Appendix — PT Pertamina v. Karaha Bodas Co., LLC (Nos. 05-1571, 05-1573)

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UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

THIS SUMMARY ORDER WILL NOT BE PUBLISHED

IN THE FEDERAL REPORTER AND MAY NOT BE

CITED AS PRECEDENTIAL AUTHORITY TO THIS OR

ANY OTHER COURT, BUT MAY BE CALLED TO THE

ATTENTION OF THIS OR ANY OTHER COURT IN A

SUBSEQUENT STAGE OF THIS CASE, IN A RELATED

CASE, OR IN ANY CASE FOR PURPOSES OF COL-

LATERAL ESTOPPEL OR RES JUDICATA.

At a stated term of the United States Court of Appeals

for the Second Circuit, held at the Thurgood Marshall

United States Courthouse, at Foley Square, in the City of

New York, on the 9th day of March, two thousand and six.

Docket Nos. 04-6551-cv(L) and 04-6672-cv(C)

PRESENT:

Hon. John M. Walker, Jr.,

Chief Judge,

Hon. Pierre N. Leval,

Hon. Sonia Sotomayor,

Circuit Judges.

2a

In the Matter of an Arbitration Between

KARAHA BODAS COMPANY, L.L.C.,

Petitioner-Appellee,

BANK OF INDONESIA, Non-Party- Witness,

Garnishee,

MINISTRY OF FINANCE OF THE REPUBLIC OF INDONESIA,

Non-Party-Respondent-Appellant,

PERUSAHAAN PERTAMBANGAN MINYAK

DAN GAS BUMI NEGARA,

Respondent-Appellant.

APPEARING FOR APPELLANT HENRY WEISBURG Shearman

PERUSAHAAN PERTAM- & Sterling LLP, New York, NY

BANGAN MINYAK DAN (Pieter Van Tol, Scott Horton,

GAS BUMI NEGARA: and Victoria Paladino, Lovells,

New York, NY, on the brief).

APPEARING FOR APPELLANT FRANK PANOPOULOS (Carolyn

MINISTRY OF FINANCE OF 8B. Lamm, R. Shawn Gunnar-

THE REPUBLIC son, and Eric Grannon, on the

OF INDONESIA: brief), White & Case LLP,

Washington, DC.

3a

APPEARING FOR APPELLEE: (CHRISTOPHER F. DUGAN, (James

E. Berger, Matthew S. Dunne,

Danielle W. Pierce, and Car-

olyn E. Morris, on the brief),

Paul, Hastings, Janofsky &

Walker LLP, Washington, DC.

= ee

SUMMARY ORDER

Appeal from a judgment of the United States District

Court for the Southern District of New York.

UPON DUE CONSIDERATION, IT IS HEREBY

ORDERED that the district court’s judgment is AFFIRMED.

Respondent-appellant Perusahaan Pertambangan Minyak

Dan Gas Bumi Negara (“Pertamina”) and non-party-

respondent-appellant Ministry of Finance of the Republic

of Indonesia (“Indonesia”) appeal from the November 19,

2004 judgment of the United States District Court for the

Southern District of New York (Thomas P. Griesa, Judge)

directing the Bank of America to turn over to petitioner-

appellee Karaha Bodas Company, L.L.C. (““KBC”) funds

restrained to secure a money judgment against Pertamina.

We assume familiarity with the facts and procedural his-

tory and provide only a selective recitation here. On Feb-

ruary 22, 2002, the district court issued restraining notices

requiring several banks in the Southern District of New

York to restrain funds deposited into certain trust accounts

held in Pertamina’s name. Of those, the “refinery accounts”

received funds from Pertamina’s export sale of refined

petroleum products. The parties dispute whether funds

flowing through the refinery accounts (the “refinery

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funds”) were Pertamina’s, and therefore subject to restraint

and execution, or Indonesia’s, and therefore not subject to

restraint or execution. Because the amount that flowed

through the refinery accounts, roughly $452 million,

exceeds the current size of the underlying money judg-

ment, roughly $319 million, a determination that the refin-

ery funds belonged to Pertamina would afford KBC full

recovery. We note that the precise funds deposited into the

refinery accounts are no longer restrained. As reflected in

the district court’s March 18, 2004 order, and as confirmed

at oral argument, the parties agreed that banks subject to

the restraining notices would release all restrained funds to

Indonesia except for an amount held in certain restrained

accounts at the Bank of America that would be sufficient

to satisfy the underlying money judgment. The parties

agreed that these funds would secure KBC’s recovery of

whatever funds passing through any of the accounts at

issue, including the refinery accounts, the court deter-

mined to belong to Pertamina.

To determine the ownership of property, we first con-

sider possession. Because the refinery accounts were held

in Pertamina’s name, Pertamina is their presumptive

owner. See Karaha Bodas Co. v. Pertamina, 313 F.3d 70,

86 (2d Cir. 2002). “[T]his presumption may be rebutted by

evidence that the Republic of Indonesia actually controlled

the disputed funds, or that Pertamina merely held the funds

for the Republic of Indonesia, in the manner of a trustee.”

Id. Such a relationship would be “established . . . by provi-

sions of Indonesian law uniquely applicable,” so we now

look to that law. /d. at 87.

The appellants contend that the Indonesian “BBM” sys-

tem establishes Indonesia’s ownership of the refinery

funds. We disagree. First, although the no-profit-no-loss

5a

subsidy of the BBM regime does establish that Indonesia

acts like a guarantor of Pertamina’s BBM operation, it

does not deprive Pertamina of control over the refinery

funds. Pertamina is allowed to spend those funds for any

purpose, such as building asphalt plants, subject only to

budgetary limitations. Second, we find no inconsistency in

the fact that Pertamina operates the refineries on behalf of

Indonesia for the benefit of the Indonesian people and the

proposition that Pertamina owns revenues generated from

the sale of its output. In short, Pertamina points to no

Indonesian legal directive that deems the refinery funds

Indonesia’s, cf. id. at 90-92, or indicates that upon their

receipt, they are anything other than “property within

Pertamina’s control, which only Pertamina controls.” Jd. at

92. Because the presumption that Pertamina owns the

refinery funds is unrebutted, the district court correctly

held that those funds belonged to Pertamina and ordered

the Bank of America to turn over the balance of the under-

lying money judgment to KBC.

For the foregoing reasons, the district court’s judgment

is AFFIRMED. Because the appellants may seek review in

the Supreme Court, KBC’s pending motion of July 5,

2005, to vacate the a trict court’s stay of execution and

turnover is DENIED.

FOR THE COURT:

Roseann B. MacKechnie, Clerk

By:

Lucille Carr, Deputy Clerk

6a

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

21-MC-00098 (TPG)

In the Matter of an Arbitration Between

Karaha Bodas Company, L.L.C.,

Petitioner,

Vv.

Perusahaan Pertambangan Minyak

Dan Gas Bumi Negara (“Pertamina”), and,

Ministry of Finance of the Republic of Indonesia,

Respondents.

FINAL JUDGMENT

1. On December 4, 2001, the United States District

Court for the Southern District of Texas entered judgment

(the “Texas Judgment”) in an action between Karaha Bodas

Company, L.L.C. (“KBC”) and Perusahaan Pertambangan

Minyak Dan Gas Bumi Negara, now known as PT Pertam-

ina (Persero) (“Pertamina”), confirming an UNCITRAL

arbitration award requiring Pertamina to pay KBC a total

of $261,166,654.92, plus interest at the rate of 4% per annum

from January 1, 2001 until full payment. The United States

Court of Appeals for the Fifth Circuit affirmed this judg-

ment, and on October 4, 2004, the United States Supreme

Court denied Pertamina’s petition for writ of certiorari.

7a

2. The Texas Judgment was registered in and became a

judgment of this Court on February 22, 2002. On February

22, 2002, this Court issued writs of execution and restrain-

ing notices pursuant to Rule 69 of the Federal Rules of

Civil Procedure and Article 52 of the New York Civil Prac-

tice Law and Rules requiring, inter alia, Bank of America,

N.A. and The Bank of New York to restrain certain funds

that flowed through 24 trust accounts maintained in Perta-

mina’s name at those banks in this District (such accounts,

the “Trust Accounts”).

3. Bank of America and The Bank of New York estab-

lished 24 restraining accounts corresponding to the Trust

Accounts in which to keep restrained funds (such accounts

the “Restrained Accounts”). |

4. The Ministry of Finance of the Republic of Indonesia

(“Ministry”) challenged the District Court’s jurisdiction

under the Foreign Sovereign Immunities Act to restrain the

funds, claiming that under Indonesian law the funds

belonged to the Government of Indonesia and not the

judgment-debtor Pertamina.

5. On April 24, 2002, the District Court issued a Final

Order determining ownership of the funds restrained in fif-

teen of the Restrained Accounts located at Bank of Amer-

ica in New York (the “Adjudicated Accounts”). The April

24 Final Order held that with respect to these fifteen Adju-

dicated Accounts, which restrained revenues from the sale

of Indonesian Liquefied Natural Gas (“LNG”): (1) Pertam-

ina had a property right in those accounts to the extent of

its Retention Fee and KBC could execute only upon an

amount of the funds equal to the Retention Fee; and (2) the

remaining LNG revenues were the Government’s portion

and cannot be executed upon by KBC. The Court certified

8a

the ruling for interlocutory appeal and stayed its ruling

pending the appeal. At the time of the April 24 Final Order,

the amount of revenues restrained in the Adjudicated

Trusts was $292,874,622.17.

6. The April 24 Final Order did not determine ownership

of the funds restrained in the remaining nine Restrained

Accounts because the record at the time was insufficient to

determine whether KBC was entitled to execution against

those accounts. These nine accounts were subsequently

denominated as the “Unadjudicated Accounts.” (The Adju-

dicated and Unadjudicated Accounts together make up the

Restrained Accounts).

7. KBC, Pertamina, and the Ministry appealed the April

24 Final Order and the Ministry moved to lift the stay to

the extent of the amount of funds belonging to the Gov-

ernment. On June 18, 2002, the U.S. Court of Appeals for

the Second Circuit issued an Order modifying the District

Court’s stay to apply only to sufficient funds to satisfy the

judgment and maintaining the stay only as to funds up to

the amount of KBC’s Judgment. As a result of the Second

Circuit’s order, the amount of funds restrained in the Adju-

dicated Accounts over and above the amount of the judg-

ment, plus interest, was released. The amount of revenues

left restrained in the 15 Adjudicated Accounts on that date

equaled $276,633,524.59. The Second Circuit’s order did

not affect the nine Unadjudicated Accounts, and the

amount of funds in those accounts continued to grow as

funds payable to Pertamina from the corresponding Trust

Accounts were restrained in the Unadjudicated Accounts

pending adjudication of the funds’ ownership.

8. In an opinion issued on December 10, 2002, the Sec-

ond Circuit affirmed the District Court’s April 24 Final

9a

Order. Because the appeal was interlocutory and proceed-

ings in the District Court would continue, the Second Cir-

cuit directed the District Court to continue the stay in force

or to substitute one similar until such time as the parties’

rights to the disputed funds were finally determined. The

District Court then undertook to determine the amount of

the Retention Fee associated with the funds restrained in

the Adjudicated Accounts that could be executed upon, and

to adjudicate ownership of the funds restrained in the nine

Unadjudicated Accounts.

9. On March 18, 2004, this Court issued an Order modify-

ing the restraining notices and requiring Bank of America to

restrain funds equal only to the amount of the Texas Judg-

ment plus accrued interest. The March 18 Order was entered

without prejudice to the parties’ positions in the litigation for

the purpose of maintaining sufficient security for KBC’s

judgment and releasing to the Ministry funds not required for

such security. The March 18 Order required, inter alia,

(1) the release to the Ministry of all funds restrained in

excess of the amount of KBC’s judgment plus interest, and

(2) that only funds equal to the amount of the Texas Judg-

ment plus accrued interest was to be left restrained in the fif-

teen Adjudicated Accounts at Bank of America, plus

whatever additional amounts would be necessary to true up

accrued interest. The funds kept restrained were to be treated

as security for such amounts, if any, as were finally held in

further proceedings in this Court and on appeal to belong to

Pertamina and to be subject to execution against Pertamina

from among the funds that passed through the Trust

Accounts since February 22, 2002.

10. The March 18, 2004 Order further provided that if

the Texas Judgment is finally affirmed, the amount

restrained at Bank of America would be paid to KBC to the

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extent it is finally determined on appeal that funds passing

through the Trust Accounts or restrained in the Restrained

Accounts which belong to Pertamina and are subject to

restraint are at least equal to the amount of the Texas Judg-

ment plus interest. If it is determined that the amount

belonging to Pertamina and subject to restraint is less than

the amount of the Texas Judgment plus interest, the March

18 Order provided that the difference would be paid to the

Ministry.

11. At various times, this Court has ruled that certain of —

the funds flowing through the Trust Accounts or restrained

in the Restrained Accounts are the property of Pertamina

and properly restrained and executable by legal process

(such funds, “Executable Funds”). Specifically:

(a) On January 29, 2004, this Court issued an opinion

ruling, among other things, that the restraining notices on

the Trust Accounts corresponding to the Adjudicated

Accounts continued to be effective under N.Y. C.P.L.R.

