.2d 106 (2d Cir.),
cert, denied, 385 U.S. 898 (1966), both dealing with the Cuban Assets
Control Regulations, 31 C.F.R. § 515 (1979).2 We infer from this his­
tory that Congress’ power to regulate commerce with foreign nationals,
U.S. Const., Art. I, § 8, cl. 3, alone or together with Congress’ other
Article I, § 8 powers, would provide it with power sufficient to legis­
late concerning the vesting by the United States in peacetime of Iranian
assets in the possession or control of U.S. persons.
In addition, insofar as vesting would constitute legislative control of
the activities of the overseas branches of U.S. banks, the overseas
location of these branches is not a bar to legislation. The United States
has authority to exercise jurisdiction over its nationals abroad. Blackmer
v. United States, 284 U.S. 421 (1932) (upholding contempt against U.S.
citizen residing in France for failure to respond to D.C. Supreme Court
supoena); Cook v. Tait, 265 U.S. 47 (1924) (upholding tax levied against
non-resident U.S. citizen for income from property located outside the
United States). Although international law principles are unsettled for
determining the nationality of corporations, the generally accepted U.S.
rule is that corporations have the nationality of the states that create
them. See Craig, Application o f the Trading with the Enemy Act to
Foreign Corporations Owned by Americans: Reflections on Fruehauf v.
Massardy, 83 Harv. L. Rev. 579, 589-92 (1970) (hereafter Craig). Were
Congress to express its intent specifically to treat as “United States
persons” American-owned and incorporated foreign branches of U.S.
banks, its determination would be upheld in the courts. As the Supreme
Court has stated in related context, such a branch bank:
is not a separate entity in the sense that it is insulated
from [its head office’s] managerial prerogatives. [The New
York head office] has actual, practical control over its
branches; it is organized under a federal statute, 12 U.S.C.
§ 24, which authorizes it “To sue and be sued, complain
and defend, in any court of law and equity, as fully as
natural persons”—as one entity, not branch by branch.
The branch bank’s affairs are, therefore, as much within
2 In 1964, Congress amended the International Claims Settlement Act of 1949 to authorize the
vesting of Cuban assets frozen under the Cuban Assets C ontrol Regulations. Pub. L. No. 88-666, 78
Stat. 1110. Congress,, how ever, repealed this vesting authority, w hich had not been em ployed, the
following year, Pub. L. No. 89-262, 79 Stat. 988 (1965), because the Johnson A dm inistration urged
that the vesting and sale o f Cuban property would jeopardize our encouragem ent of foreign invest­
ment in the United States and the protections afforded by other nations to U.S. assets abroad. S. Rep.
No. 701, 89th Cong., 1st Sess. 3 (1965). T he State D epartm ent had, in fact, opposed the passage of
vesting authority in the first place, but, although this D epartm ent deferred to State regarding support
for the bill, this Office specifically opposed any language in the signing statement casting doubt on the
constitutionality of the law.
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the reach of the in personam order entered by the District
Court as are those of the head office.
United States v. First National City Bank [Citibank], 379 U.S. 378, 384
(1965). In the Citibank case, the Supreme Court upheld the district
court’s authority, in a suit by the United States to enforce a tax lien
against an Uruguayan corporation, to issue a preliminary injunction
against the head office of Citibank ordering it not to transfer to the
corporation any corporate assets on deposit with the Montevideo
branch of Citibank. The same result would follow under judicial deci­
sions enforcing subpoenas against U.S. banks for the production of
records in the hands of foreign branches. United States v. First National
City Bank, 396 F.2d 897 (2d Cir. 1968); First National City Bank o f New
York v. Internal Revenue Service, 271 F.2d 616 (2d Cir. 1959).
Finally, we note that the Constitution does not prohibit the uncom­
pensated seizure of the assets of foreign governments. The Fifth
Amendment provides that no “private property [shall] be taken for
public use, without just compensation.” On its face, the textual refer­
ence to private property excludes foreign governments from the protec­
tion of the Just Compensation Clause. The role of the Constitution in
domestic law buttresses this reading. Constitutional protections limit the
power of the United States to act upon persons who are subject to its
legal authority by virtue of their citizenship or presence in this country.
The United States, however, asserts its powers with respect to foreign
nations not by virtue of its domestic political authority, but because, as
a sovereign nation among equals, it enjoys powers and privileges under
international law. Conversely, the rights of foreign states in this coun­
try depend not on constitutional protections, but on treaties, interna­
tional custom, and such privileges as this nation extends under princi­
ples of comity. C f Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398
(1964).
