Ecuador Seeks Setoff for Tax Judgments in Award Enforcement Suit

PERENCO ECUADOR LTD.,
Petitioner,
v.
REPUBLIC OF ECUADOR,
Respondent.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

ORAL ARGUMENT REQUESTED

REPUBLIC OF ECUADOR'S REPLY IN SUPPORT OF ITS CROSS-MOTION FOR SETOFF

Alexandre de Gramont
D.C. Bar No. 430640
DECHERT LLP
1900 K Street NW
Washington, DC 20006
Tel.: (202) 261-3300
Fax: (202) 261-3333
alexandre.deGramont@dechert.com

Michael A. Losco*
N.Y. Bar No. 5356505
Tamar Sarjveladze*
N.Y. Bar No. 5703608
DECHERT LLP
1095 Avenue of the Americas
New York, NY 10036
Tel.: (212) 698 3500
michael.losco@dechert.com
tamar.sarjveladze@dechert.com
*Admitted pro hac vice

Counsel for Respondent

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TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTRODUCTION

CONCLUSION

TABLE OF AUTHORITIES

Cases

Balkan Energy Ltd. v. Republic of Ghana, 302 F. Supp. 3d 144 (D.D.C. 2018)

Banco Central de Reserva del Peru v. Riggs National Bank, 919 F. Supp. 13 (D.D.C. 1994)

Blount v. Windley, 95 U.S. 173 (1877)

Brownley v. Peyser, 98 F.2d 337 (D.C. Cir. 1938)

Chevron Corp. v. Donziger, 833 F.3d 74 (2d Cir. 2016)

First National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611 (1983)

Goodwin v. Dalton, No. CV136035569S, 2014 WL 7714364 (Conn. Super. Ct. Dec. 26, 2014)

Heine v. Bank of Oswego, 144 F. Supp. 3d 1198 (D. Or. 2015)

Hilton v. Guyot, 159 U.S. 113 (1895)

In re Eckerstorfer, 508 B.R. 90 (Bankr. E.D. Wisc. 2014)

Just Enterprises, Inc. v. (888) Just, Inc., No. 06-5023-CV-S-JCE, 2008 WL 2625520 (W.D. Mo. Apr. 21, 2008)

Koch Mins. Sarl v. Bolivarian Republic of Venezuela, No. 17-CV-2559-ZMF, 2021 WL 3662938 (D.D.C. Aug. 18, 2021)

Koinoke Constr. Co. v. Ministry of Works, Tanzania, No. 17-1986-RJL, 2019 WL 1082337 (D.D.C. Mar. 7, 2019)

Lippe v. Bairnco Corp., 288 B.R. 678 (S.D.N.Y. 2003), aff'd, 99 F. App'x 274 (2d Cir. 2004)

*Micula v. Gov't of Romania, 104 F. Supp. 3d 42 (D.D.C. 2015)

*Micula v. Gov't of Romania, 404 F. Supp. 3d 265 (D.D.C 2019)

*Mobil Cerro Negro, Ltd. v. Bolivarian Republic of Venezuela, 863 F.3d 96 (2d Cir. 2017)

National City Bank v. Republic of China, 348 U.S. 356 (1955)

Newco Ltd. v. Gov't of Belize, 650 F. App'x 14 (D.C. Cir. 2016)

OI Eur. Grp. B.V. v. Bolivarian Republic of Venezuela, No. CV 16-1533 (ABJ), 2019 WL 2185040 (D.D.C. May 21, 2019)

Tenaris, S.A. v. Bolivarian Republic of Venezuela, No. 1:18-CV-01373 (CJN), 2021 WL 1177996 (D.D.C. Mar. 29, 2021)

Thai Lao Lignite (Thailand) Co. v. Gov't of the Lao People's Democratic Republic, No. 10-CV-5256 (KMW) (DCF), 2016 WL 958640 (S.D.N.Y. Mar. 8, 2016)

Tricon Energy Ltd. v. Vinmar Int'l, Ltd., 718 F.3d 448 (5th Cir. 2013)

United States v. Nat'l City Bank of New York, 83 F.2d 236 (2d Cir. 1936)

Virginia Elec. & Power Co. v. Sun Shipbuilding & Dry Dock Co., 68 F.R.D. 397 (E.D. Va. 1975)

Statutes

22 U.S.C. § 1650a

28 U.S.C. § 1961

Federal Arbitration Act, 9 U.S.C. § 201 et seq.

Foreign Sovereign Immunities Act

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INTRODUCTION

The Respondent, the Republic of Ecuador (“Respondent,” the “Republic,” or “Ecuador”), respectfully submits this Reply (the “Reply”) in Support of its Cross-Motion for Setoff (ECF No. 20) (“Cross-Motion”).¹ The Response submitted in opposition to the Cross-Motion by Petitioner, Perenco Ecuador Ltd. (“Petitioner” or “Perenco-Ecuador”) (ECF No. 30) (“Response”), wrongly depicts the Cross-Motion as an effort by the Republic to avoid paying the “full compensation” that it has supposedly owed to Petitioner “for over a dozen years.” Response at 1. In fact, Petitioner brought the underlying arbitration in 2008 seeking nearly $1.7 billion in damages. At the conclusion of the arbitration proceedings — including the ICSID annulment proceedings — Petitioner's damages were ultimately reduced to approximately $378 million (including sums for attorneys' fees and costs and reflecting setoffs for amounts awarded to the Republic for its environmental counterclaims). That amount represents less than a quarter of the damages claimed by Petitioner in the arbitration. Just as in the arbitration, the Republic is entitled in this action to defend itself based on the applicable law and procedure of the jurisdiction in which Perenco-Ecuador has chosen to enforce the Award. Specifically, the Republic is entitled to request setoff — not to challenge the substance of the Award — but to offset its pecuniary obligations with debt that Petitioner owes (but cannot and will not pay) to the Republic; and also to challenge Petitioner's claim that it is entitled to post-judgment interest higher than the rate provided by 28 U.S.C. § 1961(a). None of the arguments made by Petitioner in response to the Republic's Cross-Motion has merit.