§ 5222(b) even after the Bank of America trustee stopped

restraining further amounts in the Adjudicated Accounts as a

result of the amounts restrained in those accounts reaching

double the amount of the judgment or the Second Circuit’s

June 28, 2002 Order. According to the Opinion, as Retention

Fees passed through the corresponding Trust Accounts, they

would be deemed restrained even though the trustee did not

literally withhold those funds in the Adjudicated Accounts,

such that an equivalent amount from the funds already

restrained in the Adjudicated Accounts would be considered

as becoming Retention Fees. Thus, the January 29 Opinion

held that the restraints applied to $178,161,403, which the

Court determined to be the amount of Retention Fees earned

in respect of the funds that passed through the Trust

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Accounts corresponding to the Adjudicated Trusts from Feb-

ruary 22, 2002 to the end of 2002, as well as to any Reten-

tion Fees earned thereafter, and that KBC was entitled to

restrain and execute on this amount.

(b) On May 19, 2004, this Court issued on Opinion ruling,

among other things, that Pertamina continued to earn a

Retention Fee with respect to the Adjudicated Accounts,

albeit in a reduced amount, until November 21, 2003. The

May 19 Opinion further held that $132,992,871 of the funds

that had passed through the corresponding Trust Accounts in

2003 represented the Retention Fees earned in respect of the

those [sic/] accounts in 2003 and, for the same reasons pro-

vided in the January 29 Opinion, that amount was deemed

restrained in the Adjudicated Accounts and executable.

(c) On October 6, 2004, this Court orally ruled that Perta-

mina had a property interest in an additional $8,384,679 and

$3,690,000 of the revenues in the Unadjudicated Accounts

that had been restrained from the sale of natural gas products

because such amounts constituted, respectively, the amount

of the 2002 Retention Fee earned in respect of the West

Natuna, Corridor, and KMI Trust Accounts and the amount

of Pertamina’s participating interest in the contractors’ share

of the West Natuna Kakap Block PSC.

(d) On October 6, 2004, this Court also orally ruled that all

funds that had been restrained and subsequently released

from the Unadjudicated Accounts corresponding to the Cila-

cap, EXOR I, and MUS] II Trust Accounts and, after release,

passing through the Cilacap and MUSI II Trust Accounts,

through the date of this judgment, totaling $452,736,910,

belong to Pertamina.

12. The amount of the judgment as of October 6, 2004, includ-

ing simple interest at the rate of 4%, was $300,498,637.52.

12a

The amount as of October 6, 2004 restrained in the Adjudi-

cated Accounts at Bank of America pursuant to the Court’s

March 18, 2004 Order was $301,051 ,979.84.

13. As a result of the above-described rulings, this Court

hereby finds that the amount of Pertamina property

restrained and/or deemed restrained in the Adjudicated and

Unadjudicated Accounts since February 22, 2002 totals

$775,965,863, and that this amount of Executable Funds

exceeds the Texas Judgment plus accrued interest.

14. On October 6, 2004, this Court ordered Bank of Amer-

ica to release immediately $29,318,992—representing the

$3,690,000 held to be Pertamina’s participating interest in

the West Natuna Kakap Block PSC, and $25,628,992 of the

funds from the EXOR I account—to KBC. The amount of

the judgment on October 12, 2004 (the date of the release of

$29,318,992) is $300,669,894.32. Consequently, the unpaid

amount of the judgment, as of October 12, 2004, is

$271,350,902.32.

15. As a result of the above rulings, Bank of America is

hereby ORDERED, pursuant to Rule 69 of the Federal Rules

of Civil Procedure and Article 52 of the New York Civil Prac-

tice Law and Rules, to turn over to KBC $271,350,902.32,

plus all accrued interest from October 13, 2004 to the date

of full payment.

16. However, Bank of America’s obligation to turn over

such funds to KBC is hereby stayed until all U.S. appeals and

review (if any) by the U.S. Supreme Court of this Final Judg-

ment have been adjudicated or otherwise exhausted, or until

further order of this Court.

17. During the period that the foregoing stay is in effect,

simple interest at the rate of 4% per annum shall continue to

13a

accrue on the unpaid amount of the judgment, and Bank of

America shall continue to restrain funds sufficient to pay the

unpaid amount of the judgment all interest that accrues in the

future.

Dated this 22d day of October, 2004.

/s/ THOMAS P. GRIESA

Thomas P. Griesa

United States District Judge

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

21 MC 98 M-18-302 (TPG)

Filed November 24, 2004

In the Matter of an Arbitration Between

Karaha Bodas Company, L.L.C.,

Petitioner,

—against—

Perusahaan Pertambangan Minyak

Dan Gas Bumi Negara (“Pertamina”),

Respondent.

OPINION

Decision

THE Court: Let me just dictate a ruling from the bench.

1 want to in a sense incorporate by reference the state-

ment I made on the record yesterday beginning at page 159

and concluding on page 164.

MR. PANOPOULOS: Your Honor, it is difficult to hear you.

I’m sorry.

THE Court: I am sure that’s right. 1 wasn’t even looking

out.

I want to incorporate by reference in what I say now the

statement that I made beginning at page 159 of the tran-

script yesterday and concluding on page 164.

15a

What this proceeding is about is what we have referred

to as the unadjudicated accounts. The reason that termi-

nology is used is that, out of the several accounts at New

York banks that were set up to handle sales of petroleum

products coming out of Indonesia, certain of those

accounts were the subject of a ruling which I made in April

2002 and were the subject of a Court of Appeals ruling

which was handed down in December 2002.

At that time, meaning in April 2002, I was of the view

that there was not enough evidence to permit an adjudica-

tion of property rights with respect to certain accounts, and

they have henceforth been called the “unadjudicated

accounts.” That terminology will no longer apply after this

afternoon because the court is proceeding to adjudicate

these remaining accounts. [3] To the extent that I am not

making any ruling about certain of the unadjudicated

accounts, the reason is that with respect to certain of them

there are no issues.

The record reflects in prior rulings that the problem in

this litigation arises from the fact that petitioner KBC

served restraining notices on the banks with respect to the

accounts in question; that is, the adjudicated accounts and

the so-called unadjudicated accounts. These restraining

notices were served in February 2002.

(Continued on next page.)

[4] THE Court: The purpose of the service of these

restraining notices was to proceed with the enforcement of

a large judgment, which had been entered in a federal court

in Texas. That judgment was on appeal to the Fifth Circuit,

but no supersedeas bond had been posted, and therefore,

KBC was free to proceed with the enforcement of that

judgment.

l6a

What I am putting on the record this afternoon will not in

any degree attempt to deal with the amounts of money

which have been at issue. It will not attempt to present a

chronology of all that has occurred in this enormously com-

plicated litigation. It will simply deal with the essential

issue which needs to be disposed of. From the very start,

the principal issue in controversy regarding these accounts

has been the result of the fact that KBC’s judgment in this

case, obtained in the Federal court in Texas, is against the

respondent Pertamina, a company in Indonesia owned by

the Indonesian government. KBC of course can enforce its

judgment only against the property of Pertamina.

The main issue has been the degree to which the moneys

in the accounts were the property of Pertamina or were the

property of the Republic of Indonesia. The republic has

been permitted to appear in this proceeding to protect its

rights. It has been permitted to appear in the district court,

and it has been permitted to appear in the Court of Appeals

for the Second Circuit.

[5] In connection with the adjudicated accounts, what was

held by the district court and was affirmed by the Court of

Appeals was that funds in these accounts, nominally paid

to Pertamina, after the subtraction and payment by the

banks of expenses and also the share or shares of joint ven-

turers, what the Court held was that that amount belonged

to the government of Indonesia except for what is called

the retention fee. The District Court and the Court of

Appeals relied on a regulation which provided that this

amount of money less the retention fee shall be the gov-

ernment’s portion. And I’m quoting the English translation

of the Indonesian law, and it has this phrase “the govern-

ment’s portion.”

17a

It is of some interest now to note that under Indonesian

law, after Pertamina received the retention fee, or was cred-

ited with the retention fee, Pertamina was required to pay a

tax out of that retention fee and to pay a dividend to the

Republic of Indonesia. Both the tax and the dividend were

to be paid to the Republic of Indonesia. Despite the fact

that Indonesian law required the payment of the tax and the

dividend, the District Court and the Court of Appeals did

not hold that the tax and the dividend were the property of

the government. These courts did not hold that the tax and

the dividend were part of the government’s share of the

moneys in question. What was held in substance was that

the obligation to pay the tax and the obligation to pay the

dividend meant [6] that Pertamina had to pay those

amounts out of the retention fee, but that did not mean that

the full retention fee was not the property of Pertamina.

Those amounts were not ‘property of the government until

they were paid.

This is not an astonishing proposition. If a taxpayer earns

a salary, the salary belongs to the taxpayer. It doesn’t

instantly belong to the government, although the taxpayer

may ultimately owe the government a tax. If a corporation

becomes obligated by a corporate resolution to pay a divi-

dend, the revenues coming into the corporation are not the

property of the shareholders the minute they come in. They

become the property of the shareholders when the corpora-

tion pays the dividend.

So the only thing that was held to be the property of the

government was what was referred to as the government’s

share of those moneys which had come into the bank

accounts and were left after paying expenses to Mobil Oil

or shipping companies and so forth.

18a

Now we come to the issues before us on the so-called

unadjudicated accounts. What constitutes the principal con-

troversy on the unadjudicated accounts, if not the sole con-

troversy, relates to products refined from crude oil at

certain refineries. The first of these is the Cilacap refinery,

and there is a claim that the total of $387 million has

flowed into the relevant bank accounts resulting from sales

[7] of refined products from the Cilacap refinery, and it is

contended that this $387 million was subject to the restrain-

ing notices. The bank account or bank accounts involved in

those Cilacap funds are at the Bank of America. Was it one

account or two accounts?

MR. DUGAN: Just one account, I believe.

THE CourRT: One account. OK. So there was one account

in the Bank of America relating to Cilacap. And EXOR,

was there one account or two accounts?

Mr. DUGAN: One account there as well, your Honor.

THE Court: What about MUSI?

MR. DUGAN: One account there as well. MUSI and

EXOR are at Bank of New York.

THE Court: So we have an account at Bank of New York

relating to the refinery called EXOR, and, again, the funds

involved sales of refined petroleum products refined from

crude oil. The amount claimed to have flowed through that

account and that was subject to the restraining notices is

about $63 million. It appears that there is a controversy by

the government of Indonesia on the EXOR account only as

to about $38 million. But there is a substantial dispute nev-

ertheless about the EXOR account.

Finally, there is the MUSI refinery account at the Bank

of America of New York, and it is claimed that the amount

of funds there which are subject to the restraining notices is

about a [8] million and a half.

19a

The statement ... I’m making is not intended to be a

complete accounting of the unadjudicated accounts. There

are certain accounts where no money has been seized, cer-

tain accounts where apparently there is no controversy. So

the complete accounting for the unadjudicated accounts

will come in some other form and I’m not going to deal

with it in this statement. What I am trying to deal with is

merely the issues in controversy about Cilacap, EXOR, and

MUSLI. And it can be said in order to simplify things that the

issues are exactly the same with Cilacap, EXOR, and

MUSI. So that I do not need to draw any distinction among

those three accounts.

KBC contends that all of the money that flowed into

those accounts was the property of Pertamina and, assum-

ing a proper calculation of the time period and other sub-

sidiary matters perhaps, basically all of the funds flowing

through these accounts were the property of Pertamina and

subject to the restraining notices.

The government of Indonesia asserts that all of the funds

belonged to the government of Indonesia. Pertamina takes

the same position as the government. I don’t think there

will be any confusion on nomenclature. At various times in

this litigation, we have referred to the republic. At times we

have referred to the ministry of finance. In the hearings in

the last two days we have talked mainly in terms of the

government, [9] and I will probably speak in that fashion in

my statement now.

When resolving the question of who the funds belonged

to, the Court is looking to Indonesian law, as the Court did

in connection with the earlier adjudicated accounts. But

when the crucial factors are considered, Indonesian law is

really no different from New York law. This was made abun-

dantly clear in the discussion held on the record yesterday

20a

morning, and it is clear form the voluminous papers sub-

mitted on the motions before the Court.

Incidentally, I neglected to say exactly what motions are

before the Court. However, it is sufficient to simply state

that there is a motion by KBC seeking to have the Court

declare that the moneys passing through the Cilacap,

EXOR, and MUSI accounts belonged to Pertamina and

were subject to the restraining notices. The republic for the

government of Indonesia has filed an appropriate motion

seeking a declaration that those funds belonged entirely to

the government. Pertamina, as | have said, is on the same

side of this controversy with the government.

So we are at the question of, who did the funds belong to.

I started to describe the basics of the law. I will continue

with that. Much of what I will say now is so obvious that

anyone reading this would hardly think it worth saying, but

in the context of the issues here, this has to be said.