It may be argued that the peacetime seizure by the United States of
Iranian assets would violate particular treaties or general principles of
international law. It should be noted, however, that, even under such
circumstances, Congress’ express determination to authorize peacetime
vesting would be enforceable in U.S. courts. Although our courts will
ordinarily make every effort to construe statutes to accord with our
treaty obligations and general international law principles, McCulloch v.
Sociedad Nacional de Marineros de Honduras, 372 U.S. 10, 21-2 (1963);
Lauritzen v. Larsen, 345 U.S. 571, 578 (1953), Congress may, by clearly
expressing its intent to do so, legislate in derogation of international law
or contrary to prior treaty obligations. Rainey v. United States, 232 U.S.
310 (1914); Whitney v. Robertson, 124 U.S. 190 (1888). In sum, insofar as
such power may be enforced by U.S. courts, we conclude that Con­
gress does have the power to authorize the vesting of Iranian dollar
deposits in the foreign branches of U.S. banks.
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II.
Should Congress attempt to draft legislation authorizing the seizure
of the Iranian deposits, it would face additional critical questions in
attempting to provide for a feasible and effective vesting procedure.
Whether vesting could be made feasible, in short, depends upon
whether vesting could be effected by the Executive with the sole
assistance of United States courts, or whether the assent of the courts
of those nations in which Iran’s deposits are located would also be
required to secure transfers of title. Iran probably will seek injunctive
relief in foreign courts to prevent the seizure of Iranian assets, and the
banks, in any event, might seek declaratory judgments abroad authoriz­
ing their compliance with the vesting orders. Such suits would, of
course, involve jurisdictional conflicts of the first order, and foreign
courts might well refuse to give effect to what, from their point of
view, would appear to be the United States’ uncompensated ex­
traterritorial expropriation of non-enemy assets, in possible disregard of
general principles of international law. The United States Supreme
Court has already expressed this country’s judicial policy of not giving
effect to foreign government’s uncompensated expropriations of assets
located in the United States. Alfred Dunhill of London, Inc. v. Republic
of Cuba, 425 U.S. 682, 686-87 (1976). Cf. Fruehaufv. Massardy, (1968)
D.S. Jur. 147, (1965) J.C.P. II 14,274bis (Cour d’appel, Paris), discussed
in Craig, supra.
A strong argument can be made, however, that Congress can law­
fully provide for the seizure in this country of the overseas deposits by
permitting the vesting orders to be served against the head offices of
the banks involved, which are located in New York. Foreign branches
of U.S. banks and the U.S. head offices of those banks may, of course,
be treated as separate entities under state law. Sokoloff v. National City
Bank of New York, 239 N.Y. 158, 145 N.E. 917 (1924). Congress,
however, may provide that national banks and their foreign branches
shall be treated as unified entities for purposes of federal law. See the
Citibank cases, discussed supra. That the New York head offices of the
banks holding Iran’s overseas deposits have actual control of those
deposits is strongly suggested by the arrangements through which such
deposits are made and controlled.
First, although individual deposits may have differed in their details,
the deposits in question typically did not involve any transfer of cur­
rency overseas to any foreign branch of a U.S. bank. The only transfers
of funds occurred in New York when funds owed to Iran or being held
for Iran by banks other than Iran’s depository bank were transferred to
the head office of the depository bank in New York. Upon such
transfer, the head office would direct one of its overseas branches to
credit Iran with a deposit in the overseas branch equal to the amount of
the transfer. The head office, in turn, would credit the transferred funds
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to a “cover account” in the name of its foreign branch to secure the
foreign branch’s obligation to repay Iran on demand overseas for the
amount on deposit.3 An advantage of this scheme for Iran appears to
have been that it enabled Iran to keep funds on deposit in interest-
bearing checking accounts abroad, which would not have been possible
in the United States, while at the same time keeping the funds available
to a New York bank to finance Iran’s transactions here.
Further, it appears, at least in certain instances, that head office banks
in New York could draw, in New York, on Iran’s foreign branch
deposits for the benefit of Iran. We understand that, for example, if
directions from Bank Markazi or the National Iranian Oil Company to
Chase Manhattan’s head office to make particular payments resulted in
an overdraft, the head office—without further notice or its depositor’s
further consent—could cover the overdraft by withdrawing funds from
the depositor’s London account. It is even possible in theory that, in
some cases, Iran and its banks agreed that the deposits in toto would be
repayable to Iran on demand in New York.
