Article

Factual Summary:

Applicant had an LC issued by an Iraqi bank to facilitate shipments of peas and beans to Iraq. The issuer nominated a Canadian Bank to pay, and a US bank to facilitate reimbursement of any payments under the credit. After a second shipment had been made, but prior to payment, Iraq invaded Kuwait and President George Bush ordered a freeze on all Iraqi assets in the US and directed the Office of Foreign Asset Control (OFAC) to promulgate rules for the disbursement of those frozen assets to creditors. Accordingly, on 15 August 1990, OFAC issued "General License No. 7" establishing the criteria for the award of a license which was necessary to obtain payment out of the frozen funds. The criteria stated that "specific licenses may be issued on a case-by-case basis to permit payment, from a blocked account or otherwise, of amounts owed to or for the benefit of a U.S. person for goods or services exported by a U.S. person or from the United States."

The beneficiary filed its license application on 21 August 1990. The beneficiary, although not a "U.S. person," would have likely been successful in obtaining the license because its parent was a US corporation and because of the involvement of its US affiliate in the transaction. On 18 October 1990, however, OFAC amended General License No. 7.

The new language stated that OFAC would grant a license on a case-by-case basis only to those creditors who held "an irrevocable letter of credit issued or confirmed by a U.S. Bank, or a letter of credit reimbursement confirmed by a U.S. bank."

On 20 November 1990, OFAC applied the amended criteria related to the beneficiary's application and denied the license because the LC was not issued or confirmed by a US bank. After this denial, the beneficiary brought actions against the issuer, the advising bank, the applicant and OFAC. The beneficiary, among its other claims, argued that OFAC had, without Congressional authority, retroactively applied the new criteria of General License No. 7 to its application thereby infringing upon its rights. At trial, Judge Green of the U.S. District Court for the District of Columbia agreed with the beneficiary and remanded the case back to OFAC for reevaluation under the original criteria of General License No. 7.(For a summary of the disposition of the other issues in this case, see 1997 Annual Survey of Letter of Credit Law & Practice 462 (1997) (summarizing Bergerco Canada v. Iraqi State Co. for Food Stuff Trading, 942 F.Supp. 252 (D.D.C. 1996). On appeal, reversed.

Legal Analysis:

The beneficiary argued that OFAC had improperly retroactively applied the amendments to its application for a license. The U.S. Court of Appeals for the District of Columbia Circuit, Williams, J., rejected the beneficiary's argument. The court noted that all rule changes are "generally retroactive, in that they tend to alter the value of existing assets and thus the return on past investments." The court then applied the test for improper retroactive effect. To satisfy the test, the rule change must "impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed" or be an arbitrary and capricious agency action. The court noted that only the first prong of this test fit the facts of this case. Under that first prong, the court found that the original language of General License No. 7 had not created any right to a license. There was no absolute guarantee that the beneficiary would have obtained its license even under the original criteria.

The court went on to note that the "right" to have an application processed under existing criteria was not a "right" for the purposes of determining impermissible retroactivity. Indeed, if it were then, "virtually every licensing applicant would acquire protection from any rule-made variation in licensing standards, even where the original set of rules was vague or obviously provisional."

The beneficiary next argued that OFAC's own regulation - 575.402 created a right to have their application processed under the original criteria. That regulation states that:

Any amendment, modification, or revocation of any section of this part or of any order, regulation, ruling, instruction, or license ... shall not, unless otherwise specifically provided, be deemed to affect any act done or omitted to be done, or any ... proceeding commenced or pending prior to such amendment, modification, or revocation. All penalties, forfeitures, and liabilities under any such order, regulation, ruling, instruction, or license shall continue and may be enforced as if such amendment, modification or revocation had not been made.

The court noted that this regulation was promulgated after General License No. 7, but accepted the beneficiary's argument that it simply restated a general proposition concerning OFAC's general operating policies. Even accepting that argument, however, the court found that OFAC was not, in this instance, operating under its general policies for rule making. In this instance, OFAC had responded to a crisis situation in which it had to act swiftly. The normal rule-making and comment period did not apply. Under such circumstances, the court noted, rules are generally seen as "in flux."

Finally, the court noted that the only "act" invited by the original language of General License No. 7 and taken in reliance on that language by the beneficiary was the ministerial act of filing an application. As such, the beneficiary had not lost anything substantial in reliance upon the original rule. Accordingly, the trial court's decision to remand the case to OFAC was reversed.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.