Although Pertamina is a company owned by the govern-

ment of [10] Indonesia and although its activities in the oil

industry are subject to very thorough regulation, neverthe-

less, Pertamina is a separate company, separate from the

government of Indonesia as an entity. This was recognized

in the earlier phases of this litigation, and the fact is still

true. Pertamina can enter into contracts. Pertamina has its

own bank accounts, in its own name. The contracts it enters

into are in its own name. Pertamina sells petroleum prod-

ucts in its own name. It receives payments in its own name

which go into its own bank accounts. Parties in Indonesia

and parties abroad can do business with Pertamina. They

can sell equipment and raw materials to Pertamina. The

government itself, according to the record, sells crude oil to

Pertamina. And Pertamina buys crude oil from the govern-

ment in Pertamina’s name, and undoubtedly owes the gov-

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ernment the price for that oil. If a party enters into a trans-

action with Pertamina, for instance, selling Pertamina

equipment or building facilities for Pertamina, Pertamina

will be obligated to pay for that equipment or those facili-

ties. If Pertamina should fail to pay, Indonesia has a judicial

system which will entertain a lawsuit if that is necessary

between the supplier and Pertamina.

It was conceded, as one would expect, that Indonesia has

a law system, the same as the rest of the civilized world. If

someone claims that Pertamina is wrongfully withholding

[11] payment on an obligation, for instance, for the sale of

equipment or for the construction of facilities, that party

has legal recourse against Pertamina in Indonesian courts.

If that party wins, that party can get a judgment against Per-

tamina.

That party does not sue the government or Indonesia.

The government of Indonesia would lodge the strongest

possible objection if the party sued the government on the

basis of an obligation of Pertamina. So if the supplier, the

party I’m talking about, wins a lawsuit, the party can get a

judgment and can enforce that judgment. If Pertamina

refuses to pay, that party can enforce the judgment by levy-

ing on property of Pertamina including bank accounts. This

is of course in accordance with legal systems throughout

the civilized world, and Indonesia is no exception.

Pertamina has financial statements. These financial state-

ments are included in reports. These financial statements,

like the financial statements in the United States or else-

where, have balance sheets and income statements. Pertam-

ina has its assets. And the assets are listed as such. They are

not listed as assets of the government of Indonesia. Perta-

mina has liabilities, and they are listed as such. They are

not listed as liabilities of the government of Indonesia.

22a

Pertamina has income listed as such. It is not listed as

income of the government of Indonesia. It has expenses

listed as such. These are not listed as expenses of the gov-

ernment of [12] Indonesia.

Pertamina seeks financing, sometimes abroad. And these

financial statements are used to help obtain financing.

Needless to say, Pertamina does not seek financing by say-

ing it is not liable for anything and only the government is

liable, who is not a party to the contract in question.

Pertamina has debt obligations. And parties have a right

to look to Pertamina on those debt obligations.

So all of this is in accordance with Indonesian law,

Indonesian accounting practices. And these are the basics

of the law and the accounting practices which exist.

Now, Pertamina sold refined petroleum products out of

the refineries I mentioned. These products were exported

and sold abroad. Purchasers paid for these products, and

they paid Pertamina. And the funds that were paid were,

according to agreement, deposited in the account at the

Bank of America and the accounts at the Bank of New

York. Expenses were paid under the administration of the

banks. If there were any joint venturers, the joint venturers’

shares were paid. In other words, whatever was needed to

pay parties other than Pertamina was taken out of the funds

and paid by the banks. What was left was in Pertamina’s

name and this was the net receipts after paying outside par-

ties whatever they were due.

The funds were duly transmitted, or were subject to

transmission, from the New York banks to bank accounts of

[13] Pertamina in Indonesia.

Here let me pause to refer to a complication which | do

not want to describe in detail, but let me try briefly to state

the necessaries. The amount of money which ended up

23a

literally staying, or being lodged in the New York banks

was limited to the amount necessary to pay the judgment

plus interest. This was done under the guidance of the

Court of Appeals and also was implemented by the District

Court and evolved in various ways that are not necessary to

be described. So the amount actually lodged in New York

banks pursuant to the restraining notices is a little over

$300 million.

There are no funds from Cilacap, EXOR, or MUS] liter-

ally held up in New York banks. But the effect of court rul-

ings and agreements is that if the Court decides that these

funds were subject to restraint, the amounts that I have

talked about as having flowed through these accounts will

be deemed to be available to be applied to the judgment.

This is not a perfect description, but it is as far as I’m going

to go now. But this is why I have referred to the fact that

amounts of money have flowed through the accounts. And

that’s what has happened. And the issue is, when those

moneys flowed through the accounts, to whom did they

belong? Pertamina or the government of Indonesia? If they

belonged to Pertamina, they were subject to the restraining

notices. If they belonged to the government of Indonesia,

they were not subject to the [14] restraining notices.

I’m going back to the flow of the funds. As I said, the

funds, after payment of expenses to ovside parties, were in

Pertamina’s name. They were transmitted to Pertamina in

Indonesia. There is no suggestion that these funds or any

portion of them were paid to the government of Indonesia

or seized by the government of Indonesia in any way

because of some property interest asserted in these particu-

lar funds by the government. That was not done. This is a

completely different picture from what was presented in

connection with the adjudicated accounts.

24a

These funds, in connection with Cilacap, EXOR, and

MUSI, simply became part of the general funds of Pertam-

ina, as well as receipts from other sales, and were used to

pay the various expenses of Pertamina.

The record contains a financial statement of Pertamina

for the year 2001. It shows a balance sheet as of December

31, 2001, and it shows a consolidated statement of income

for the year ending December 31, 2001. There is also a

statement for an earlier period, but I’m going to concentrate

on the 2001 balance sheet and income statement.

The balance sheet lists assets of Pertamina. They include

cash on hand in banks of about 20 trillion Indonesia rupi-

ahs. Various other assets that one would expect are listed.

The total assets are listed at what appears to be [15] about

96 trillion rupiahs. The figure is a little bit hard to read, but

I believe it’s about 96 trillion rupiahs.

The balance sheet, of course, lists liabilities and share-

holders equity. Total current liabilities are listed at about

30 trillion rupiahs. Other liabilities appear to be about 37 or

38 trillion rupiahs. Stockholders equity is listed as about

28 trillion rupiahs. Total liabilities and stockholders equity

is listed at about 96 trillion rupiahs. These are all listed as

assets and liabilities and equity of Pertamina. They are not

listed as assets and liabilities and equity of the government

of Indonesia.

Now, in the consolidated statement of income, there is,

as one would expect, a list of revenues and a list of

expenses. The revenues for the year 2001 were about 212 or

213 trillion rupiahs. The figure is hard to read, but that is

about it.

These revenues for 2001 included, as one would expect,

the revenues from the export of oil products, the kinds of

things which were going on with the Cilacap, EXOR, and

25a

MUSI accounts. The amount for 2001 was about 14 trillion

rupiahs. The income statement, of course, listed expenses.

The items under expenses total about 201 trillion rupiahs.

The item labeled “profit before government share” is listed

as about 10 '/, trillion rupiahs. It appears that, pursuant to

certain legal provisions which came into effect when Pert-

amina was [16] started, that the government was entitled to

a share of these profits. That share is listed for 2001 as

about 6 trillion rupiahs.

The net profit after all things are considered is listed as

about 4 !/, trillion rupiahs.

All of these items are listed as revenues, expenses, prof-

its, and so forth of Pertamina. And one would expect this to

be done, in view of the fact that Indonesian law, as I have

described, is not some weird concoction. It is in accordance

with the law of the civilized world, and its accounting prac-

tices are of the same nature.

Now we come to the argument of the government. The

argument of the government was summarized by me to a

very substantial extent in the pages I referred to from yes-

terday’s transcript, pages 159 through 164. Almost all of

the factual basis for the government’s argument is some-

thing that I accept. Pertamina, as I have said, is a company

owned by the Indonesian government. It is heavily regu-

lated by the Indonesian government. But the argument of

the government in this proceeding is based on a quite spe-

cific set of circumstances. Indonesia, pursuant to clear law,

has a program, or a policy, under which petroleum products

are furnished to the people of Indonesia at prices which are

set by the government and are based on a practice of gov-

ernment subsidies. This is referred to as the BBM program

or policy. Pertamina participates in [17] this program, as it

is directed to do by law. And in participating in this pro-

26a

gram, Pertamina is obliged to act for the benefit of the

Indonesian government and the people of Indonesia. Under

this program, Pertamina refines crude oil, turns it into

petroleum products such as gasoline and fuel oil, and Pert-

amina sells these products directly or indirectly to domes-

tic purchasers in Indonesia. The record shows that to some

extent the crude oil used in this program is lifted out of the

ground by Pertamina, to some extent is lifted out of the

ground by other parties, including the government of Indone-

sia or joint ventures between the the government of Indone-

sia and other parties. Where the government of Indonesia is

involved in lifting crude oil and selling it to Pertamina, this

is a sale by the government of Indonesia to Pertamina, and

Pertamina pays the government for that crude oil.

Pertamina must sell the refined products at prices which

accord with the regulations or policies of the BBM pro-

gram. The program has been described on the record here

as being for Pertamina a no-loss and no-profit situation.

Although there may be technical exceptions to this basic

concept that are suggested in parts of the evidence, the gov-

ernment and Pertamina assert that the BBM program was

indeed a no-loss and no-profit program as far as Pertamina

was concerned, and the Court accepts that basic proposi-

tion. This means that if, for a relevant period, Pertamina

was selling [18] products to domestic purchasers in Indone-

sia and was making a profit, then that profit would need to

be paid to the government of Indonesia. On the other hand,

if Pertamina was selling at prices which resulted in a loss to

Pertamina, then the government would pay a subsidy to

Pertamina to cover that loss. The calculation of profit or

loss would be made by the method one would expect--that

is, taking the costs to Pertamina in connection with this

program--that is, the cost of raw materials, the cost of refin-

27a

ing, etc.--and then taking the revenues and determining

which was larger. If the revenues exceeded the costs, there

was a profit. If the revenues were less than the costs, there

was a loss.

Now, here, it is necessary to deal with the circumstance,

which is basically the main factor in the government’s

argument and Pertamina’s argument, that revenues from

export sales belonged to the government of Indonesia. The

export sales were non-BBM sales. They were not subsi-

dized. There were also some non-BBM domestic sales. All

the non-BBM revenues were used in the calculation of

whether there was a profit or loss in the BBM program.

That is, even though the export sales were not BBM sales,

and even though there were some domestic sales that were

not BBM sales at the fixed prices, nevertheless, the rev-

enues for such non-BBM sales were used in the calculation

of whether there was a profit or a loss on the BBM pro-

gram.

[19] One thing that has been said is that these revenues

were a proxy for BBM costs. I am not sure what that means,

but basically what happened is that these revenues were

applied to reduce the BBM costs. Another way to put it is

simply that they were added to the revenues on the BBM

program. It’s all the same thing.

If one wonders what happened to the costs associated

with the non-BBM sales, the answer that has been given to

the Court is that there were unitary costs and there were no

specific costs associated, additional costs associated with

the non-BBM sales. Exactly how that was accomplished is

an accounting matter. It has not been gone into. But the

Court does not doubt that that type of accounting would be

quite legitimate.

28a

So the non-BBM revenues were used as I have just

described, and since we are concerned in our proceedings

here with the non-BBM revenues derived from export

sales, I will probably concentrate to some extent on those

particular revenues in further discussion.

Now, in the consolidated statement of income for the

year 2001, there is an item listed under Revenues entitled

“reimbursement of fuel expenses from the government.”

And in the year 2001, that was about 61 trillion rupiahs.

The record does not show exactly how that was calculated,

but it is conceded by Pertamina that the method of calcu-

lation is what I [20] described a few minutes ago--that is,

taking the costs of BBM sales and the revenues from the

BBM sales, and then taking the revenues from the non-

BBM sales to add to BBM revenues or reduce BBM costs

and netting out what results from those figures. And for

2001, what netted out was 61 trillion rupiahs.

Pertamina and the government urge that because the

BBM program was for the benefit of the government and

for the people of Indonesia and because the export sales

revenues were used in the calculation of profit or loss from

that program, this means that the revenues from the export

sales were the property of the government of Indonesia

from the moment that they were earned.

This brings me to my conclusion. I conclude that Perta-

mina and the government have drawn an incorrect conclu-

sion. The fact that the revenues from the export sales were

used in the calculation of BBM profit or loss in the way

I have described, this fact under no circumstances means

that those revenues belonged to the government of Indone-

Sia at any time, when they were passing through the banks

in New York or at any time.

29a

The fact that these revenues from the export sales were

used to calculate Pertamina’s profit or loss on the BBM

program is indeed a very strong indication that these rev-

enues belonged to Pertamina. The government of Indone-

sia, in 2001, [21] paid a very large subsidy. The reason the

subsidy was not 14 trillion rupiahs higher than the 61 tril-

lion rupiahs is because the government considered that the

14 trillion rupiahs from the export sales belonged to Pert-

amina and reduced the costs of the BBM program to Pert-

amina--that is, reduced Pertamina’s costs. This is totally

inconsistent with any idea that the 14 trillion rupiahs

belonged to the government of Indonesia.

