MARGARITA ROSA DE CUELLAR, PETITIONER V. NICOLAS F. BRADY, SECRETARY OF THE TREASURY, ET AL. No. 90-56 In The Supreme Court Of The United States October Term, 1990 On Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Eleventh Circuit Brief For The Federal Respondent In Opposition TABLE OF CONTENTS Question Presented Opinions below Jurisdiction Statement Argument Conclusion OPINIONS BELOW The opinion of the court of appeals (Pet. App. 66-107) is reported at 881 F.2d 1561. The opinion of the district court (Pet. App. 41-65) is reported at 686 F. Supp. 890. JURISDICTION The judgment of the court of appeals was entered on September 1, 1989. On November 29, 1989, Justice Kennedy granted an extension to January 18, 1990, in which to file a petition for a writ of certiorari, and the petition was filed on that date. Pet. App. 108. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). QUESTIONS PRESENTED Whether the Secretary of the Treasury acted arbitrarily and capriciously by denying petitioner a license under the Cuban Assets Control Regulations, 31 C.F.R. Pt. 515, for the redemption of bearer bonds issued by Cuba. STATEMENT 1. Section 5(b) of the 1917 Trading With the Enemy Act (TWEA), 50 U.S.C. App. 5(b), authorizes the President, in times of national emergencies, to impose embargoes on transactions between persons subject to the jurisdiction of the United States in countries designated as hostile by the President. In 1962, President Kennedy declared a national emergency and placed an embargo on Cuba. Pursuant thereto, the Treasury Department's Office of Foreign Assets Control promulgated the Cuban Assets Control Regulations. The regulations prohibit transactions with either the Cuban government or Cuban nationals, 31 C.F.R. 515.201(a), unless such transactions fall within the scope of either a general or specific licensing provision. /1/ 2. Petitioner, a Cuban national, is the sole beneficiary of a trust established by her mother in 1936. The trust consists of 133 "Republic of Cuba External Sinking fund 4 1/2% Bearer Bonds," with a face value of $127,000. Cuba issued the bonds in 1937 under an indenture agreement with Manufacturers Hanover Trust Company (Manufacturers Hanover), which called for Cuba to retire the bonds through annual payments to a sinking fund from 1938 through 1977. Manufacturers Hanover, as trustee, was responsible for paying off the principal upon the bonds' maturity with funds accumulated for that purpose in the sinking fund. Under the indenture agreement, once the bonds matured in 1977, bondholders had six years to redeem the bonds and Manufacturers Hanover was required to return any unredeemed funds to Cuba. By its terms, the bond issue constituted irrevocable contractual obligations of Cuba, "secured by the pledge of (its) good faith and credit," and by "a first preferential right and lien" on 90% of Cuba's tax revenues and economic resources. Pet. App. 74. The pledge of tax revenues and resources was secure "(s)o long as any of the bonds of this issue shall remain outstanding." Ibid. The bonds were payable in full at their maturity in June 1977, although in the event that there were insufficient funds in the sinking fund, Manufacturers Hanover was directed to distribute the funds pro rata. Cuba made the required payments into the sinking fund until December 31, 1960, when it defaulted. On July 8, 1963, the sinking fund was blocked pursuant to the Cuban Assets Control Regulations. Pet. App. 72-74. In May 1987, petitioner filed a petition with the Secretary of the Treasury for a specific license to unblock the funds represented by the bonds issued by Cuba. Pet. App. 75. The Secretary, through the Office of Foreign Assets Control, denied this request in July 1987. /2/ Pet. App. 28-40. The director of the Office of Foreign Assets Control explained that the sinking fund was blocked under Section 515.201(b) of the Cuban Assets Control Regulations, 31 C.F.R. 515.201(b), because under the indenture agreement between the Republic of Cuba and Manufacturers Hanover, Cuba retained a reversionary interest in the funds held by Manufacturers Hanover. /3/ Pet. App. 31-32. The Director also stated that it would be inappropriate to unblock the sinking fund held by Manufacturers Hanover as to petitioner when it was apparent that there were potentially numerous unknown bondholders. Ibid. He further stated that petitioner was not technically an owner of the funds, but was a secured creditor and, accordingly, was not "legally entitled" to the trust funds as provided by 31 C.F.R. 515.524(a)(1). Pet. App. 34-35. 