I. THIS COURT SHOULD FOLLOW MOBIL AND MICULA II AND REJECT PETITIONER'S CONTENTION THAT SETOFF IS NOT AVAILABLE UNDER 22 U.S.C. § 1650a.

As explained in the Republic's Cross-Motion, this Court squarely held in Micula v. Gov't of Romania, 404 F. Supp. 3d 265, 283 (D.D.C 2019) (“Micula II”), that in an action to enforce an ICSID award under 22 U.S.C. § 1650a, “the defense of setoff or satisfaction is available.”² In reaching that holding, this Court relied in part on the reasoning of the Second Circuit in Mobil Cerro Negro, Ltd. v. Bolivarian Republic of Venezuela, 863 F.3d 96, 121 (2d Cir. 2017) (“Mobil”) — which stated in dictum that setoff was available against an ICSID award. Petitioner asserts that both Micula II and Mobil “mistakenly assumed that a set-off was permissible because they thought that 1650a requires only enforcement, and not recognition, of ICSID awards.” Response at 21. Based on that assertion, Petitioner contends that “this Court should reject both the mistaken premise that Section 1650a does not provide for recognition, and the resulting conclusion that set-off should be an available defense.” Id. at 22.

Petitioner's contention is based on a fundamental misunderstanding of the reasoning behind both Micula II and Mobil. In seeking setoff in this case, the Republic is not challenging the substance of the Award in any respect. Rather, it is invoking its right under U.S. law to offset the pecuniary obligations of the Award with debt owed to the Republic by Petitioner — just as the Republic could do if the Award were a judgment from another state or federal court in the United States. The Courts in both Micula II and Mobil began their analysis with the text of Section 1650a, which provides:

An award of an arbitral tribunal rendered pursuant to chapter IV of the [ICSID] convention shall create a right arising under a treaty of the United States. The pecuniary obligations imposed by such an award shall be enforced and shall be given the same full faith and credit as if the award were a final judgment of a court of general jurisdiction of one of the several States. The Federal Arbitration Act (9 U.S.C. § 1 et seq.) shall not apply to enforcement of awards rendered pursuant to the convention.

22 U.S.C. § 1650a (emphasis added). Congress enacted Section 1650a to implement the ICSID Convention, which the United States ratified in 1966. See Micula II, 404 F. Supp. 3d at 269; Mobil, 863, F.3d at 100-103.³ Based on the plain language of the statute (which in turn implements the plain language of the Convention), the federal courts are required to enforce the pecuniary obligations of an ICSID award and to give them the same full faith and credit as would be afforded to a final judgment of a state court.

Petitioner confuses the issue by relying on cases involving the recognition (sometimes referred to as “confirmation”) of international arbitration awards under the Federal Arbitration Act, 9 U.S.C. § 201 et seq. (“FAA”). As the Second Circuit explained in Mobil, under the FAA, international arbitration awards under other conventions (including, specifically, the New York and Panama Conventions) are subject to recognition proceedings in the U.S. courts — in addition to enforcement proceedings. In challenging the recognition of the award, a party may invoke the limited grounds stated in the FAA (which, with respect to awards under the New York and Panama Conventions, incorporate the grounds stated in those Conventions). See 863 F.3d at 118-19.

By contrast, in a proceeding under Section 1650a, there are no substantive grounds under which a party can seek to challenge the ICSID award itself. Instead, challenges to an ICSID award — based on the grounds stated in the ICSID Convention — are brought before an ICSID Annulment Committee, which decides the challenges without the further review of a domestic court (as in the arbitration proceedings at issue here). Notably, Section 1650a refers only to enforcement (and not to recognition or confirmation). That does not mean, however, that respondents in ICSID enforcement actions are unable to assert any challenges or defenses in a proceeding under Section 1650a. The main issue in Mobil was whether an ICSID-award creditor could seek to enforce the award on an ex parte basis under Section 1650a, without regard to the notice and venue provisions of the Foreign Sovereign Immunities Act (the “FSIA”). The Second Circuit held it could not; Section 1650a “requires federal courts to enforce ICSID awards as if they were final judgments of state courts — that is, pursuant to civil actions brought under the Federal Rules of Civil Procedure on such awards.” Id. at 124. The Second Circuit explained that to hold otherwise would prevent the ICSID-award debtor from raising various (albeit limited) defenses that would be available to challenge the enforcement of an ICSID award — just as they would be available to challenge the pecuniary obligations under the final judgment of a state court. As stated by the Court in Mobil:

[T]he exclusion of the substantive attacks available under the FAA from ICSID award actions does not, in our judgment, imply an intention that a foreign sovereign award-debtor be denied notice of the action to enforce the award and the occasion to make non-merits challenges to the award: for example, to question the authenticity of the award presented for enforcement, the finality of the award, or the possibility that an offset might . . . make execution in the full amount improper.

Id. at 121 (emphasis added).

Even before the Second Circuit's decision in Mobil, this Court had concluded in Micula I that “[t]he ICSID Convention anticipates that a Contracting State with a federal constitution, such as the United States, can elect to treat an ICSID award as a final judgment of a constituent state court[,]” and that “[t]hat is precisely what section 1650a does.” Micula I, 104 F. Supp. 3d at 52. Therefore, based on Micula I — and also based on Mobil, decided in the interim — this Court correctly held that setoff is available against an ICSID award. Micula II, 404 F. Supp. 3d at 283. Although this Court in Micula II declined to grant the asserted tax setoffs requested by Romania in that case, that was only because “a Romanian court [had] declared the asserted tax setoffs to be unlawful under Romanian law.” Id. at 284 (citing to respondent's expert on Romanian law). (As explained in Section II below, such is not the case with respect to the tax setoffs sought by the Republic in this case. Moreover, to be clear, the Republic here seeks setoff under federal common law, not Ecuadorian law.) However, the Court in Micula II held that other amounts (specifically, for sums received by petitioner though forced executions in Romania) could be used to offset the amount of the ICSID award and, accordingly, ordered such setoff. Id. at 284-86.