There is nothing about the BBM program or the

accounting for it which takes away in the slightest from the

fact that these revenues from the export sales belonged to

Pertamina, were available to Pertamina to put in its bank

accounts, were available for use by Pertamina to pay its

expenses. None of that is in any degree contradicted by

what has been asserted and what I have found about the

BBM programs.

Now, in addition to the use of the revenues to calculate

the subsidy of 61 trillion, which is shown in the income

statement of 2001, the 14 trillion was a line item in the

income statement. The specific use of the 14 trillion in cal-

culating the subsidy is not shown. That calculation is not

shown and is not in any paper that is on the record here,

although the method of that calculation has been conceded.

But, in addition to using the 14 trillion in a perfectly

obvious way to calculate the subsidy due, the 14 trillion

rupiahs was listed as a line item in the consolidated state-

ment of income. The 14 trillion rupiahs had been received

[22] by Pertamina from the export sales. And those 14 tril-

lion rupiahs are shown as a line item on the statement of

30a

income. It’s there. This is not something dreamed up by

anybody. The statement of income simply does include, in

black and white, 14 trillion rupiahs as revenues from the

export sales. That 14 trillion rupiahs is used as one of the

items adding up to the total revenues of 212 trillion rupi-

ahs. It is used as part of the calculation leading up to the

ultimate figure of profit before the government’s share,

and so forth.

This is in accordance with proper accounting practices.

Nobody suggests that this financial statement was in any

way fraudulent or incorrect. Nobody suggests that it is not

in accordance with both Indonesian law and Indonesian

accounting practices.

For these reasons, I conclude that it is clear beyond any

shadow of a doubt that the export revenues flowing

through the Cilacap, EXOR, and MUSI accounts were

funds belonging to Pertamina which were subject to the

restraining notices involved in this litigation. The matter

indeed is not really complicated. The arguments of Perta-

mina and the government really made no showing of any

substantial reason why this conclusion is not the right con-

clusion.

That concludes my ruling on the law, and we will now

go to something else.

(Continued on next page)

[23]

SO ORDERED.

Dated: New York, New York

October 6, 2004

/s/ THOMAS P. GRIESA

THOMAS P. GRIESA

U.S.D.J.

3la

In The Matter Of:

KARAHA BODAS Co., L.L.C., v.

PERUSAHAAN PERTAMBANGAN MINYAK DAN GAS BUMI

Trial Volume |

October 5, 2004

SOUTHERN DISTRICT REPORTERS, P.C.

500 PEARL STREET

New York, NY 10007

(212) 805-0300

Original File 4ASAKARETXT, 165 Pages

Min-U-Script® File ID. 1687466869

Word Index included with this Min-U-Script®

[Page 159]

Now, let me address the issue we are about. I think that

the exhibits before me and the written materials establish

that there was and is this BBM program. I think the mate-

rials establish that the operations of Pertamina were very

largely in furtherance of that program and that the program

was [Page 160] established by the government of Indone-

sia and Pertamina’s operations in that program are pur-

suant to the laws of Indonesia, decrees, regulations,

whatever. I think the materials before me establish that the

sales that are at issue here, which yielded the funds that are

now tied up, they came from what has been referred to as

32a

non-BBM business. But I think the materials establish that

this business was not totally outside the BBM framework

but that what was done and what was intended, what was

legally decreed is exactly what Pertamina and the ministry

say, that the revenues from those sales were used, were in

effect treated as BBM revenues so as to offset BBM costs.

And the purpose of this was to have that type of applica-

tion so as to ultimately determine the ultimate question.

That is, for some period in question, and I’m not exactly

sure whether the period is at the end of a month or the end

of a year or the end of a quarter, but at the end of some

period, it was intended and established by law that there

would be a determination of whether Pertamina had made

a profit or incurred a loss after taking into account all Per-

tamina’s revenues, both from BBM sales and from non-

BBM sales, and taking into account all of Pertamina’s

expenses. And those revenues and those expenses are

reflected in the earnings statements of Pertamina. And they

involve very, very large total amounts of money. I think

the materials before me establish that if Pertamina incurred

a loss, then the [Page 161] government of Indonesia in

some way paid Pertamina to cover that loss. Now, I’m not

entirely sure of that, because there is some evidence that

the government may have made up the difference between

the BBM price, the fixed price to the Indonesian con-

sumers and the market price. So I’m not completely sure of

exactly what occurred in connection with what I have just

said. But the principle is really not different. Regardless of

the exact mechanics, I think the evidence shows that the

government was making up the loss.

Now, the weight of the evidence is that if Pertamina

made a profit, then it had to pay the profit to the govern- »

ment, although there is some question about that that is

33a

raised by a document introduced by KBC. But, again, for

our ultimate question, in my view, that does not make a

difference in the principle that we have to deal with.

So what I’m saying to you is that there is no reason, in

my view, to introduce further evidence to support what

I have said. I accept the idea that all of what I have said

was done for the benefit of the Indonesian government and

the Indonesian people, the Indonesian government repre-

senting the Indonesian people, that all of the activities of

Pertamina were designed to further those governmental

objectives. And I don’t need to cite a great many specific

instruments. There are plenty of governmental legal instru-

ments which display what I have said, as far as I know.

[Page 162]

Now, what’s the issue that remains? In my view, none of

that solves the issue before the Court. And what I’m com-

ing to now, of course, is in my view the controversy. The

question, in my view, is, what is the effect of this circum-

stance? Pertamina was and is a company. Pertamina, even

according to the documents most heavily relied on by Per-

tamina and the government, Pertamina for one thing had

assets. This directive 105 has a section, section 3, about

Pertamina’s balance sheet, and it speaks of Pertamina’s

assets. It speaks of Pertamina’s liabilities. Now, is the idea

that these were assets but not assets? Were they something,

was this a facade? Were these financial statements created

with some hidden meaning that assets don’t mean assets?

These financial statements were undoubtedly used for

many purposes by Pertamina, including getting financing

in connection with its operations. Were they giving out

these financial statements and having some hidden mean-

ing? The financial statements have earning statements

showing revenues of Pertamina, showing expenses of Per-

34a

tamina. Were these not revenues of Pertamina? Were these

financial statements which were undoubtedly given to

companies relying on them, was there some hidden mean-

ing so that revenues did not mean revenues of Pertamina

and expenses did not mean expenses of Pertamina? Why

does directive 105 talk about assets if there were no

assets?

So, granted that at the end of some day, whether it’s

[Page 163] at the end of the month or the end of a quarter

or the end of a year, granted that there was to be a reckon-

ing so that there had to be a figuring of whether there was

a profit or a loss to Pertamina, that profit and loss was fig-

ured on the basis of calculating the revenues of Pertamina

versus the expenses of Pertamina. How else does one fig-

ure whether Pertamina has a profit or a loss? Now, if they

weren’t revenues of Pertamina, there would be a very odd

accounting. I would not know quite what kind of an animal

to call that. Then I suppose you would have to say, well,

the costs were not the costs of Pertamina. They were sim-

ply the costs of the government. Then, why is the govern-

ment figuring whether there’s profit or a loss? It would be

a very, very odd arrangement.

So the issue in my mind is this. While the revenues were

coming in from these export sales and while they were

going to Pertamina and while, as we discussed this morn-

ing, while they could be used as part of the funds to pay

the obligations of Pertamina, while they could be used to

back up contracts entered into by Pertamina, while Perta-

mina could spend that money, could put it in Pertamina’s

bank account, while all that was going on, is it or is it not

the case that Pertamina, that it was Pertamina’s money and

that Pertamina could use it to pay any obligation that Per-

tamina had? Can it not be used to pay the obligation to

35a

KBC? And if such money is restrained in a New York bank

account or comes through a New [Page 164] York bank

account, can it not be restrained to pay this obligation?

So what I’m trying to say is, most of what Pertamina and

the republic have presented I accept. You do not need to

spend any more time putting on evidence of that. What I do

not accept without further exploration is a conclusion that

because of those circumstances, Pertamina had no owner-

ship interest in those funds and the government had the

sole ownership of those funds. And that issue revolves, in

my view, upon what occurred with respect to who had the

ability to spend the money, how the money was accounted

for in a financial statement, and so forth and so on. And

none of that, those issues are not even touched by this dis-

cussion of the BBM arrangements and so forth.

So try to come back tomorrow and focus on these issues,

and don’t take time in having a lot of testimony about

things which I really accept. So we’ll see you at 10 o’clock

tomorrow.

MR. SLATER: Thank you, your Honor.

(Adjourned at 10:00 a.m., Wednesday, October 6, 2004)

36a

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

21-MC-98 (TPG)

In the Matter of an Arbitration Between

Karaha Bodas Company, L.L.C.,

Petitioner,

—against—

Perusahaan Pertambangan Minyak

Dan Gas Bumi Negara (“Pertamina’”’),

Respondent.

OPINION

The present motion is labeled a Motion for Turnover of

Retention Fees Accrued Through November 2003. It was

filed on April 6, 2004. It is another in a series of motions

in the complex litigation about obtaining security for the

payment of a judgment awarded to petitioner Karaha

Bedas Company, L.L.C. (“KBC”). The background has

been set forth in detail in prior rulings, the most recent of

which was an opinion of this Court dated January 29,

2004. Only a summary will be presented now.

Background

KBC won an arbitration award against Pertamina in the

amount of $261.1 million. On the basis of this award, judg-

37a

ment was entered for the $261.1 million in the United

States District Court for the Southern District of Texas.

Pertamina appealed to the Fifth Circuit. However, Pertam-

ina declined to file a supersedeas bond and therefore there

was no stay of execution. This circumstance led to litiga-

tion in this Court and other courts, in which KBC has

sought to restrain funds belonging to Pertamina.

As of the time of the January 29, 2004 opinion, Pertam-

ina’s appeal had not been decided. However, on March 23,

2004 the Fifth Circuit affirmed the lower court judgment.

Pertamina has stated that it intends to apply for certiorari

to the United States Supreme Court.

The litigation in the Southern District of New York results

from the fact that KBC has served restraining notices on

Bank of America and the Bank of New York pursuant to

N.Y. C.P.L.R. § 5222. The notices were served on February

22, 2002 and placed restraints upon a total of twenty-four

trust accounts held in Pertamina’s name at the two banks.

These trust accounts receive proceeds from the marketing of

oil and gas products. Twenty-two of the accounts are at Bank

of America and two are at the Bank of New York.

Soon after service of the restraining notices, the issue was

raised by Pertamina and the Republic of Indonesia as to how

much of the funds in the trust accounts actually belongs to

Pertamina, and how much belong to the Republic. KBC can,

of course, only execute on property of Pertamina. This has led

to a remarkably voluminous amount of motion practice in the

District Court and applications for review in the Court of

Appeals. Even more remarkable is the fact that, as of the pres-

ent time, the only trust accounts as to which property rights

have even been partly decided after fifteen accounts at Bank

of America. As to the other nine accounts, an initial motion is

still being briefed. The fifteen account are spoken of as the

38a

“Adjudicated Accounts,” and the other nine are referred to as

the “Unadjudicated Accounts.”

The District Court, as affirmed by the Court of Appeals,

has ruled that Pertamina did not own all of the funds passing

into the Adjudicated Accounts, although they were all in the

name of Pertamina. However, Pertamina did own, and does

own, that portion of the funds constituting the “Retention

Fees.” As explained in prior rulings, these Retention Fees are

5% of Net Operating Income, or about 5/65 of the total funds

passing into the accounts.

Pertamina and the Republic sought to limit the amount of

the Retention Fees subject to the restraining notices by con-

tending that the effect of the restraining notices as to the

Adjudicated Accounts ceased in June 2002, rather than con-

tinuing through that year and thereafter, as argued by KBC.

This issue was raised in certain motions which were made,

briefed, and argued in the year 2003. In the opinion of Janu-

ary 29, 2004 the Court held that the effect of the restraining

notices did not terminate in June 2002, but continued through

2002 and into 2003, and would continue, until the amount of

the judgment plus interest was secured.

The Current Motion

The motions referred to above dealt with how long the

restraining notices were effective as to the Retention Fees.

For reasons to be explained, a new issue has now been raised

by Pertamina and the Republic, leading to the current motion.

This motion results from the fact that Pertamina and the

Republic now take the position that no Retention Fees were

even earned by Pertamina commencing January 1, 2003, so

that there were no additional funds in the Adjudicated

Accounts subject to restraint beginning on that date.

39a

Pivotal to current motion is a letter of November 21, 2003

from the Ministry of Finance of the Republic to the Governor

of the Bank of Indonesia, terminating the payment of Reten-

tion Fees to Pertamina.

Pertamina and the Republic take the position that this let-

ter was merely confirmation of prior legal enactments which

had already terminated the Retention Fees as of January 1,

2003. KBC concedes that the Retention Fees were ended by

that letter, but vigorously opposes the idea that this occurred

at any time before the letter.