3. Petitioner then filed suit against the Secretary of the Treasury and Manufacturers Hanover. On cross-motions for summary judgment, the district court granted partial summary judgment for petitioner. Pet. App. 41-65. The court held that the trust fund qualified under 31 C.F.R. 515.524 for a general license, and that petitioner was legally entitled to "the distributive share" represented by her bonds. Pet. App. 41-65. The court also determined that issuing a license to petitioner was not inconsistent with the policy concerns underlying the blocking regulations. Id. at 56-59. 4. The court of appeals reversed. Pet. App. 66-107. It held that Cuba's reversionary interest in the sinking fund was sufficient to block that entire fund, and that the Secretary's decision not to allow piecemeal unblocking of the sinking fund in order to enable petitioner to receive her distributive share was "well supported by the language of the Agreement, the intent of the parties to the contract, and the relevant case law." Pet. App. 85; id. at 85-89. The court of appeals disagreed with the district court that the funds could be unblocked pursuant to a general license for certain trusts under Section 515.524. The court held that the distinction drawn by the Secretary between private trusts, which can be licensed, and trust indentures, which cannot, was "reasonable" and consistent with "the entire regulatory scheme concerning the licensing of blocked transactions." Pet. App. 96. The court of appeals also concluded that the bonds issued by Cuba were securies and, thus, were also blocked under Section 515.514(e), which specifically excludes any transaction in which the government of Cuba issued the securities. Pet. App. 97-98. Finally, the court of appeals held that the Secretary's action was fully consistent with the goals of the TWEA and its implementing regulations. Id. at 106-107. /4/ ARGUMENT 1. Petitioner argues that Cuba does not have a sufficient interest in the sinking fund to justify applying the blocking regulations in her case. Pet. 15-16. That claim lacks merit. The indenture agreement provided that Manufacturers Hanover must return to Cuba any funds not claimed by bondholders within six years of the bonds' maturity date. Pet. App. 73. Cuba therefore has a reversionary interest in the fund, as petitioner concedes, Pet. 22, and that reversionary interest is an "interest" for purposes of the Cuban Assets Control Regulations. See 31 C.F.R. 515.312 ("The term 'interest' when used with respect to property shall mean an interest of any nature whatsoever, direct or indirect."); Behring Int'l, Inc. v. Miller, 504 F. Supp. 552, 557 (D.N.J. 1980) (remainder interest, even if "contingent or de minimis," was a sufficient interest to warrant blocking of trust account established by Iran for benefit of United States comany to pay for warehouse services). See also United States v. Quong, 303 F.2d 499, 503 (6th Cir.) ("interest" under the TWEA must be construed broadly), cert. denied, 371 U.S. 863 (1962); United States v. Broverman, 180 F. Supp. 631, 636 (S.D.N.Y. 1959) (same). Any such interest under the TWEA is sufficient to block the entire sinking fund account. See 50 U.S.C. App. 5(b)(1)(B) (the President may "prevent or prohibit * * * any * * * transactions involving * * * any property in which any foreign country * * * has any interest"). /5/ Cuba's reversionary interest in the sinking fund also easily fits within the definition of "property" in the blocking regulations. See 31 C.F.R. 515.203(f). /6/ Accordingly, the court of appeals correctly held that Cuba has a sufficient interest in the sinking fund to trigger the blocking regulations. Petitioner argues that the decision below conflicts with the Fifth Circuit's decisions in Real v. Simon, 510 F.2d 557 (1975), and Tagle v. Regan, 643 F.2d 1058 (1981), but those cases are distinguishable. As the court of