The various cases cited by Petitioner involving recognition and enforcement under the FAA are, under the plain language of Section 1650a, inapplicable to this case. Moreover, none of the cases involved a request for setoff against enforcement of the awards at issue in those cases. Thus, for example, in Balkan Energy Ltd. v. Republic of Ghana — a case decided by Judge Mehta (who also decided Micula I and Micula II) — Ghana asked the Court to take “notice” of garnishment orders issued in the Ghanian courts that purported to order Ghana to pay amounts owed under the arbitration award to the petitioner's creditors, which amounts allegedly exceeded the amount of the award. 302 F. Supp. 3d 144, 159 (D.D.C. 2018). Judge Mehta denied that request because, inter alia, “[a] court 'may refuse to enforce the award only on the grounds explicitly set forth in Article V of the [New York] Convention.'” Id. (quoting TermoRio S.A. E.S.P. v. Electrana S.P., 487 F.2d 928, 933 (D.C. Cir. 2007)) (emphasis in original). Accordingly, Judge Mehta concluded that the “foreign proceedings provide no reason to deny confirmation” of the Award. . . .” Id. (emphasis added). Neither Balkan Energy nor the other cases cited by Petitioner address the question of whether equitable setoff is available against the enforcement of the pecuniary obligations of an international arbitration award under the FAA. Indeed, none of the respondents in those cases specifically asked for setoff against enforcement.⁴ More fundamentally, the question of whether this Court may grant setoff against the pecuniary obligations of the ICSID Award is not governed by the FAA, but rather by Section 1650a. For the reasons stated in Micula II and Mobil, this Court may order setoff against the ICSID Award at issue.

II. THE REPUBLIC HAS DEMONSTRATED THAT IT IS ENTITLED TO EQUITABLE SETOFF FOR THE TAX JUDGMENTS THAT ARE ENFORCEABLE UNDER ECUADORIAN LAW.

A. The Republic Has Satisfied the Requirements for Equitable Setoff.

In its Cross-Motion, the Republic demonstrated that it has satisfied the requirements for set-off, viz.: (1) Petitioner is insolvent; that is, but for the Award proceeds, Petitioner does not have sufficient assets to pay the enforceable tax judgments (or any of the other tax claims) against it in Ecuador, so that setoff against the Award in this action is the only realistic opportunity for the Republic to recover these debts; (2) the judgments for which the Republic seeks setoff are enforceable under Ecuadorian law; and (3) there is mutuality sufficient to satisfy the requirements of equitable setoff.

In support of its Cross-Motion, the Republic submitted the expert opinion of Prof. Coronel — an independent expert who was not involved in this matter prior to being retained by the Republic.⁵ Prof. Coronel offered clear and irrefutable evidence that the tax judgments for which the Republic seeks setoff are enforceable against Petitioner as a matter of Ecuadorian law. These are judgments that have either been affirmed by Ecuador's highest cassation court — the National Court of Justice (the “NCJ”) (formerly the Supreme Court of Ecuador) — or for which Petitioner failed to post an appeal bond. First Coronel Report ¶¶ 40, 41; see also Second Coronel Report ¶¶ 31, 41. Once the claims are deemed enforceable, the SRI may (but is not required to) issue a Payment Order to collect the tax debt from the debtor. Second Coronel Report ¶ 12, 21; Second Ordóñez Decl. ¶¶ 37, 38, 46. The Republic also presented the Declaration of Mr. Ordóñez,⁶ an Ecuadorian-trained lawyer who has worked at the SRI for nearly fourteen years and who currently serves as the SRI's General Assistant Director for Tax Compliance. First Ordóñez Decl. ¶¶ 4-10. Mr. Ordóñez testified that the SRI had attempted to enforce several Payment Orders against Petitioner to collect the tax debt — but was unable to do so because Petitioner has insufficient assets to satisfy the debt. Id. ¶¶ 43-44. Petitioner has made no serious effort to rebut that testimony. (See also Second Ordóñez Decl. ¶¶ 46, 59, 61.)

By contrast, Petitioner has submitted the Expert Report of Ms. Carmen Amalia Simone Lasso dated Sept. 20, 2021 (ECF No. 33) (“Simone Report”). Ms. Simone is a partner in the Ecuadorian law firm of Pérez Bustamante y Ponce (“PBP”), which for many years represented Petitioner in the tax litigation concerning the tax claims at issue in this Cross-Motion. Indeed, Ms. Simone even participated on behalf of Petitioner in a final argument hearing before the District Tax Court involving one of the claims. Simone Report ¶ 6. Ms. Simone acknowledges that in preparing her Report, she was “assisted by my colleagues at PBP.” Id. ¶ 10. As a result, Ms. Simone is not an independent or unbiased “expert.” She and her colleagues at PBP acted for many years as paid advocates for Petitioner concerning the very matters in controversy in this

Cross-Motion. Ms. Simone cannot be expected to take positions different from those that she and her colleagues advocated on behalf of Petitioner in the tax litigation, concerning the very claims that are now at issue before this Court. For these reasons, the Court must afford little or no weight to her opinions — and at the very least must approach her opinions with considerable caution.⁷ Similarly, Petitioner has submitted the Declaration of Mr. Emmanuel Marie Patrick Colombel dated Sept. 20, 2021 (ECF No. 32) (“Colombel Decl.”). Mr. Colombel is the CFO of Petitioner's ultimate parent company — who does not appear to be a lawyer, let alone an Ecuadorian lawyer. See Colombel Decl. ¶ 1. The Court should give no weight to his “opinions” concerning Ecuadorian tax law, which, in any event, merely repeat the same flawed arguments offered by Ms. Simone.