These contrary positions form the issues raised in KBC’s

present motion for turnover of Retention Fees accrued in the

Adjudicated Accounts through November 2003. The outcome

of this motion makes a substantial difference. As of Decem-

ber 31, 2002 the amount of the Retention Fees restrained in

the Adjudicated Accounts was $178 million, not enough to

secure the judgment plus interest, which currently totals

approximately $297 million. KBC contends that another

$132 million in Retention Fees was restrained in the Adjudi-

cated Accounts between January 1 and November 21, 2003,

bringing the total of restrained funds in the Adjudicated

Accounts to $310 million, which is in fact sufficient to secure

the judgment plus interest.

The Evidence

The issues would be quite straightforward, although not

entirely simple, if Pertamina and the Republic conceded that

the Retention Fees were lawfully paid to Pertamina until the

time of the November 21, 2003 letter and that there was no

official act cancelling the Retention Fees until that letter. But,

far from making such a concession, Pertamina and the

Republic contend that the governing legal provisions which

40a

existed even before the November 21, 2003 terminated the

Retention Fees as of January 1, 2003. Pertamina and the

Republic concede that about $132 million in Retention Fees

was paid to Pertamina between January | and November 21,

2003. However, as the Republic puts it, these amounts were

only “nominally distributed”—were only “provisionally

paid”—to Pertamina. Pertamina goes so far as to state that,

“Any remittance of funds to Pertamina after January 1, 2003

as a Retention Fee has been improper.”

However, these positions are diametrically opposite to

what was asserted by Pertamina and the Republic in earlier

motions. The subject of Retention Fees for 2003 was a

prominent feature of the various motions that were filed

between February 14, 2U93 and June 27, 2003, and that were

decided in the opinion of January 29, 2004. These will occa-

sionally be referred to as “the 2003 motions.” The Republic

filed another motion addressed to the Unadjudicated

Accounts in November 2003. This motion has not yet been

fully briefed.

The written submissions and hearings on the 2003 motions

all occurred before November 21, 2003, the date of the letter

referred to above. All of the factual presentations and the

arguments on these motions had as their premise that the

Retention Fees were still in effect and were being earned by

Pertamina in 2003. No argument was made—not even a sug-

gestion was voiced—remotely resembling the current con-

tention of Pertamina and the Republic that as of January 1,

2003 Pertamina’s right to Retention Fees was ended. The

issues in these motions was whether the restraining notices

were still effective to reach these ongoing Retention Fees.

Many citations to the record on the 2003 motions could be

made, showing that all parties viewed Pertamina as having a

continuing right, in the year 2003, to receive the Retention

4la

Fees. This was what was categorically represented to the

Court. A few examples are here set forth.

At the hearing of August 27, 2003 the attorney for Pertam-

ina stated that Retention Fees were accruing to Pertamina cur-

rently at the rate of about $10 million per month (Tr. 32). The

attorney spoke of “prospective accrual of Retention Fees

going forward” (Tr. 35), and stated that the Retention Fees

“are amounts that continue to accrue over time” (Tr. 45). The

attorney for the Republic spoke of the Retention Fees in the

Unadjudicated Accounts as accumulating “from February 22

[2002] until the present time” (Tr. 49). The Republic’s attor-

ney stated that the Retention Fees had been reduced some-

what, but said that she did not have a calculation of such

reduction (Tr. 31-32). In response to extensive questions by

the Court as to the current status of the Retention Fees, and

the continued buildup of Retention Fees in the various

accounts, there was no hint from the attorneys for Pertamina

or the Republic that such fees ceased as of January 1, 2003.

The whole tenor of the discussion was flatly to the contrary.

In various presentations to the Court, Pertamina and the

Republic have relied on declarations filed by Sahala L. Gaol

and Bambang Yuwono. Sahala is with the Ministry of Finance

of the Republic, and Yuwono is with a new Indonesian entity

dealing with oil and gas business, known as BP Migas.

In connection with the 2003 motions, Sahala submitted a

declaration dated May 9, 2003 in which he presented a

detailed description of how the Retention Fees are calculated.

He spoke in the present tense. There was no suggestion that,

as of the time of his declaration, over four months into the

year 2003, the Retention Fees no longer existed. Sahala filed

a subsequent declaration dated July 31, 2003. This declara-

tion referred to Government Regulation 41 of 1982, which

was the legal provision giving Pertamina the right to the

42a

Retention Fees. According to Sahala, this regulation was fully

effective as of the time of his declarations, although the

amount of the Retention Fees had been reduced. Sahala

stated:

6. In accordance with Government Regulation 41 of

1982, as of December 16, 1982, the Ministry of

Finance, through Bank Indonesia in Jakarta, pays Per-

tamina only 5/65 of the amount deposited in the Pert-

amina account at Bank of America as its Retention

Fee. The Ministry of Finance no longer pays Pertam-

ina the remainder of the Retention Fee from the tax

payments.

The last sentence of the quotation refers to the fact that com-

panies engaged with Pertamina in the sale of products were

obligated to pay taxes to Indonesia, and that originally Perta-

mina was paid 5/65 of such taxes as part of its Retention

Fees. Apparently as of the beginning of 2003 that portion of

the Retention Fees were no longer paid. But, according to

Sahala, the Retention Fees continued after January 1, 2003

despite the reduction in the amount.

Yuwono submitted a declaration dated May 6, 2003. This

declaration contains a detailed description of how Net Oper-

ating Income is calculated and how Pertamina’s Retention

Fees are arrived at as 5% of NOI. The declaration presents an

illustration of how the calculations are to be made, based

upon certain 2002 figures. But the description portrays the

Retention Fees as ongoing, and there is no suggestion that

they terminated at the end of 2002. It should be noted that

Yuwono spoke of the entity, BP Migas, as a Government

agency with various responsibilities for managing the Pro-

duction Sharing Contracts in which Pertamina was involved.

43a

The legal enactments that established BP Migas in 2002, and

which are themselves not set forth in the May 6 Yuwono dec-

laration, will be discussed later. But there was no suggestion

that BP Migas had assumed a role as of January 1, 2003 that

deprived Pertamina of its Retention Fees, as is now contended

on the present motion. Yuwono submitted a second declara-

tion dated August 5, 2003. Certain additional details are pre-

sented about how Net Operating Income is calculated. The

declaration specifically refers (para. 22) to the fact that Pert-

amina’s Retention Fees are still being earned, although they

had been reduced.

Submissions on the Current Motion

In connection with the present motion, Pertamina and the

Republic refer to certain Indonesian laws, decrees, and regu-

lations, which they contend had the effect of terminating Per-

tamina’s right to Retention Fees as of January 1, 2003. Some

of these were enacted or promulgated before the January 1,

2003 date. Another decree, dated June 26, 2003, is relied on

as confirming that, effective January 1, 2003, Pertamina’s

Retention Fees were over with. Of course, Pertamina and the

Republic refer to the letter of November 21, 2003 from the

Ministry of Finance to the Governor of the Bank of Indone-

sia, already described above. But it is the contention of Pert-

amina and the Republic that the November 21, 2003 letter

merely confirmed what prior legal enactments had already

provided—i.e., the termination of the Retention Fees as of

January 1, 2003.

There is a startling anomaly in the fact that in the various

submissions and arguments in connection with the 2003

motions, the attorneys for Pertamina and the Republic never

mentioned the laws, decrees and regulations now relied upon

as cancelling the Retention Fees. Every one of these laws,

44a

decrees, and regulations existed at the time of the 2003

submissions and arguments. In particular, the June 26, 2003

decree, which Pertamina and the Republic now point to as the

enactment that cancels the Retention Fees, was in existence at

the time of both the July 31 Sahala declaration, and the

August 5 Yuwono declaration. Nonetheless, both of these

declarations specifically represented that the Retention Fees

were ongoing at the time.

Indeed, if the Retention Fees had in fact ended as of Janu-

ary 2003, this circumstance would have been of the utmost

relevance to the 2003 motions. There would have been no

need to worry about whether the effect of the restraining

notices on the Retention Fees extended into 2003, if the

Retention Fees did not exist to be restrained.

No one would suggest that the highly qualified attorneys

for Pertamina and the Republic were not fully informed about

the relevant Indonesian law. Of course, they were. But quite

obviously they concluded that the Retention Fees did not ter-

minate as of January 1, 2003, and that Pertamina was fully

entitled to such fees after this date, although somewhat

reduced in amount.

The inevitable conclusion is that the cancellation of the

Retention Fees cariz with the November 21, 2003 letter, and

not before. What was presented in the various arguments and

statements of position prior to the time of November 21, 2003

letter was that the Retention Fees were still in effect.

It is necessary to summarize the legal provisions now

relied upon by Pertamina and the Republic.

For some years Pertamina has been a state-owned company

involved in the exploitation of Indonesia’s oil and gas

resources. In a law enacted in 2001 (“Law 22/2001”), a new

framework for oil and gas activities in Indonesia was estab-

lished. Pertamina was to be phased out of its role, and ulti-

45a

mately to be converted into a private company. Law 22/2001

provided for the creation of a new entity, “BP Migas,” to take

over certain of Pertamina’s rights and responsibilities.

BP Migas was actually established on July 16, 2002 pur-

suant to Government Regulation 42 of 2002 (“GR 42/2002”).

GR 42/2002 contains provisions about the transition from

Pertamina to BP Migas. Contract documents were to be sur-

rendered to BP Migas within six months. Certain Pertamina

employees would be transferred to BP Migas within one year.

Through the end of 2002 the operational costs of BP Migas

were to be charged to Pertamina and Pertamina was to receive

fees during such period for supervisory services. However,

there was no provision giving a definite termination date for

the business Pertamina was then carrying on or any provision

terminating the Retention Fees. Surely there was nothing in

GR 42/2002 which terminated the Retention Fees as of Janu-

ary 1, 2003. In fact, as already described, the Retention Fees

were not ended as of that date, but was in reality confirmed as

continuing past that date by virtue of the reduction in the

amount of the Retention Fees.

The Ministry of Finance promulgated a decree on June 26,

2003 denominated Decree No. 295/KMK.06/2003. Decree

No. 295 provided that, effective January 1, 2003, BP Migas

was to receive income from the Government amounting to

1% of the income the Government received from the oil and

gas resources. Decree No. 295 did not provide for a halt to the

activities that Pertamina had been performing nor did it state

that the Retention Fees were terminated.

Pertamina and the Republic have provided a declaration

of Sahala, dated February 13, 2004, to summarize the

above legal provisions. After describing the provisions,

Sahala states:

46a

6. The end-result of these regulations and decrees is

that Pertamina’s Retention Fee as it is defined in Arti-

cle 5(1) of Government Regulation No. 41 of 1982 is

no longer effective.

This statement speaks, of course, as of the date of the decla-

ration, February 13, 2004, and does not in any way state that

the Retention Fees ended on January 1, 2003. In fact, the

Sahala declaration relies on the letter of November 21, 2003

as the directive which terminated the Retention Fees. It is

noteworthy that the Sahala declarations of May 9, 2003 and

July 31, 2003, submitted in connection with the 2003

motions, made no mention of the legal enactments described

in his declaration of February 13, 2004, submitted on the new

motion. In fairness to Sahala, it must be repeated that he does

not claim that the legal provisions issued prior to the Novem-

ber 21, 2003 letter contained anything cancelling the Reten-

tion Fees, although counsel for Pertamina and the Republic

attempt to construe his declaration as supporting such a con-

clusion.

It is abundantly clear that the cancellation of the Reten-

tion Fees did not occur before the November 21, 2003 letter

from the Ministry of Finance to the Governor of the Bank of

Indonesia dated November 21, 2003. It is appropriate to quote

this letter in full:

In relation to the * iplemeniation of Law Number

22 of 2001 regarding Oil & Gas and the issuance of

Government Regulation Number 42 of 2002 regard-

ing the Implementing Body of Upstream Business

Activities in Oil & Gas dated July 26, 2002 it is here-

by stated as follows:

47a

1. Pursuant to article 27 of the Government Regula-

tion No, 42 of 2002 it is regulated that:

a. Until end of the year 2002, operating expenses

of the Implementing Body shall be charged to

Pertamina’s budget.

b. For charging of operating expenses of the

Implementing Body as referred to in item a,

Pertamina shall still be provided with com-

pensation in term of fees for guidance and

supervision to Production Sharing Contract

contractor for relevant term.

2. In connection with the provision of the Govern-

ment Regulation mentioned in point (1) above,

starting from January 1, 2003 the operating

expenses of the Implementing Body shall not be

charged to Pertamina’s budget and since that

period, Pertamina will no longer be entitled to the

compensation of retention (fee) as it has been

applied before.

3. In regard to the provision of point (2) above, we

request you to stop immediately the payment of

retention (fee) to Pertamina. Accordingly, all of

our previous correspondences to Bank Indonesia

related to the payment of retention (Pertamina

portion) from each export revenues of Pertamina

and the contractor payment in term of Production

Sharing Contract, shall be declared void.