These facts would readily justify a decision by Congress to treat
Iran’s overseas deposits in the foreign branches of U.S. banks as being
within the control of, and therefore “present” in, the U.S. offices of
those banks as well. It is the ordinary rule that a debt follows the
debtor and, insofar as a national bank and its foreign branches are all
one entity, that bank, as a debtor to its depositors, is present both here
and overseas. The Supreme Court expressly recognized the possibility
of dual-situs debts in Cities Service Co. v. McGrath, 342 U.S. 330 (1952).
In that case, the Court unanimously upheld, under the Trading with the
Enemy Act, the vesting of two gold debentures issued by Cities Service
Company, a U.S. corporation, although one debenture was located
outside the United States. The Supreme Court said:
[T]he obligor . . . is within the United States and the
obligation of which the debenture is evidence can be
effectively dealt with through the exercise of jurisdiction
over that petitioner.
342 U.S. at 334. In our judgment, the exercise of jurisdiction over
national banks in the United States to seize debts to Iran that are
evidenced by bank records abroad would present a precisely analogous
case, and would equally “transgressf ] no constitutional limitation[ ]
on [Congress’] jurisdiction.” Id.
The seizure in the United States of Iran’s overseas bank deposits
would, of course, not forestall attempts by Iran in foreign courts to
recover its deposits. Although this country’s ability to provide the
3A lthough no reported judicial decision is definitive on this point, it appears from those cases
involving “cover accounts'* such as these that the original depositor has no ow nership interest in the
cover accounts. If so, it w ould not be useful for the United States to seize the cover accounts. See
Schrager-Singer v. Attorney General o f the United States, 271 F.2d 841 (D C. Cir. 1959).
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banks with a complete defense to such actions would be enhanced if
Iran’s deposits were seized within U.S. territory, we understand that
the legal disputes would be heated. At least three core issues would be
involved in any overseas suits that Iran would bring to recover its
deposits:
1. Whether the foreign situs nations should excuse performance
of the branch banks’ obligations because elements of perform­
ance would be required in the United States and U.S. law will
have rendered those elements impossible to perform;
2. Whether the foreign courts should recognize the validity of
U.S. vesting as consistent with their nations’ public policy both
specifically with respect to Iran and generally with respect to
commonly accepted principles of international law; and
3. Whether the foreign courts should recognize the validity of
U.S. vesting as a matter of comity.
In arguing for the validity of its vesting, the United States would likely
assert the United States’ predominant interest in the operation of the
branch banks, the involvement of paramount U.S. foreign policy and
national security concerns, foreign condemnation of the Iranians’ ac­
tions, the hardship that foreign enforcement of the banks’ obligations
would pose for the banks and for the international monetary system,
and the acceptability of reprisal under international law. The most
serious doubts exist, however, as to whether these arguments would
prevail in a foreign forum. Foreign courts might well view the banks’
obligations as wholly performable abroad. They might perceive that
their own nations’ interests are significantly at stake in being able to
assure foreign depositors the security of their deposits. The courts
might fear that the U.S. vesting itself would destabilize the world
monetary system, and would recognize that the United States would
not likely give effect to other nations’ extraterritorial seizures of prop­
erty in the United States. How foreign courts would reconcile these
competing considerations in suits by Iran is at best uncertain.
In this connection, we think you should be aware that seven of the
nine Justices deciding Cities Service Co. v. McGrath, supra, conditioned
their judgment regarding the constitutionality of this country’s seizure
here of the overseas gold debentures on the obligor’s implicit right
under the Fifth Amendment to recoup from the United States the
extent of any liability imposed abroad in connection with the seized
obligation.4 342 U.S. at 333-36. We believe the same result would likely
obtain if Iran were to succeed, subsequent to our vesting, in a foreign
suit against the banks for the recovery of Iran’s deposits. The banks
would be able to involve sympathetically the Supreme Court’s recogni­
4The remaining tw o Justices would have reserved the question. 342 U.S. at 336.
271
tion that the “Fifth Amendment’s guarantee . . . [is] designed to bar
government from forcing some people alone to bear public burdens
which, in all fairness and justice, should be borne by the public as a
whole.” Armstrong v. United States, 364 U.S. 40, 49 (1960).
John M . H arm on
Assistant Attorney General
Office o f Legal Counsel
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