1. Petitioner is Insolvent.

Courts in the United States do not strictly require finality or enforceability for claims for which equitable set-off is sought — where, as here, the party against whom setoff is sought is insolvent or non-resident in the jurisdiction of the pending action. As both the Supreme Court and the D.C. Circuit have held, “'the insolvency of the party against whom the set-off is claimed is a sufficient ground for equitable interference.'” Brownley v. Peyser, 98 F.2d 337, 340 (D.C. Cir. 1938) (quoting N. Chicago Rolling-Mill Co. v. St. Louis Ore & Steel Co., 152 U.S. 596, 615 (1984)). Federal and state courts around the country have repeatedly reached the same conclusion.⁸ The reason is self-evident. It would be inequitable to allow a plaintiff (here, Perenco-Ecuador) to recover substantial sums from a defendant (here, the Republic) — when the plaintiff owes the defendant monies that defendant will not be able to recover elsewhere due to the plaintiff's insolvency, or its ability to put the assets it receives in the present action beyond the reach of the defendant. As the Supreme Court stated long ago in Blount v. Windley:

This remedy [of setoff] has been very much extended in equity where the insolvency of the judgment plaintiff, his non-residence within the jurisdiction of the court, the fact that the mutual obligations have grown out of the same transaction, and many other purely equitable considerations, have been held to authorize the setting off of many classes of obligations by the defendant, against a judgment duly recovered against him in a court of law.

95 U.S. 173, 177 (1877) (emphasis added) (citations omitted).

Here, Petitioner is seeking to enforce the pecuniary obligations (worth nearly $400 million) of an Award granting it damages arising from its operation of oil blocks in Ecuador, when Petitioner has failed to pay its tax debts arising from the operation of the same blocks — and, moreover, makes clear that it has no intention of paying them. Petitioner does not deny (and does not even respond to) the Republic's assertion that Petitioner is expected to transfer the Award proceeds to its ultimate beneficial owners immediately upon receipt — effectively admitting the allegation. Furthermore, the Republic in its Cross-Motion provided ample evidence that Petitioner has no assets (apart from the anticipated Award proceeds) that could satisfy its tax debt in Ecuador. Thus, Mr. Ordóñez provided detailed testimony — with documentary support — that the SRI has attempted “to collect upon the tax obligations corresponding to the 2002, 2004-2005, and 2006 fiscal years[.]” First Ordóñez Decl. ¶ 43. Through those efforts, the SRI “confirmed that there are no assets or receivables recorded in Perenco's name in the country, and which could be used to enforce or secure collection for those obligations.” Id. (emphasis added). Mr. Ordóñez testified that the SRI has attempted, inter alia, to:

(i) seize currently available or future funds or receivables existing in Perenco's accounts (by sending an official notice to the Superintendence of Banks so that it would send the corresponding official notice to institutions from the financial system; (ii) seize present or future funds or receivables belong to Perenco's liquidator and its legal representatives; (iii) prohibit disposal of all fixed assets registered in Perenco's name, as well as in the name of its legal representatives; and (iv) seize any present and future receivables that specific taxpayers (e.g., the OCP consortium) owe to Perenco for any reason.

Id. (citing Coactiva Execution Procedure No. DZ9-COBUAPC19-00000225, Payment Request dated May 9, 2019, Exhibit 48 (ECF No. 23-48)). Mr. Ordóñez identifies additional evidence of Petitioner's inability to pay in his Second Declaration (at ¶ 61).

Petitioner makes no serious effort to rebut that evidence or to show (or even generally allege) that it has assets in Ecuador (or elsewhere) that could satisfy its tax debt. Instead, Petitioner plays at word games — asserting that is not “insolvent” but merely in “liquidation.” Response at 39. Petitioner first offers the Expert Report of Ms. Simone on this point — even though she concededly has “no view” on whether Petitioner has any “assets in-country” that could satisfy its tax debt. Simone Report ¶ 72. Nor does she suggest that Petitioner has any such assets elsewhere. Instead, Ms. Simone offers general assertions concerning the definitional differences between “insolvency” and “liquidation” under Ecuadorian law — and scrupulously avoids the question of whether Petitioner has assets sufficient to pay its tax debt. Ms. Simone opines, for example, that

[l]iquidation under Ecuadorian law has nothing to do with insolvency, and also is no obstacle to recovery of any tax debts. To the contrary, the Ecuadorian authorities will not liquidate the branch until its local debts — including any tax debts — have been satisfied.

Id. ¶ 119. But even assuming arguendo that such general propositions are correct, they have nothing to do with the issue before the Court. It may be that, as a general matter, a company in liquidation under Ecuadorian law is not necessarily insolvent. But that hardly addresses the issue of whether Perenco-Ecuador has assets sufficient to pay its tax liability, other than the anticipated Award proceeds. And it may be accurate as a general matter that liquidation is not by itself an “obstacle to recovery of any tax debts.” But if Petitioner has insufficient assets to pay its tax debts (i.e., the question on which Ms. Simone takes “no view”), that will not only be an obstacle — but an insurmountable obstacle — to recovering the tax debts in the absence of setoff in this action.

Ms. Simone also opines that “[e]ven after the branch is liquidated, Ecuadorian law provides for other avenues of enforcement of tax debts in Ecuador and abroad.” Id. She fails to identify any such “avenues.” Given that the Republic does not know where Petitioner will transfer the Award proceeds, the Republic has no basis even to assess whether any means of enforcement would be available. At best, the Republic would have to undertake a long and protracted asset search and then succeed in piercing the corporate veils (which are likely numerous) between Petitioner and its ultimate beneficial owner(s) (assuming that the Republic could even identify them). At that point, it is impossible to know how Petitioner's beneficial owners will have disposed of the Award proceeds.