Paragraph 3 of the letter requests Bank of Indonesia “to stop

immediately the payment of retention (fee) to Pertamina.” No

prior legal enactment has been cited containing a statement

48a

that Pertamina was no longer entitled to Retention Fees and

directing that payment of such fees should stop.

Paragraph 2 states that “starting from January |, 2003 the

operating expenses of the Implementing Body [BP Migas]

shall not be charged to Pertamina’s budget and since that

period, Pertamina will no longer be entitled to the compensa-

tion of retention (fee) as it has been applied before.” This lan-

guage might be read as raising the issue of retroactivity.

However, there is no actual statement that Retention Fees,

paid since January 1, 2003, are retroactively cancelled. If

there had been such a provision, there wouid be a most

serious question as to whether such an attempt at retroac-

tivity could affect the rights of KBC under its restraining

notices. However, Pertamina and the Republic do not argue

that the letter had such retroactive effect, nor that the letter

itself had any force of law. Their argument is that the pre-

existing legal provisions prospectively terminated the Reten-

tion Fees as of January !, 2003. As already stated, the Court

rejects this argument.

Pertamina and the Republic attempt to characterize the

Retention Fees paid in 2003 as “nominal,” “provisional,” or

simply “improper.” No suggestion of such a status was made

during the lengthy discussions of Retention Fees in connec-

tion with the 2003 motions. The Court rejects the current

attempt to re-characterize the Retention Fees.

An issue has been raised about whether the Retention Fees

paid in 2003 were or were not “repaid.” A declaration of

Sahala dated April 26, 2004 states that az of December 22,

2003, based on a “preliminary reconciliation,” Pertamina was

directed to repay $117 million from Retention Fees received

from January through September 2003. Sahala was recently

deposed, and testified that he did not know whether or not

such repayment had actually been made. Yuwono’s deposi-

49a

tion was basically to the same effect. In any event, if repay-

ment was demanded, and even if it was or is made, this does

not take away from the fact that Retention Fees were paid in

2003 and were subject to the restraints imposed under New

York law.

The Court is constrained to comment upon a strange cir-

cumstance relating to the November 21, 2003 letter and other

events in November 2003. As indicated earlier, in November

2003 the Republic filed a motion to release funds belonging

to the Republic from the Unadjudicated Accounts. That

motion has not been fully briefed, but certain features of it are

of interest on the present motion before the Court. Among the

submissions in support of the November 2003 motion was an

opinion of an Indonesian attorney, Dr. Sudargo Gautama,

dated November 6, 2003. The Republic’s memorandum in

support of that motion was dated November 12, 2003.

The opinion of Dr. Gautama has now also been submitted

in support of the position taken by Pertamina and the Repub-

lic on the current motion.

In the various submissions by the Republic on the different

motions, it was the November 6 opinion of Gautama that first

described the series of legal enactments, now relied upon by

Pertamina and the Republic in the current motion for the

proposition that the Retention Fees paid to Pertamina ended

as of January 1, 2003. The Guatama opinion was to the effect

that the new laws had the effect of contradicting the former

law (Government Regulation 41 of 1982) which gave Perta-

mina the right to the Retention Fees. Gautama described how

the new laws established the entity BP Migas, provided for a

transfer of responsibilities from Pertamina to BP Migas, and

provided for the compensation of BP Migas. The conclusion

of Dr. Guatama was:

50a

As noted above, the Retention Fee set forth in Arti-

cle 5(1) of Government Regulation 41/1982 is no

longer effective.

Of course, Guatama spoke in the present time, as of Novem-

ber 6, 2003. His opinion cited no specific provision of law

terminating the Retention Fees as of January 1, 2003 or as of

any other date. It must be repeated that this recitation of the

new laws was not contained in the submissions in connection

with what has been referred to as the 2003 motions.

The Republic, in its memorandum of November 12, 2003,

made use of the Guatama opinion. However, the memoran-

dum did not take the position that the effect of the legal enact-

ments was actually to terminate the Retention Fees. The

memorandum asserted (p. 6) that as of November 2003, the

Retention Fees were still being paid and could be restrained.

The effort of the Republic was to portray the amount of the

restrained 2003 Retention Fees as relatively small—about

$12 million——-with regard to the Unadjudicated Accounts in

question.

It would seem no coincidence that in a matter of days the

Ministry of Finance issued the November 21, 2003 letter,

which concededly did cut off the Retention Fees. Although

one cannot be certain, it may very well be that the Republic

was step-by-step reassessing its strategy in relation to the

restraints in New York, which had been placed upon very

large amounts of money. Ultimately that strategy resulted in

the radical change of position manifested in the current

motion. The Republic, along with Pertamina, now asserts that

the Retention Fees were ended as of January 1, 2003. As

described earlier in detail, this is something that was never

even suggested in the 2003 motions, and it was not argued in

the memorandum filed by the Republic on its other motion

Sla

shortly before the appearance of the November 21, 2003 let-

ter.

All of this reinforces the conclusion of the Court that the

Retention Fees were in effect until November 21, 2003.

Conclusion

Obviously there was, pursuant to arrangements lawfully

enacted, a transfer of responsibility from Pertamina to BP

Migas. However, that involved a transition over a period of

time. Exactly what the stages were in this transition in 2001,

2002, and 2003, the record does not show nor does it need to

show. The sole issue before the Court is whether Pertamina

was earning, and was entitled to earn, the Retention Fees

commencing with the service of the restraining notices on

February 22, 2002 and continuing until the admitted end of

the Retention Fees on November 21, 2003. Conclusive evi-

dence that this was in fact the case is provided by the posi-

tions taken by Pertamina and the Republic and their

experts—all asserted repeatedly and with deliberation—dur-

ing the presentation of the “2003 motions,” and even in the

November 2003 motion about the Unadjudicated Accounts.

The attempt to switch to a totally contrary position in con-

nection with the present motion has unfortunately put Perta-

mina and the Republic in a position in which their arguments

cannot be given weight. It is surely no small problem that, in

connection with the current motion, legal enactments are now

brought to the surface, which existed and would have been

highly germane on the 2003 motions, if these legal enact-

ments in fact provided what is now argued. But they do not.

And the best evidence of this is the interpretations made by

Pertamina and the Republic themselves, as well as their

experts, in the earlier submissions.

52a

The motion of KBC is granted to the extent that the

Court finds that Pertamina had a right to collect Retention

Fees on the Adjudicated Accounts during the entire period

of February 22, 2002 until November 21, 2003. In order to

eliminate the need for further litigation, the Court finds, on

the basis of the record, that the amount of those fees in

2003 was $132 million, in addition to the $178 million

restrained in 2002. The fees were restrained in the manner

described in the Court’s opinion of January 29, 2004.

The Court will not direct an actual turnover. The funds

will remain at Bank of America under conditions hereto-

fore specified.

KBC requests certification for immediate appeal of the

rulings in the January 29, 2004 opinion and in this opinion.

The Court grants this application.

The parties will settle an appropriate order.

SO ORDERED.

Dated: New York, New York

May 19, 2004

/s/ THOMAS P. GRIESA

THOMAS P. GRIESA

U.S.D.J.

53a

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

No. 21 MC 98 (TPG)

IN THE MATTER OF AN ARBITRATION BETWEEN

KARAHA BoDAS COMPANY, L.L.C.,

Petitioner,

—against—

PERUSAHAAN PERTAMBANGAN MINYAK

DAN GAS BUMI NEGARA (“PERTAMINA”),

Respondent.

ORDER

Further to this Court’s Opinion dated January 29, 2004,

and in order to maintain sufficient security for the judg-

ment obtained by Karaha Bodas Company (“KBC”) against

Pertamina, as well as to release to the Ministry of Finance

of the Republic of Indonesia funds not required for such

security, but without prejudice to the rights of any parties

going forward in this litigation, it is hereby ORDERED:

1. This Order pertains to the funds restrained pur-

suant to Restraining Notices issued by this

Court on February 22, 2002 to Bank of America

and The Bank of New York, and thereafter

extended from time to time, most recently on

March 4, 2004.

S4a

2. Subject to the terms and conditions of this Order,

Bank of America and The Bank of New York

shall release to the Ministry of Finance of the

Republic of Indonesia all funds currently with-

held except the amounts now held at Bank of

America in the 15 adjudicated trust accounts at

that bank set forth on Schedule 1 hereto (the

“Adjudicated Accounts”), and no additional

amounts shal! hereafter be withheld by either

bank, except that Bank of America shall withhold

such amounts as are required frum time to time to

true up the interest component of KBC’s judg-

ment against Pertamina entered December 4,

2001 in the United States District Court for the

Southern District of Texas (the “Texas Judg-

ment”).

3. The funds so held in the Adjudicated Accounts

shall be treated as security for such amounts, if

any, as are finally held in further proceedings in

this Court and on appeal to belong to Pertamina

and to be subject to execution against Pertamina,

from among the funds that passed into the

accounts listed in Schedules 1, 2, and 3 at Bank

of America or The Bank of New York since Feb-

ruary 22, 2002. Although the parties disagree as

to the past effect of the restraining notices, the

parties agree that the restraining notices will be

effective from the date of this order going for-

ward.

4. The Court will now proceed to complete its

determination, subject to appeal, as to what

funds that have passed and will pass into the

55a

accounts listed in Schedules 1, 2, and 3 are

funds belonging to Pertamina and subject to the

restraints versus funds belonging to the Ministry of

Finance or otherwise not subject to the restraints.

In these further proceedings the Court will deter-

mine the effect of Indonesian law on the respec-

tive property interests as such law stands as of

the data of entry of this order. The purpose of the

latter clause is understood to be directed solely at

possible changes that would diminish KBC’s right.

. At the same time the Court awaits the conclusion

of proceedings regarding the Texas Judgment.

The exact sequence of ithe proceedings cannot be

known at this time. However, if the Texas Judg-

ment is finally affirmed, the amount held in the

Adjudicated Accounts will be paid to KBC to

‘the extent that it is finally determined that funds

passing through the accounts listed in Schedules

1, 2, and 3, which belong to Pertamina and are

subject to the restraints, are at least equal to the

amount of the Texas Judgment plus interest. If it

is determined that the amount belonging to Pert-

amina and subject to the restraints is !« ss than the

amount of the Texas Judgment plus interest, the

difference will be paid to the Ministry of Finance.

If the Texas Judgment is finally reversed or

vacated, or the amount reduced, this will be given

effect in determining the ultimate allocation and

payment of the funds held in the Adjudicated

Accounts. In the event that the Texas Judgment

is finally reversed or vacated in its entirety, the

Restraining Notices shall be dissolved and be of

no further force and effect.

56a

6. Any funds paid to the Ministry of Finance shall

be paid to the Ministry’s foreign exchange account

at the Federal Reserve Bank of New York.

7. The Restraining Notices may be extended here-

after but only subject to the terms and condi-

tions specified in this Order.

Dated: March 18, 2004

/s/ THOMAS P. GRIESA

Hon. Thomas P. Griesa

United States District Judge

Schedule 1

ARUN II Trust

ARUN III Trust

Bontang Excess Sales MCGC Trust

Bontang Excess Sales AQP Trust

Bontang Excess Sales Korea II Trust

Bontang Excess Sales KCO Trust

Bontang LPG PKG V Trust

Bontang LPG PKG VII Trust

Bontang II Trust

Bontang III Trust

Bontang IV Trust

Bontang V Trust

Bontang VI Trust

East Java Pipeline (PSC Revenue) Trust

ONWSY Trust

57a

Schedule 2

BLRE Trust

Corridor Trust

East Java Pipeline (Throughput Fee) Trust

KMI Trust

South Sumatra Trust

West Natuna Trust

Schedule 3

Cilacap Trust

Exor I Trust

MUSI II Trust

58a

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

M-18-302 (TPG)

In the Matter of an Arbitration Between

Karaha Bodas Company, L.L.C.,

Petitioner,

—against—

Perusahaan Pertambangan Minyak

Dan Gas Bumi Negara (“Pertamina”),

Respondent.

OPINION

On February 14, 2003 petitioner Karaha Bodas Company

L.L.C. (“KBC”) filed a motion seeking an order (1) direct-

ing Bank of America to transfer to KBC approximately

$266 million, which was being held in certain accounts pur-

suant to a restraining notice; and 2) directing Bank of Amer-

ica to transfer to KBC certain additional funds on a monthly

basis. Respondent Pertamina opposes the motion. The Min-

istry of Finaace of the Republic of indonesia (“the Repub-

lic”) has been permitted to participate in this proceeding as

a “Non-Party with Interest.” The Republic also opposes the

Menon.

Almost simultaneously with the above motion, Pertamina

fiied a motion to stay execution, contending that the court

should held the proceedings brought by KBC in abeyance

59a

pending the outcome of the underlying litigation then pend-

ing in the Fifth Circuit and the outcome of a certiorari peti-

tion to the Supreme Court from a Second Circuit decision

dealing with the funds held at Bank of America.'

On April 28, 2003 the Republic filed a motion seeking the

release of approximately $262 million from Bank of Amer-

ica accounts, claiming that those funds belonged to the

Republic of Indonesia and could no longer be restrained.

