Court Refuses to Issue Writ of Execution Using Theory of Reverse Veil-Piercing
General Star National Insurance Company (“General Star ”) sought a writ of execution against the Romanian Bank of Foreign Trade (“RBFT”) on a theory of reverse veil-piercing, which seeks to hold a corporation (RBFT) liable for the actions of its shareholder (the Romanian government).
The district court judge noted that the Supreme Court has held that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such.” First Nat'l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 626-27, 103 S.Ct. 2591, 77 L.Ed.2d 46 (1983) [hereinafter “Bancec” ]. The Court cautioned that “[f]reely ignoring the separate status of government instrumentalities would result in substantial uncertainty ... [and][a]s a result, the efforts of sovereign nations to structure their governmental activities in a manner deemed necessary to promote economic development and efficient administration would surely be frustrated.” Bancec, 462 U.S. at 626.
In Bancec, the Cuban government established a bank to serve as an official autonomous credit institution for foreign trade. Id. at 613. The Cuban bank sued an American bank, seeking to collect on a letter of credit. Id. The American bank counterclaimed, asserting a right to set off the value of its assets that had been seized and nationalized by the Cuban government within days after the Cuban bank filed suit. Id. The Cuban government subsequently dissolved the Cuban bank, transferred its assets, and substituted itself as plaintiff. Id. at 615-16. The question presented, therefore, was whether the American bank was entitled to the setoff, despite the fact that the Cuban bank was established as a separate juridical entity from the Cuban government.
The Bancec decision “announce[d] no mechanical formula for determining the circumstances under which the normally separate juridical status of a government instrumentality is to be disregarded.” Id. Rather, the decision merely applied “internationally recognized equitable principles to avoid the injustice that would result from permitting a foreign state to reap the benefits of our courts while avoiding the obligations of international law.” Id. at 633-34. This Court is guided, therefore, by the general principle that the presumption of corporate separateness may be overcome where (1) “a corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created,” or (2) when recognition of the separate corporate form “would work fraud or injustice.” Id. at 629 (internal quotation marks omitted); Additionally, the Bancec Court provided a definition of a typical independent government instrumentality:
A typical government instrumentality, if one can be said to exist, is created by an enabling statute that prescribes the powers and duties of the instrumentality, and specifies that it is to be managed by a board selected by the government in a manner consistent with the enabling law. The instrumentality is typically established as a separate juridical entity, with the powers to hold and sell property and to sue and be sued. Except for appropriations to provide capital or to cover losses, the instrumentality is primarily responsible for its own finances. The instrumentality is run as a distinct economic enterprise; often it is not subject to the same budgetary and personnel requirements with which government agencies must comply. Bancec, 462 U.S. at 624.
Based on the facts of the case the court denied the General Star's motion for a writ of execution against RBFT.
[GENERAL STAR NATIONAL INSURANCE COMPANY, formerly known as the Monarch Insurance Company of Ohio, v. ADMINISTRATIA ASIGURARILOR DE STAT, et. Al. 2010 WL 1948580 (S.D.N.Y. May 12, 2010)]