Petitioner has also offered the testimony of Mr. Colombel on this point. He provides no further clarity on the identity of Petitioner's beneficial owners, simply describing Petitioner's ultimate parent company, Perenco S.A., as a “family-owned business.” Colombel Decl. ¶ 9. As stated in the Cross-Motion (at 5-6), there is a chain of Bahamian holding companies between Petitioner and Perenco S.A. — whose ownership is itself opaque. Mr. Colombel does not contend or show otherwise. Still, if anyone could state that Petitioner has assets sufficient to satisfy its tax debt, it would presumably be Mr. Colombel. He fails to do so. Like Ms. Simone, Mr. Colombel evades the issue by trying to draw a distinction between “insolvency” and “liquidation.” Thus, Mr. Colombel asserts that “[t]he local branch [of Perenco-Ecuador] is being wound up not because it is insolvent, but because Ecuador expropriated our operations and we no longer have any business there.” Colombel Decl. ¶ 8 (emphasis in original). Mr. Colombel further asserts that Petitioner's tax liabilities “will be sorted out in the local liquidation process.” Id. But “sort[ing] out” liabilities hardly means that they will be paid — or that Petitioner has assets to pay them — especially if Petitioner “no longer [has] any business” in Ecuador. Mr. Colombel not only fails to identify any assets held by Petitioner that could satisfy Petitioner's tax debt; he fails even to make a general assertion that there are such assets. His failure to do so in response to the Republic's allegations on this point can only lead the Court to conclude that there are no such assets.

The Republic has more than carried its burden of demonstrating that Petitioner has insufficient assets to satisfy its tax debt in Ecuador, and that if the Court does not offset the Award proceeds by the amount of that debt, the Republic will almost certainly be unable to recover it in any other setting. Petitioner's Response serves only to advance that conclusion. The equitable considerations underlying the common law right of equitable setoff apply overwhelmingly to this case. When foreign States and State-owned entities have sought to enforce pecuniary obligations owed by private companies in the U.S. federal courts, the courts have not hesitated to allow the private companies to assert equitable setoff against those obligations.⁹ The rules must be applied equally. Where, as here, equity dictates granting setoff to a foreign State against pecuniary obligations that a private entity seeks to enforce in this Court, the Court should also grant setoff.

2. The Tax Claims for Which the Republic Seeks Setoff Are Enforceable in Ecuador.

As stated above, where the party against whom setoff is sought is insolvent, or otherwise able to evade the debts for which setoff is sought, courts in the U.S. have not required full maturity or enforceability of the debts in question. Nonetheless, in its Cross-Motion, the Republic seeks set-off only for those tax judgments that are enforceable as a matter of Ecuadorian law (while seeking a stay of enforcement against the rest). As Prof. Coronel explained in his First Expert Report, tax claims in Ecuador are enforceable (a) once they have been affirmed by the NCJ; or (b) if they have been appealed to the NCJ, are pending in that forum, and an appeal bond has not been posted. First Coronel Report ¶¶ 21-25, 27, 40; see also Second Coronel Report ¶ 9, 10. Prof. Coronel cited in his First Report the applicable provisions of Ecuadorian law that establish these propositions, which are neither controversial nor ambiguous. Thus, as Prof. Coronel sets forth in his First Report, under the Ecuadorian Tax Code (“TC”), “[e]nforceable acts” by the SRI are “[t]hose acts consisting of administrative resolutions issued in tax claim proceedings for which no further appeal has been filed or no further appeal has been provided in the same administrative venue.” First Coronel Report ¶ 30 (citing TC, art. 84, Exhibit 39 (ECF No. 22-39)) (emphasis in original). Prof. Coronel references Article 11 of the Cassation Law, which provides that the SRI can proceed to enforcement even while the appeal is pending, if the party appealing the claim has failed to post the required appeal bond. First Coronel Report ¶ 40 (citing Case No. 17505-2007-24646, S.T.D.C.T. (Jan. 25, 2018), Exhibit 49 (ECF No. 22-49)); Second Coronel Report ¶ 17 (citing Cassation Law, art. 11, Exhibit 16 (ECF 33-16)). He also cited the Organic Law on Jurisdictional Guarantees and Constitutional Oversight, which plainly states that appeals to the Constitutional Court (known as “extraordinary appeals”) do not stay the enforcement of tax judgments. First Coronel Report ¶ 27 (citing Organic Law on Jurisdictional Guarantees and Constitutional Oversight, art. 63, Exhibit 43 (ECF No. 22-43)).

We have updated the chart in Republic's Cross-Motion (at 18-19) with the claims that are now enforceable against Petitioner under Ecuadorian law and attach it as Exhibit A to this Reply. (For ease of reference, Exhibit A identifies each claim with an “Item No.,” by which we reference the claims discussed herein.) These amounts have been updated with interest as of October 11, 2021. In addition, as explained in the Second Ordóñez Declaration, the Republic has identified an additional claim pending before the NCJ for which Petitioner failed to post an appeal bond.¹⁰ Second Ordóñez Decl. ¶ 31. The SRI is currently seeking payment of that claim and the Republic has therefore added that claim to the amounts for which it seeks setoff in its Cross-Motion. Accordingly, the amount of enforceable tax liability owed by Petitioner (taking into account the updates set forth in Table A) is currently $53,775,998.36. Second Ordóñez Decl. ¶ 32.¹¹

In her Report, Ms. Simone acknowledges that two of the claims set forth above — for 2004 Block 7 (Item 3) and 2005 Block 7 (Item 5) — are now final and enforceable, because “there is no pending appeal and the SRI has issued a Payment Order and associated precautionary measures.” Simone Report ¶ 70. Based on that admission alone, the Court should grant setoff for at least those two claims, in the amount of $14,654,567.8 (including interest as of October 11, 2021).¹² But Ms. Simone's reasons for asserting that the other claims are not yet enforceable are flawed on their face. First, with respect to the claims that are currently on appeal — and for which Petitioner has failed to post an appeal bond — Ms. Simone does not contest that the claims are enforceable as a matter of Ecuadorian law. Instead, she asserts that “it is the SRI's practice not to pursue enforcement proceedings while a cassation appeal is pending, because if the [NCJ] ultimately annuls a Bill of Assessment that the SRI has begun to enforce, the SRI must not only make restitution, but the individual officers of the SRI may be subject to personal liability.” Id. ¶ 66 (citing Tax Code, art. 207, Exhibit 3 (ECF No. 33-3)) (emphasis added). Ms. Simone, who is not (and has never been) an SRI public servant, fails to cite any authority to support the existence of the “practice” she describes. As Mr. Ordóñez explains in his Second Declaration, Article 207 does not contemplate any grounds for liability in these circumstances; it applies on its face applies only to judicial auctions carried out in the framework of an enforcement action. Seeking to enforce a judicial decision which is enforceable under Ecuadorian law cannot engage the liability of a public servant. Second Ordóñez Decl. ¶¶ 43-44. Furthermore, Ms. Simone offers no serious explanation as to why — notwithstanding this supposed practice — the SRI proceeded to issue a Payment Order to collect on the 2002/Block 7 claim (Item 1), which remains on appeal before the NCJ, but for which Petitioner failed to post an appeal bond. She merely “suspect[s]” that the SRI issued a Payment Order because it “wants to avoid any possibility that such obligation becomes time-barred[.]” Id. ¶ 66 (emphasis added). But suspicions and unsupported descriptions of “practices” are insufficient to rebut the legal opinion of Prof. Coronel — supported by the plain language of the governing law that he has exhibited to his Reports — that these judgments are now enforceable against Petitioner. See First Coronel Report ¶ 40; Second Coronel Report ¶¶ 16-17. And again, as Mr. Ordóñez testified, the SRI has attempted to enforce this and other judgments against Petitioner, but has been unable to do so because of its lack of assets. First Ordóñez Decl. ¶¶ 42-43; Second Ordóñez Decl. ¶ 55.