At a hearing held on May 23, 2003 the court decided

certain issues raised by KBC’s February motion and the

Republic’s April motion, but left certain issues for further con-

sideration. No funds were actually turned over or released.

On June 27, 2003 KBC filed a new motion, which in

effect replaced KBC’s February 2003 motion. The new

motion refined the issues dealing with KBC’s rights in funds

held by Bank of America and funds passing through Bank of

America, and requested an order requiring Bank of America

to turn funds over to KBC.

Facts

KBC is a corporation located in the Cayman Islands with

its center of operations in the United States. Pertamina is an

Indonesian state-owned oil and gas company. KBC and Per-

tamina entered into contracts in 1994 for a joint venture

involving the development of facilities in the Karaha area of

West Java. In 1997 the projects were suspended as a result

of Indonesian government decrees. This termination of

operations Jed KBC to seek arbitration in Switzerland for

breach of contract by Pertemina.

On December 18, 2000 the arbitral panel made an award

of $261.1 million to KBC against Pertamina. On December

Certiorari has since been denied.

60a

4, 2001 the award was confirmed by the U.S. District Court

for the Southern District of Texas, and judgment was entered

in that court for $261.1 million. Pertamina has appealed that

judgment to the Fifth Circuit, and that appeal is still pending.

Pertamina declined to file a supersedeas bond under Fed. R.

Civ. P. 62(d), and therefore there is no stay of execution.

Wholly apart from the contracts with KBC, Pertamina’s

business activities involved the marketing of oil and gas

products. It had at times carried this out through joint ven-

tures with private contractors, pursuant to agreements

known as Production Sharing Contracts. The sales proceeds

of some of these ventures were channeled through trust

accounts held in Pertamina’s name at Bank of America and

the Bank of New York. A total of twenty-four such accounts

are at issue in this proceeding.

The court has heard extensive evidence regarding fifteen

of these accounts, all at Bank of America, now referred to as

the “adjudicated accounts.” These bear the names of the

joint venture projects in Indonesia.

Arun III

Bes MCGC

Bontang V

Bontang VI

Arun II

Bes AQP

Bontang II

BLPG PKG V

BLPG PKG VII

BES Korea II

BES KCO

Bontang III CSTE

Bontang IV

East Java

ONWJ

6la

An additional nine accounts are also the subject of this

proceeding. Seven of these are at Bank of America:

West Natuna

Corridor

KMI

CILACAP

East Java Thruput Fee

South Sumatra

BLRE

Two are at the Bank of New York:

e MUSI II Trust

e EXOR I Trust

The issues dealt with in this opinion relate only to the

Bank of America accounts. The Bank of New York accounts

will not be referred to hereafter.

As already indicated, the evidence regarding the adjudi-

cated accounts shows that they are trust accounts containing

revenues generated from Production Sharing Contracts. The

revenues enter the trust accounts in Pertamina’s name. How-

ever, pursuant to Pertamina’s standing instructions, upon

receipt of these revenues, Bank of America, as trustee, makes

certain payments. The payments cover operational expenses

incurred by the joint venture, as well as expenses incurred

by the joint venturer and the share of the profit owed to the

joint venturer. What is left over after these payments is a

balance to be paid to Pertamina. This balance will be

referred to hereafter as “the amount payable to Pertamina.”

For reasons that will be explained hereafter, there has been

extensive litigation in this court regarding how much of the

money payable to Pertamina actually belongs to Pertamina,

as opposed to the Republic of Indonesia.

62a

On February 22, 2002 the Texas judgment was registered

in the Southern District of New York. Restraining notices

were issued pursuant to N.Y. C.P.L.R. § 5222, one of which

was served on Bank of America. Bank of America complied

with the restraining notice by placing in escrow the funds

payable to Pertamina from all twenty-two of the trust

accounts discussed above that were located at the Bank.

The Republic moved to quash the restraining notices,

asserting that it owned all of the restrained funds, that the

judgment debtor Pertamina owned none of the funds, and

therefore that KBC had no right to restrain any of the

funds. KBC opposed the motion, taking the view that Per-

tamina owned all of the funds in question and that all were

subject to restraint. On April 5, 2002 the court issued a

bench ruling embodied in an order dated April 24, 2002.

The court dealt only with the 15 “unadjudicated accounts”

and made no decision regarding the others. The court

determined that Pertamina had a property right in the adju-

dicated accounts “to the extent of its five percent (5%)

Retention Fee, which can be executed upon in the manner

allowed under New York C.P.L.R. 5222(b).” The court also

determined that under Indonesian law the Retention Fee

was equal to 5% of Net Operating Income generated from

each Production Sharing Contract. The court held that the

remaining funds payable to Pertamina were owned by the

Republic of Indonesia, and that the accounts could not be

executed upon to the extent of the Republic’s portion.

Enforcement of these provisions of the April 24 order was

stayed, however, to allow for review by the Court of

Appeals.

All parties sought ieave to appeal the court’s order. KBC

sought reversa! of the court’s determination that only 5% of

the Net Operating Income was owned by Pertamina. Perta-

63a

mina and the Republic appealed, objecting to a ruling that

as much as 5% belonged to Pertamina.

On June 7, 2002 the total amount restrained by Bank of

America reached $546 million, or approximately twice the

amount of the judgment plus interest—i.e., $503 million in

the adjudicated accounts and $43 million in the remaining

seven accounts. It appears that at that point the Bank

stopped restraining additional payments into the adjudi-

cated accounts. According to the record before the court,

Bank of America acted on its own. There was no court

order and no court determination regarding any issues

under C.P.L.R. § 5222(b).

On June 18, 2002 the Court of Appeals granted all

motions for leave to appeal, and issued an order modifying

the District Court’s restraint. The Court of Appeals stated:

Because Bodas also has a substantial possibility of

success on the merits, we conclude that the district

court did not abuse its discretion. However, we mod-

ify the stay to apply only to sufficient funds to satis-

fy the judgment, because no legitimate interests are

served by tying up funds beyond what would be nec-

essary to make Bodas whole if it prevails on appeal.

Bank of America then undertook to give effect to the

Court of Appeals order. The Bank took the total amount

restrained in the adjudicated accounts as of June 7, 2002

($503,441,910.86) and subtracted the amount of KBC’s

judgment, plus interest as of June 7 ($276,633,524.59).

This left an amount to be disbursed out of the $503 million

of $228,808,386.23. Bank of America then deducted from

this amount legal fees of $249,817.02 and added interest

from June 7 of $260,727.35, giving a net to be released out

of the adjudicated accounts on June 19 of $226,819,296.59.

64a

Robert Braun of Bank of America states that no other

funds have been restrained in the fifteen adjudicated accounts

beyond the $276,663,524.59 (which will be referred to here-

after as $277 million) except to cover the 4% interest accru-

ing on the judgment. At a November 12, 2003 hearing the

amount restrained from the adjudicated accounts was esti-

mated by the Republic’s lawyers to be approximately

$290 million.

The Court of Appeals order of June 18 did not affect the

seven other Bank of America accounts. Thus the $43 million

remained on hold, and Bank of America resumed withhold-

ing amounts coming into these accounts. The total amount

withheld reached almost $290 million as of June 2003. At

this time Bank of America ceased withholding further

amounts from the seven accounts.

On December 10, 2002 the Court of Appeals affirmed the

District Court’s April 24 order, stating:

The district court correctly adjudicated the relative

ownership interests of the Republic of Indonesia

and Pertamina. We therefore affirm the district court’s

order granting KBC’s motion to attach the Retention

and denying KBC’s motion to attach the remainder

of the disputed funds. Because this is not an appeal

from a final judgment, proceedings in the district

court will presumably move on to other matters. We

direct the district court, in the course of those pro-

ceedings, to continue the stay presently in force or to

substitute one similar until such time as the parties’

rights to the disputed funds are finally determined.

Karaha Bodas Co. v. Pertamina, 313 F.3d 70, 92-93 (2d Cir.

2002). Thus the Court of Appeals held that Pertamina had

ownership rights only as to the Retention Fee, and that the

65a

Republic was the owner of the rest of the funds, although

they were nominally payable to Pertamina.

In the various proceedings before this court, it has been

necessary to determine what fractional portion of the funds

payable to Pertamina comprised the Retention Fee. It should

be recalled that it was the funds payable to Pertamina

(arrived at after deducting various amounts described earlier

in this opinion) which were restrained by Bank of America.

The Retention Fee has been spoken of as 5% of Net Oper-

ating Income. This is correct. But Net Operating Income is

not synonymous with the funds payable to Pertamina. In

order to arrive at the latter amount, the sum payable to the

joint venturer is deducted from Net Operating Income. The

Court of Appeals has set forth a useful illustration of what

occurs. In the following quotation “PSC Revenue” actually

means Net Operating Income.

For instance, if the PSC Revenue were $100, Perta-

mina’s retention would be $5, or five percent.

Under the terms described in Pertamina’s annual

reports, though, the PSC Revenue would be divided:

$35 would go to the PSC Contractor, and $65 would

go to Pertamina in New York, then be transferred

immediately to the Ministry in Jakarta. Once the $65

reached Jakarta, Pertamina would receive $5. After

taxes and dividends, however, Pertamina would only

retain $1.

Id. at 84 n.13. The concept embodied in the quoted footnote

has been used frequently by the parties and the District

Court in proceedings following the Court of Appeals ruling.

In the illustration used in the Court of Appeals footnote,

when Net Operating Income ($100) is reduced by the $35

payable to the joint venturer, this leaves $65, which is the

66a

amount payable to Pertamina. Pertamina’s Retention Fee is

$5 out of this $65, or 5/65 of the amount payable to

Pertamina.”

In February and April of 2003, KBC, Pertamina, and the

Republic filed three of the motions with which this opinion

is concerned, addressing issues related to exactly how much

money held by Bank of America was subject to execution by

KBC. The court held oral argument on the three motions at

a hearing on May 23, 2003.

One of the issues related to the proper method for calcu-

lating Net Operating Income, and was resolved in a bench

ruling. It had been agreed that Net Operating Income was

arrived at after deducting expenses of the joint venture.

What was still in dispute was whether expenses of the joint

venturer should also be deducted in calculating Net Oper-

ating Income. The court ruled that they should.

Also discussed at the May 23 hearing was a broader

issue about the extent of KBC’s rights. The Republic took

the position that no further Retention Fees passing into the

adjudicated accounts after June 9, 2002 were subject to

restraint and that the total of the Retention Fees restrained

was about $20 million. KBC contended that the restraint

continued to apply after June 9 and would so continue until

the amount of the restrained fees reached the amount of

$277 million plus interest.

2 In certain recent submissions the parties have alluded to the pos-

sibility that a slightly different method of calculation has been used.

But these suggestions have not thus far been presented in sufficiently

cogent fashion for the court to base any finding on. Consequently for

purposes of this opinion, the court will make use of the method of cal-

culation illustrated by the Court of Appeals. In any event, any changes

in the method of calculating the Retention Fee, while perhaps resulting

in adjustments in the figures, will not alter what the court is saying

about the Retention Fee in principle.

67a

At the hearing of May 23, 2003 the court deferred deci-

sion on this issue, but took the view that, at least prospec-

tively, there should be no doubt that Retention Fees

flowing into the adjudicated accounts were subject to

restraint up to the entire amount specified by the Court of

Appeals as necessary to secure the judgment. This was

embodied in an order of May 30, 2003, which provided that

“beginning now and from this time forward, the restrained

funds [the $277 million plus interest] will be considered

security for all Retentions earned by Pertamina in connec-

tion with the projects involved in the accounts subject to

the stay. The amounts of such Retentions will be subject to

findings by the court on presentation of appropriate evi-

dence.” The court invited KBC to make a new motion

addressing these matters. KBC filed such a motion on June

27, 2003.

The Republic sought to appeal or to obtain a writ of

mandamus regarding the May 39, 2003 order. On Decem-

ber 17, 2003 the Court of Appeals dismissed the Repub-

lic’s appeal for lack of jurisdiction, stating that it found

“no basis upon which to assert jurisdiction over this appeal

because the district court has yet to determine what amount,

if any, of the restrained funds is owned to the Republic. As

a result, the district court’s order has had no legal effect, nor

does it determine with finality any aspect of the motions of

the parties.” The Court of Appeals went on to state:

The proper course is to permit the district court to

receive the additional evidence it has indicated is

necessary to make a final determination of the

restrained funds owned by Pertamina. We trust that

the district court knows, and will be mindful of the

fact, that if and when some portion of the restrained

68a

funds is determined to be owned by the Ministry, no

portion of the Ministry’s funds can serve as security

to satisfy the debt of Pertamina. Further, we note that

nothing in our prior orders in this case prevented the

district court from restraining incoming funds that

belong to Pertamina, up to the amount of the judg-

ment due to appellee Karaha Bodas Company, LLC

(“KBC”).

The Court also denied the mandamus petition.

The Current Issue for Decision

Although this opinion deals with four motions, there is

one basic issue which now needs to be decided as a result of

all of the motions. This relates to the period of time over

which the Retention Fees passing into the adjudicated

accounts should be considered to have been captured by

the restraining notice served on Bank of America.

