Magazine article American Banker

Court Finds for Costa Rican Banks in Loan Default Suit; Government Actions Called 'Consistent' with US Policy

Magazine article American Banker

Court Finds for Costa Rican Banks in Loan Default Suit; Government Actions Called 'Consistent' with US Policy

Article excerpt

NEW YORK -- A federal appeals court has ruled in favor of three Costa Rican banks that defaulted on loans from a 39-bank syndicate in 1981.

The court found it was not necessary to decide on an Act of State Doctrine claim because the actions of the Costa Rican government, which were responsible for the default, were "consistent with the policy and law of the United States."

The unanimous three-judge panel of the U.S. Court of Appeals for the Second Circuit issued its 10-page decision this week on an appeal brought by Fidelity Union Trust Co. of New Jersey, a member of the syndicate headed by the Allied Bank International of New York.

According to Robert McKay, a Fidelity Union attorney, the bank plans to ask for a rehearing of the case by the full Second Circuit Court of Appeals.

In 1976, the three banks assumed the obligations of the Latin American Bank, in the Cayman Islands, when it failed.

New promissory notes were issued. These were to be paid in 11 semiannual payments in New York in U.S. dollars.

The new agreement stated that failure to pay interest or principal within 30 days of the payment date would constitute default, and the syndicate could then demand payment in full.

The payments were made until 1981, when Costa Rica found itself in a severe economic crisis.

The Costa Rican central bank said it would not release foreign currency for payments of debts because the government was, at the time, renegotiating its external debt.

The Central Bank of Costa Rica informed the Allied syndicate that the debt was to be "deferred" and that the payment then due would not be made.

The banks sued, but a lower court ruled that the Act of State Doctrine barred any finding on behalf of the plaintiffs.

Later in 1983, after the ruling, a refinancing agreement was signed by the parties.

Fidelity Union refused to accept the agreement and appealed the lower court ruling in an attempt to collect $5. …

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