Second, as is evident from even the foregoing discussion, Ms. Simone conflates the meaning of “enforceable” with the process of “enforcement.” She suggests that even after the NCJ has issued its judgment — and the SRI has issued a Payment Order — the taxpayer can still raise substantive challenges against the judgment itself. Simone Report ¶¶ 17, 52 (Table No. 1), 57-60, 62, 73 (Table No. 2). That is incorrect. As already explained, under Ecuadorian law, once a judgment issued by the District Tax Court has been confirmed by the NCJ (following a cassation appeal), that judgment is final and binding, and the taxpayer has the obligation to abide by it. See Second Coronel Report ¶ 25. The SRI has the power (but not the obligation) to issue a payment order and, thus, to initiate collection proceedings, if the tax debtor does not comply and the SRI determines that there is a risk of non-payment. But the issuance (or not) of a payment order and the commencement (or not) of proceedings to collect is unrelated to the final and binding nature of the judgment in question. Second Ordóñez Decl. ¶ 43.

Although Ms. Simone is correct that two Payment Orders issued by the SRI have been annulled by the District Tax Court, she conveniently omits several key points. As regards the Payment Order for the 2004-2005 (Block 21) obligation, the SRI has challenged the decisions of the Tax District Court before the NCJ, and the proceedings are currently pending. Moreover, the disputed Payment Order was annulled by the District Tax Court on the grounds that the SRI had incorrectly indicated Petitioner as the taxpayer (“contribuyente”), instead of the person responsible for compliance with the tax obligation (“responsable”), as the legal representative of the Contractor (from 2002-2005) and then of the Consortium (from 2006-2009). Even if the District Tax Court agreed with the bases for that annulment, the SRI could correct this ministerial error quite easily in a new Payment Order. In addition, as regards fiscal year 2006 (Block 21), the Payment Order was annulled only to the extent it concerned Mr. Ernesto Jorge Rocha Yáñez, a former legal representative of Perenco — and not to the extent it concerned Petitioner itself.

Third, Ms. Simone (along with Mr. Colombel) argues that the tax judgments for which the Republic seeks setoff were wrongly decided. In particular, she argues that the NCJ incorrectly determined that Petitioner lacked standing when it challenged in its individual capacity tax assessments that the SRI had made against it in its capacity as legal representative of the Contractor. Simone Report ¶ 69.¹³ These are the same arguments that Ms. Simone and her law firm made on behalf of Petitioner in the Ecuadorian courts — and which were rejected — because they are wrong as a matter of Ecuadorian law. As explained, Perenco-Ecuador is liable for the Contractor's tax obligations in its capacity as that party's legal representative, operator, and as a member thereof — jointly and severally with Burlington and Preussag. First Coronel Report ¶ 44; Second Coronel Report ¶ 30.

But more fundamentally, it is not this Court's function to determine whether the enforceable judgments that the Republic has presented for setoff were correctly decided as a matter of the law of the forum in which they were rendered. There is some authority (cited by Petitioner) for the proposition that, in the context of recognizing and enforcing a foreign judgment (as opposed to granting setoff for pecuniary obligation under a foreign judgment), U.S. courts may decline recognition or enforcement based on evidence that the judgments at issue were rendered in the absence of independence or due process. See, e.g., Hilton v. Guyot, 159 U.S. 113, 202 (1895); Chevron Corp. v. Donziger, 833 F.3d 74 (2d Cir. 2016). However, Petitioner's generalized allegations concerning the entirety of the Ecuadorian judicial system during the Presidency of Rafael Correa (who served as President of Ecuador from January 15, 2007 to May 24, 2017) do not rise anywhere close to a showing that the tax claims and judgments before this Court were issued by biased officials at the SRI, or decided by biased judges on the District Tax Courts or the NCJ. While Petitioner relies heavily on Donziger, the Second Circuit in that case concluded that there was no “need here to reach any question as to the institutional adequacy of the Ecuadorian judicial system” and limited itself to case-specific issues. 833 F.3d at 129.