appeals explained, Pet. App. 92-94, neither case involved property in which Cuba retained a reversionary interest. Both cases involved estates of Cuban nationals that passed by intestate succession to United States residents. And in both cases the heirs were known, and their respective shares were determined by operation of law. In Real, the issue was whether the Secretary could block an account established by a deceased Cuban national from passing by intestate succession to the decedent's heirs, who were citizens or residents of the United States. The court held that the decedent's account could not be blocked because a decedent does not retain a legal interest in his own estate. 510 F.2d at 564. In Tagle, the decedent's estate passed to her three children, two of whom resided in the United States. The court held that where the interests of United States residents in the decedent's estate could be "sufficiently separated and identified," the residents were entitled to a license under Section 515.525. 643 F.2d at 1063-1064. By contrast, in this case Cuba has a reversionary interest in the sinking fund. In addition, since it is uncertain how many of the bearer bonds remain outstanding, "(petitioner's) distributive share with respect to the other bondholders is undetermined." Pet. App. 93-94. Neither Real nor Tagle requires the unblocking of an asset in which Cuba retains an undivided and undetermined interest. There is also no merit to petitioner's contention that the Secretary acted unreasonably in refusing to unblock partially the sinking fund to allow petitioner to be paid a proportionate share of the assets. Pet. 22-25. As the lower courts have consistently recognized, it is no defense that United States citizens also have interest in the blocked property. See Nielsen v. Secretary of the Treasury, 424 F.2d 833, 839 (D.C. Cir. 1970) (court upholds blocking of account established by Navy to pay Cuban refugees who held three-quarters of the stock of a Cuban corporation that had supplied water to the United States base at Guantanamo Bay, finding "no constitutional requirements entitling the non-Cuban shareholders to withdraw a proportionate share of the blocked assets of the Cuban corporation"); Behring Int'l, Inc. v. Miller, 504 F. Supp. at 557-558. /7/ 2. Petitioner also contends that she is entitled to receive a general license under 31 C.F.R. 515.524 in order to obtain her portion of the sinking fund. Section 515.524 provides a general license for certain trusts and estates in which Cuban nationals have an interest and which are administered by United States banks or trust companies. Petitioner argues that the literal language of Section 515.524 applies to "any trust administered in the United States," Pet. 18, and includes the agreement here. As the court of appeals noted, Pet. App. 94, the Secretary has interpreted this regulation to apply only to private trusts, not to all types of trusts, loosely defined, created to service corporate or Cuban government debt financing. That interpretation, as the court of appeals held, Pet. App. 95-99, is a reasonable one, since there are material differences between private trusts and trust indentures. To begin with, as the court of appeals noted, Pet. App. 95, while a trustee holds equitable title in the trust corpus in a private trust, "the debenture indenture trustee does not hold title to, or have possession of, any property." Broad v. Rockwell Int'l Corp., 642 F.2d 929, 941-942 n.13 (5th Cir.) (en banc) (quoting American Bar Association, Commentaries on Indentures 7-8 (1971)), cert. denied, 454 U.S. 965 (1981). "The modern corporate trust deed is in many respects sui generis * * * (It) retains characteristics of a trust, but it is distinguished from a real or true trust, by the fact that the corpus -- the incumbered property -- frequently remains in the possession and under the control of the borrower." Payne, Exculpatory Clauses in Corporate Mortgages and Other Instruments, 19 Cornell L.Q. 171, 171 (1934). In addition, under a trust indenture, the trustee is typically a corporate entity that "perform(s) certain ministerial tasks connected with the normal operation of the debentures" on behalf of "a great number of parties." Broad, 642 F.2d at 941. /8/ Moreover, the distinction between private trusts and trust indentures was recognized by Congress in the Trust Indenture Act of 1939, 15 U.S.C. 77aaa et seq. That Act, adopted the year after Cuba and Manufacturers Hanover signed the sinking fund agreement, regulates identures that must be registered under the Securities Act of 1933, 15 U.S.C. 77a et seq. "Indenture" is defined as "any mortgage, deed of trust, trust or other indenture, or similar instrument or agreement * * * under which securities are outstanding or are to be issued." 