This case involves tax audits and assessments that began before Mr. Correa was elected President (e.g., the SRI audit for the 2002 fiscal year (Block 7) commenced in March 2006 and the corresponding Bill of Assessment was noticed to the Contractor in November 2006). It also involves decisions by the District Tax Courts and the NCJ long after Mr. Correa left office (e.g., April 2019 for the District Tax Court's ruling with respect to 2009/Block 7). See First Ordóñez Decl. ¶¶ 25-34. The record shows that Petitioner pursued all the procedural protections afforded by Ecuador's system for the review of SRI assessments — in many instances seeking administrative review by the SRI and pursuing appeals to the Tax District Courts, the NCJ, and the Constitutional Court (winning some victories — including the reduction of tax assessments — along the way). Id. Although Petitioner complains about the length of the proceedings — asserting that they have progressed “at a glacial pace” (Response at 14) — if the SRI and Ecuador's tax judges were in fact biased and lacking in independence, they would have quickly entered judgments against Perenco on all the claims and attempted to enforce them immediately.¹⁴

Indeed, Petitioner's own expert, Ms. Simone, served as a Vice-Minister and as a Judge of the Tax District Judge during the Presidency of Mr. Correa. Simone Report ¶ 3. She presumably does not believe that all persons appointed to such positions during the Correa Presidency lacked independence or integrity. And while she states in her Report that she left her position as a Tax District Court Judge in 2012 — because she did not think she would be able to carry out her role in an independent matter — Ms. Simone does not identify any alleged serious procedural improprieties or due process violations in the prosecution of the tax claims against Petitioner. She simply disagrees with the substance of some of the decisions and opines (incorrectly) that most of the judgments for which the Republic seeks setoff are not yet enforceable against Petitioner (apart from the approximately $14.6 million of the judgments that she concedes are now final and enforceable against Petitioner).

In sum, Petitioner has failed to rebut the testimony of Prof. Colonel and Mr. Ordóñez that the tax judgments for which the Republic seeks setoff are now enforceable under Ecuadorian law.

3. There is Mutuality for the Purposes of Equitable Setoff.

As explained in the Republic's Cross-Motion, set-off requires mutuality between the creditor and debtor, but does not require that the obligations arise from the same transaction. See Cross-Motion at 23-24 (and cases cited therein). (Here, however, the Republic is seeking to recover tax obligations owed by Petitioner for the operation of the same oil blocks for which the Tribunal awarded it damages.) Relying again on the Expert Report of Ms. Simone, Petitioner asserts that there is no such mutuality here, because under Ecuadorian law, the SRI (the entity to whom Petitioner owes its tax debt) is separate from the Government of Ecuador. Response at 40 (citing Simone Report § V.E.). But in the context of granting equitable setoff against foreign States, U.S. courts, including the Supreme Court, have not required strict juridical identity between foreign States and their constituent subparts (including State-owned enterprises as opposed to State agencies), where doing so would lead to inequitable results. Thus, in Bancec, the Supreme Court considered a counterclaim for setoff under federal common law made by First National City Bank (now Citibank), which had been sued by Bancec in U.S. District Court. Bancec — established by the Cuban government as “[a]n autonomous credit institution for foreign trade” with its own “full juridical capacity” — had sued Citibank on a letter of credit. 462 U.S. at 611. Within days of the commencement of Bancec's lawsuit, the Cuban Government seized and nationalized all of Citibank's assets in Cuba. Id. Citibank counterclaimed against Bancec, “asserting a right to set off the value of its seized Cuban assets.” Id. The Supreme Court held that to give effect to Bancec's separate juridical status in these circumstances would cause injustice and that a setoff claim was therefore appropriate. Id. at 632. See also Banco Central, 919 F. Supp. at 16 (holding that “where treating an entity as separate from its government 'would work fraud or injustice,'” strict juridical identity is not required to satisfy the mutuality element of equitable setoff) (quoting Bancec, 462 U.S. at 629). Here, too, refusing set-off on the grounds that the SRI and the Republic of Ecuador do not have strict juridical identity would be unjust and contrary to the principle of equitable setoff. Therefore, the requirement of mutuality is satisfied for the purposes of setoff in this case.¹⁵

B. Petitioner's Other Asserted Defenses to Setoff Have No Merit or Are Irrelevant.

Petitioner has attempted to state various other defenses to the Republic's setoff claim, which have no merit or are irrelevant. First, Petitioner invokes the defenses of judicial estoppel and waiver to assert that the Republic is not entitled to setoff, based on its assertion that Republic undertook to the Annulment Committee to “'pay the Award unconditionally, voluntarily and in full, within 60 days of the decision on annulment and 'without such payment being subject . . . to enforcement proceedings.'” Response at 22 (quoting Perenco v. Ecuador, ICSID Case No. ARB/08/6, Procedural Order No. 2 (Apr. 21, 2020), ¶ 4, attached as Exhibit A to the Parties' Joint Status Report dated June 17, 2021 (ECF No. 11-1)). But Petitioner omits the key language. The Republic's commitment was made subject to a specific condition. As stated in the letter from Ecuador's then Minister of Economy and Finance, Mr. Richard Martínez Alvarado: “[I]n case Ecuador's application for annulment were not to be upheld in full or in part, the Republic of Ecuador commits to pay the Award unconditionally, voluntarily and in full, within 60 days . . ., without such payment being subject to enforcement proceedings or to the intervention of Ecuador's courts.” Letter from Mr. Martínez Alvarado to ICSID Annulment Committee (Apr. 20, 2020), at 1-2, attached as Exhibit 3 to Declaration of Mark W. Friedman (ECF No. 31-3) (emphasis added). But the Republic's application for annulment was upheld in part — including, specifically, on an issue that forms part of the basis for the tax judgments for which the Republic seeks setoff in its Cross-Motion.¹⁶

As Petitioner acknowledges, the doctrine of judicial estoppel requires as its first element that “[a party's] later position [must be] 'clearly inconsistent' with its earlier position.” Response at 23 (citation omitted; emphasis added). There is no inconsistency here. The Republic's commitment was expressly conditioned on an event — the complete rejection of its annulment application — that did not come to pass. Similarly, even assuming arguendo that the Republic's position to the Annulment Committee constituted a waiver of its right to seek setoff, the position was again conditioned, specifically, on an event that that did not happen. Therefore, neither defense has merit.

Second, Petitioner raises several defenses that might arguably be applicable if the Republic were seeking to enforce the tax judgments as foreign judgments in this Court. But the requirements of comity, the revenue rule, and the District of Columbia's statute for enforcing foreign judgments are irrelevant where, as here, the Republic is seeking equitable setoff as opposed to the enforcement of foreign judgments. See Micula II, 404 F. Supp. 3d at 285 (concluding that “international comity concerns play no role here”); Thai Lao Lignite (Thailand) Co. v. Gov't of the Lao People's Democratic Republic, No. 10-CV-5256 (KMW) (DCF), 2016 WL 958640, at *4 (S.D.N.Y. Mar. 8, 2016) (holding that “Respondent is entitled to invoke its statutory set off right with respect to these obligations, even without first obtaining a judgment from a United States Court”).¹⁷ Neither the Supreme Court in Bancec nor this Court in Banco Central required the setoff claims against the foreign States and their State-owned entities to be reduced to judgment before offset. The requirements for the enforcement of foreign judgments are simply inapplicable to equitable setoff.

In sum, for all the reasons stated above, the Republic has demonstrated that equitable setoff is warranted for the tax judgments that are now enforceable against Petitioner in Ecuador.

III. THE COURT SHOULD STAY ENFORCEMENT AGAINST THE AMOUNTS OF TAX CLAIMS FOR WHICH IT DOES NOT GRANT SETOFF.

The Republic in its Cross-Motion explained why the Court should stay enforcement with respect to those tax claims that are not yet enforceable in Ecuador, because Petitioner's challenges to them remain pending before the Ecuadorian courts (except for the judgments identified for which appeal is pending before the NCJ but for which Petitioner has failed to post the required bond). Cross-Motion at 27-28. Those claims now amount to $19,178,768.31 with interest. Second Ordóñez Decl. ¶ 32. Petitioner does not seriously oppose the Republic's requested relief, or that the Court has the authority to provide it. See Response at 43. Accordingly, the Court should stay enforcement of the Award with respect to amounts equal to the tax claims which are not yet enforceable against Petitioner in Ecuador. Again, setoff here represents the only real opportunity that the Republic will have to collect the tax debt against Petitioner. A stay against enforcement of portions of the Award amounts, when reduced to judgment, will similarly advance the interests of justice, and therefore is well within the Court's discretionary powers.

IV. PETITIONER IS NOT ENTITLED TO POST-JUDGMENT INTEREST AT A HIGHER RATE THAN THAT PROVIDED FOR BY 28 U.S.C. § 1961.

Petitioner is not entitled to post-judgment interest beyond the rate set forth in 28 U.S.C. § 1961. “The language of § 1961 is 'mandatory' and '[i]ts terms do not permit the exercise of judicial discretion in its application.'” OI Eur. Grp. B.V. v. Bolivarian Republic of Venezuela, No. CV 16-1533 (ABJ), 2019 WL 2185040, at *6 (D.D.C. May 21, 2019) (quoting Carte Blanche(Sing.) Pte., Ltd. v. Carte Blanche Int'l, Ltd., 888 F.2d 260, 268–70 (2d Cir. 1989)). “A judgment confirming an arbitration award — like any other civil judgment — is subject to § 1961.” Tricon Energy Ltd. v. Vinmar Int'l, Ltd., 718 F.3d 448, 457 (5th Cir. 2013).

In accord with this rule, this Court has repeatedly granted post-judgment interest at the statutory rate set forth at 28 U.S.C. § 1961 where, as here, the underlying award granted interest at a different rate “until paid.”¹⁸ As this Court stated in Tenaris, “[a] different post-judgment rate can only be applied in two instances: (1) when the parties agree to a different rate by 'clear, unambiguous, and unequivocal language,' or (2) when the arbitral award itself 'explicitly state[s] the interest rate to be applied 'post judgment.'” 2021 WL 1177996, at *2 (quoting Westinghouse Credit Corp. v. D'Urso, 371 F.3d 96, 102 (2d Cir. 2004)); OI Eur., 2019 WL 2185040, at *6.¹⁹ Neither exception is applicable here. Perenco argues that the Court should grant post-judgment interest at the rate fixed in the Award because “the Parties agreed in a Supplemental Joint Status Report that the net amount due to Perenco under the Award . . . is 'subject to additional post-Award interest until full and final payment.'” Response at 45 (citing Parties' Supplemental Joint Status Report (July 27, 2021), ECF No. 17 at 2) (emphasis in original). But the parties' status report does not unambiguously evince an intent to contract around the mandatory rule of Section 1961. It merely repeats the language of the Award. Here, the language used by the parties in the Joint Status Report simply mirrored the language of the award, which courts — including this one — have uniformly held do not displace the statutory interest rate. If, as this Court (and others) have repeatedly held, the words “until full and final payment” as used in an award are insufficient to override the statutory interest rate stated in Section 1961, then the parties' mere repetition of that language in a status report to the Court does not constitute the “clear, unambiguous, and unequivocal language” that is required for a finding that the parties have expressly contracted around the statutory post-judgment interest rate. Tenaris, 2021 WL 1177996, at *2. Accordingly, the Court should order post-judgment interest at the rate provided for by 28 U.S.C. § 1961.

CONCLUSION

For the reasons stated above and in the Republic's Cross-Motion (and supporting submissions), this Court should (1) order setoff against the Award in the amount of the tax judgments that are now enforceable in Ecuador (currently amounting to $53,775,998.36, with interest); (2) stay enforcement of those Award amounts representing the tax judgments that are not yet enforceable in Ecuador (currently amounting to $19,178,768.31, with interest), pending their resolution in the Ecuadorian courts; (3) order post-judgment interest to be set as provided for in 28 U.S.C. § 1961; and (4) order such other relief as requested in the Republic's Cross-Motion, or as the Court deems proper.

Respectfully submitted,

Alexandre de Gramont
D.C. Bar No. 430640
DECHERT LLP
1900 K Street NW
Washington, DC 20006
Tel: (202) 261-3300
Fax: (202) 261-3333
alexandre.degramont@dechert.com

Michael A. Losco*
N.Y. Bar No. 5356505
Tamar Sarjveladze*
N.Y. Bar No. 5703608
DECHERT LLP
1095 Avenue of the Americas
New York, NY 10036
Tel.: (212) 641-5645
michael.losco@dechert.com
tamar.sarjveladze@dechert.com
*Admitted pro hac vice

Counsel for the Respondent

October 18, 2021