15 U.S.C. 77ccc(7). Although the sinking fund would have been specially exempted from the Trust Indenture Act of 1939 only because it was issued by a foreign government, see 15 U.S.C. 77ddd(a)(6), such agreements are generally subject to that Act. As the court of appeals observed, the sinking fund agreement itself demonstrates that Manufacturers Hanover "in many respects stand(s) in a position distinct from that in a private trustee." Pet. App. 96. Manufacturers Hanover holds neither legal nor equitable title to the asset, and it has no discretion over the management of the sinking fund. The company serves only a depository function for the sinking fund, and it disburses the funds to the bondholders according to the indenture agreement. Significantly, the real security for the bonds is Cuba's tax revenues. That security, of course, was never entrusted to Manufacturers Hanover, and remains in Cuba's hands. In any event, 31 C.F.R. 515.514 prohibits the transfer of "securities," which includes the bonds in this case, as the court of appeals noted, Pet. App. 97-98. The fact that the bonds were secured by a trust is immaterial. CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. KENNETH W. STARR Solicitor General STUART M. GERSON Assistant Attorney General ANTHONY J. STEINMEYER CONSTANCE A. WYNN Attorneys SEPTEMBER 1990 /1/ As originally enacted, the TWEA authorized the President to act only in "time of war." Act of Oct. 6, 1917, ch. 106, 40 Stat. 411 (codified as amended at 50 U.S.C. App. 1 et seq.). The Act was amended in 1933 to expand the President's powers to deal with emergencies in peacetime. Act of Mar. 9, 1933, ch. 1, 48 Stat. 1. In 1977, Congress amended Section 5(b) to limit the President's authority under the TWEA to "time(s) of war" or during a "period of national emergency." 50 U.S.C. App. 5(b)(1). In order to continue economic measures taken pursuant to Section 5(b) prior to 1977, Congress grandfathered the existing embargoes. The President may extend such embargoes for one-year periods upon determining that the extension "is in the national interest of the United States." Act of Dec. 28, 1977, Pub. L. No. 95-223, Section 101(b), 91 Stat. 1625. Since the TWEA was amended in 1977, the President has determined that a continued embargo of Cuba is in the national interest. See 53 Fed. Reg. 35,289 (1988); 52 Fed. Reg. 33,397 (1987); 51 Fed. Reg. 30,201 (1986); 50 Fed. Reg. 36,563 (1985); 49 Fed. Reg. 35,927 (1984); 48 Fed. Reg. 40,695 (1983); 47 Fed. Reg. 39,797 (1982); 46 Fed. Reg. 45,321 (1981); 45 Fed. Reg. 59,549 (1980); 44 Fed. Reg. 53,153 (1979); 43 Fed. Reg. 40,449 (1978). /2/ In 1942, through Executive Order No. 9193, 3 C.F.R. 1174 (1938-1943 Comp.), the President delegated his authority under TWEA to the Secretary of the Treasury, who subsequently delegated that authority to the Office of Foreign Assets Control. Treasury Dep't Order No. 128 (Rev. 1, Oct. 15, 1962). See Regan v. Wald, 468 U.S. 222, 226 n.2 (1984). /3/ Section 515.201 prohibits transactions, unless specifically authorized, in which Cuba has "at any time on or since (July 8, 1963) had any interest of any nature whatsoever, direct or indirect." 31 C.F.R. 515.201(b). Section 515.201 specifically prohibits "(a)ll dealings in, including, without limitation, transfers, withdrawals, or exportations of, any property or evidences of indebtedness or evidences of ownership of property." 31 C.F.R. 515.201(b)(1). /4/ The court held that blocking the sinking fund (1) denies Cuba the use of hard currency to promote activities adverse to United States interests; (2) preserves the possibility that the United States might vest blocked Cuban assets in order to pay the claims of United States citizens or residents against Cuba, and (3) provides an "important bargaining tool for negotiations with the Cuban government." Pet. App. 100-103. The court disagreed with the district court's view that unblocking of the sinking fund was necessary to prevent the government from using the funds to satisfy the claims of United States citizens, stating that there was "little historical basis for fear that this will occur." Id. at 102. Moreover, the court found that a partial unblocking of the sinking fund could dissipate the sinking fund to such an extent that it would become a useless negotiation tool with the Cuban government. Id. at 105-106. Significantly, the court concluded that the Secretary's decision to hold all assets until a single, comprehensive settlement could be reached was "entitled to great deference." Id. at 105. /5/ The Secretary has long recognized (and has advised Congress) that Cuban government bonds and the sinking funds that secured them are considered "interests" of Cuba and are blocked. In its 1964 census of blocked Cuban assets, the Office of Foreign Assets Control (OFAC) specifically referred to several Cuban bond issues (of which the 1937-1977 series is the most important). OFAC estimated that the Cuban government had realizable assets of $14.6 million, of which $12.3 million was subject to counter-claims by New York banks. Of the remaining $2.3 million, OFAC calculated that more than $670,000 was money held in the United States in "bond sinking funds." Claims of U.S. Nationals Against the Government of Cuba: Hearings on H.R. 10327, etc. Before the Subcomm. on Inter-American Affairs of the House Comm. on Foreign Affairs, 88th Cong., 2d Sess. 161 (1964). A second Treasury census again counted the 1937-1977 bond series as Cuban assets. Office of Foreign Assets Control, U.S. Dep't of the Treasury, Blocked Foreign Assets in the United States: Summary Report of 1983-84 Census of Blocked Property (1985). /6/ Section 515.203(f) states in part that "'property' includes gold, silver, bullion, currency, coin, credit, securities (as that term is defined in section 2(1) of the Securities Act of 1933, as amended), bills of exchange, notes, drafts, acceptances, checks, letters of credit, book credits, debts, claims, contracts, negotiable documents of title, mortgages, liens, annuities, insurance policies, options and futures in commodities, and evidences of any of the foregoing." /7/ Petitioner argues, Pet. 15-16, that the sinking fund should be unblocked because "there is no evidence (i) that Cuba has ever had an interest in the De Cuellar Estate (ii) that (petitioner), as sole surviving heir, has ever been a 'national' or 'designated national' of Cuba or (iii) that (petitioner) intends to use her share of the Sinking Fund for or on behalf of The Cuban Government." Those arguments are beside the point. First, the Secretary has never taken the position that Cuba had an interest in the De Cuellar trust administered by Citibank. The Secretary's concern has always been with the sinking fund, in which Cuba does have an interest. Second, that petitioner is neither a national or a designated national of Cuba is irrelevant. Petitioner is forbidden from redeeming her bonds from the sinking fund because the fund is one in which Cuba has an interest. Third, while the government has no reason to believe that petitioner would use her portion of the sinking fund on behalf of the Cuban government, blocking the funds serves the three purposes of the Cuban Assets Control Regulations, as the court of appeals recognized, Pet. App. 100-107. /8/ Some courts have held that the indenture trustee is not properly denominated a "trustee," whose common-law duties go beyond those in the trust agreement, but is more properly called a "stakeholder," whose duties and obligations are exclusively defined by the terms of the indenture agreement. See Meckel v. Continental Resources Co., 758 F.2d 811, 816 (2d Cir. 1985); Broad, 642 F.2d at 941-942 n.13; Hazzard v. Chase Nat'l Bank, 159 Misc. 57, 83-84, 287 N.Y.S. 541, 570 (Sup. Ct. 1936), aff'd mem., 257 A.D. 950, 14 N.Y.S.2d 147 (1939), aff'd mem., 282 N.Y. 652, 26 N.E.2d 801, cert. denied, 311 U.S. 708 (1940).