The Republic and Pertamina contend that the restraining

notice was operative against the adjudicated accounts only ©

until June 7, 2002, when the amount restrained in these

accounts and in the other seven accounts at Bank of Amer-

ica reached approximately double the amount of the judgment

plus interest, or a total of $546 million——_$503 million in the

adjudicated accounts and $43 million in the other seven

accounts. As already described, the Court of Appeals issued

an order on June 18, 2002 requiring that the portion of the

$503 million to be restrained should be reduced to the amount

of the judgment ($261.1 million). The parties agree that inter-

est should be added. As of June 18 the amount of the judg-

ment plus interest was $277 million and interest has

continued to accrue. The Republic and Pertamina now take

the position that 5/65 of the $277 million plus interest, or a

69a

little over $20 million, is all that is available to KBC out of

the adjudicated accounts, to secure its judgment or to be

executed upon.

KBC’s position is radically different. KBC contends that

all Retention Fees coming into the adjudicated accounts

from February 22, 2002 (when the restraining notice was

served) until the present time have been, and will be, cap-

tured by the restraining notice, up to the amount of the

$277 million plus interest.

Discussion

Fed. R. Civ. P. 69(a) provides as follows:

Process to enforce a judgment for the payment of

money shall be a writ of execution, unless the court

directs otherwise. The procedure on execution ...

and in proceedings on and in aid of execution shall

be in accordance with the practice and procedure of

the state in which the district court is held, existing

at the time the remedy is sought... .

New York C.P.L.R. § 5222(b) is one of the New York pre-

visions dealing with supplementary proceedings following a

judgment, and provides for restraining notices.

All property in which the judgment debtor or

obligor is known or believed to have an interest

then in and thereafter coming into the possession or

custody of such a person [a party served with a

restraining notice], including any specified in the

notice, and all debts of such a person, including any

specified in the notice, then due and thereafter com-

ing due to the judgment debtor or obligor, shall be

subject to the notice. Such a person is forbidden to

70a

make or suffer any sale, assignment or transfer of,

or any interference with, any such property, or pay

over or otherwise dispose of any such debt, to any

person other than the sheriff or the support collec-

tion unit, except upon direction of the sheriff or

pursuant to an order of the court, until the expira-

tion of one year after the notice is served upon him

or her, or until the judgment or order is satisfied or

vacated, whichever event first occurs.... If a gar-

nishee served with a restraining notice withholds

the;payment of money belonging or owed to the

judgment debtor or obligor in an amount equal to

twice the amount due on the judgment or order, the

restraining notice is not effective as to other prop-

erty or money.

A further provision allows a court on its own initiative or on

the motion of any interested party to make an order condi-

tioning or modifying the use of a procedure for enforcing a

judgment. C.P.L.R. § 5240.

Pursuant to § 5222(b), the restraining notice served on

Bank of America applied to all funds which Pertamina was

“known or believed to have an interest then in or thereafter

coming into the possession or custody of’ Bank of America.

The Bank was required to apply the restraint to such funds

until the withheld money “belonged or owed to” Pertamina is

“equal or twice the amount due on the judgment.” After that

“the restraining notice is not effective as to other property

or money.” C.P.L.R. § 5222(b).

As already described, Bank of America restrained funds

beginning February 22, 2002, when the notice was served. It

restrained funds payable to Pertamina in the fifteen adjudi-

cated accounts, as well as the seven other accounts men-

tioned previously. All these restrained funds were deemed to

Tla

be funds in which Pertamina was “known or believed to have

an interest,” despite the fact that there was a contest over who

actually owned the funds payable to Pertamina. Although

Bank of America was not a party to that contest, it promptly

learned about it. But Bank of America restrained all the funds

in the twenty-two accounts payable to Pertamina. Under

§ 5222(b), the restraining notice would continue to operate

until the “money belonging or owed to” Pertamina was equal

to twice the amount due on the judgment.

On April 5, 2002 the District Court held that only the

Retention Fee portion of the funds payable to Pertamina actu-

ally belonged to Pertamina. This would be 5/65 of those

funds. Nevertheless, Bank of America continued restraining

the funds after the April 5 decision.

Bank of America ceased restraining further funds as of

June 7, 2002 when the amount withheld from all twenty-two

accounts reached $546 million. This cessation occurred

despite the fact that twice the amount of the “money belong-

ing or owed to” Pertamina was only a fraction of the

$546 million, according to the District Court ruling. Under

this ruling, Pertamina was entitled to 5/65 of the $503 million

in the adjudicated accounts or $39 million. There had been

no determination as to the ownership of the $43 million in

the other seven accounts. Thus, as of June 7, 2002, taking

into account the District Court ruling, out of the $503 mil-

lion restrained in the adjudicated accounts only $39 million

was “money belonging or owed to” Pertamina. If this

$39 million is added to the entire $43 million in the other

seven accounts, the total of $82 million was far less than

twice the amount due on the judgment. Thus there was,

and is, no basis for any theory that the restraining notice

ceased to operate against Bank of America on June 7, 2002.

72a

Shortly thereafter the Court of Appeals issued its order of

June 18, 2002, allowing appeals from the District Court’s

order of April 24, 2002. At the same time, the Court of

Appeals directed that the amount of the restrained funds

from the adjudicated accounts be reduced. The statement

of the Court, already quoted, bears repetition.

Because Bodas also has a substantial possibility: of

success on the merits, we conclude that the district

court did not abuse its discretion. However, we

modify the stay to apply only to sufficient funds to

satisfy the judgment, because no legitimate inter-

ests are served by tying up funds beyond what

would be necessary to make Bodas whole if it pre-

vails on appeal.

Although the Court of Appeals did not expressly refer to a

state statute, its modification of the restraint was consistent

with C.P.L.R. § 5240.

The Court did not deal with the issue of Retention Fees,

nor did it voice any opinion as to how § 5222(b) would be

applied to Retention Fees. It surely did not sanction any idea

that KBC’s rights under § 5222(b) were cut off in such a way

that the amount of KBC’s security was a mere $20 million.

Any such assumption would have been wholly contrary to the

structure which the Court of Appeals was setting up. The

Court simply stated that an amount of money sufficient to

satisfy the judgment was all that should be withheld, and

that there was no need to set aside twice that amount. But

whether it was Retention Fees which made up that amount,

and if so, over what period of time those Retention Fees

accrued—these were questions which the Court of Appeals

did not touch.

73a

Based on their present accountings, Pertamina and the

Republic have reported to the court that during the period

from February 22 through December 31, 2002 a total of

$178,161,403 in Retention Fees passed into the adjudicated

accounts at Bank of America.’ Since 2’ vut $39 million in

Retention Fees had gone into those accounts as of June 7,

2002, it appears that there was another $139 million by the

end of the year.

What occurred in 2003 has unfortunately not been

resolved. At a hearing of August 27, 2003, the attorney for

Pertamina estimated that the Retention Fees relating to the

adjudicated accounts were running about $10 million per

month. An indication of a somewhat different amount appears

from the fact that about $1.9 billion in funds payable to

Pertamina passed into the adjudicated accounts in 2003,

and using the 5/65 fraction would yield Retention Fees of

about $146 million for 2003. However, Pertamina and the

Republic have now come up with various arguments which

would whittle down the 2003 figure to much lower

amounts or possibly zero, depending on how their various

contentions play out. Since the purpose of this opinion is

largely to resolve an issue in principle, the details of the

contentions of Pertamina and the Republic regarding 2003,

and the counter-contentions of KBC, will not be set forth

or resolved here.

Regarding the seven other accounts, as of November

2003 the amount restrained in these accounts was

$289 million. There has not been any adjudication reg2id-

ing what portion of the $289 million belongs to Pertamina.

But it cannot be assumed that it is all of the $289 million,

3 Prior to the hearing of January 27, 2004 there was some dispute

about the correctness of the $178,161,403. But at the hearing all parties

agreed to this figure.

74a

and if it were to turn out that Pertamina’s share was 5/65,

then the amount owned by Pertamina and subject to exe-

cution would be about $22 million.

It is now necessary to decide how C.P.L.R. § 5222(b) oper-

ated after June 7 and June 18 on the adjudicated accounts.

Pertamina and the Republic contend that the operation

of the restraining notice ceased when the amount withheld

in the adjudicated accounts, and the seven other accounts,

reached $546 million on June 9, 2002—i.e., twice the amount

of the judgment plus interest. But Pertamina and the Repub-

lic are involved in a contradiction. For the purpose of stop-

ping the operation of the restraint they argue that the amount

subject to § 5222(b) reached double the amount of the judg-

ment on June 7. But for the purpose of limiting the amount

which actually secures KBC’s judgment, Pertamina and the

Republic argue that this is only a small fraction of the

amount restrained—actually only 5/65 of the $277 million

plus interest limit imposed pursuant to the Court of

Appeals order of June 18, 2002, this fraction being as of

that time, a little over $20 million.

This is not the proper application of the law. In setting

forth what is proper, it is appropriate to accept one prong

of the argument of Pertamina and the Republic. It is now

established as of the adjudicated accounts that the only part

of the funds payable to Pertamina which actually belonged

to Pertamina, were the Retention Fees. So, according to

Pertamina and the Republic’s own argument, with which

the court agrees, this should be the basis for deciding how

§ 5222(b) applied. What was formerly uncertain about prop-

erty rights is now settled.

The court has stated earlier that there was no basis for any

idea that the restraining notice ceased to operate against Bank

of America on June 7, 2002 when the total funds withheld in

75a

all the accounts reached $546 million ($503 million in the

adjudicated accounts and $43 million in the other seven

accounts). The reason is that as of this time the District Court

had ruled that only the Retention Fee portion actually

belonged to Pertamina and was subject to execution, and

this was only a fraction of the $546 million. Obviously,

there was still doubt about the ownership of the funds

because the District Court ruling was subject to appeal, but

there is no justification for any categorical position that

KBC’s rights of restraint against the adjudicated accounts

ceased as of June 7, 2002. And we now know that the Court of

Appeals affirmed the District Court.

As a matter of law under § 5222(b), the restraining notice

would continue to operate after June 7, 2002 until the

withheld “money belonging or owed to” Pertamina was equal

to twice the amount of the judgment. The Court of Appeals

order of June 18, 2002 did not halt the operation of § 5222(b).

All that Court did was to modify the /imit, so that, instead of a

limit of twice the amount of the judgment, there was a ceiling

‘of the amount of the judgment.

After June 18, funds payable to Pertamina were continuing

to flow into the adjudicated accounts. A portion of these funds

(the Retention Fees equal to 5/65 of those funds) belonged

to Pertamina. Pursuant to § 5222(b), with the modification of

the Court of Appeals, the restraint continued to apply to the

Retention Fees coming into the adjudicated accounts and

would continue to apply until the total of the Retention Fees

reached the amount of the judgment plus interest. As of

November 2003 this was about $290 million. Thus the

restraint applied to the entire $178,161,403 in Retention Fees

entering the adjudicated accounts from February 22 to the

end of 2002 and also the Retention Fees earned thereafter up

to an additional amount of at least $110 million.

76a

As Retention Fees continued to flow into the adjudicated

accounts after June 18, 2002, Bank of America was not

required literally to put a freeze on these post-June 18 Reten-

tion Fees. The $277 million (or the $290 million) was

many times larger than the amount of Retention Fees that

had passed into the adjudicated accounts. As time moved on

from June 18, and additional Retention Fees continued to

flow into the accounts, the restraint applied to those fees,

as already described, up to the amount of the limit estab-

lished by the Court of Appeals. But the amount of money

withheld pursuant to the Court of Appeals’s order continued

to be much larger than the Retention Fees subject to

restraint. For instance, as of the end of 2002 the amount

withheld was a little over $280 million, whereas the total

Retention Fees subject to the restraint was $178 million.

Thus, Bank of America did not need to, and indeed could

not, literally put a hold on these Fees.

Thus we have a situation, perhaps unique, where Reten-

tion Fees were subject to restraint as they passed into the

adjudicated accounts, but where Bank of America could not

literally freeze the additional Fees because there was

already a sum of money withheld which was far in excess

of the Retention Fees as they were coming into Bank of

America.

It is necessary at this point to examine the nature of the

funds dealt with by the June 18, 2002 Court of Appeals

order. Pertamina and the Republic in effect argue that such

funds constituted a kind of res, owned partly by Pertamina

(and thus subject to execution by KBC) and partly by the

Republic, which res amounted to $277 million as of June

18, 2002. According to Pertamina and the Republic when it

was later held by the Court of Appeals that Pertamina owned

only the Retention Fee portion and the Republic owned the

77a

rest, this established what KBC had a right to execute on,

and that was limited to $21 million out of the $277 million

res. Pertamina and the Republic contend that the Republic

had a right to take the other $256 million. If distribution

was held up by litigation, interest might accrue, but this

would simply be an amount of additional money to be

shared out of such res.

It will be recalled that Pertamina and the Republic take

the view that the restraining notice against the adjudicated

accounts ceased to operate on June 7, 2002, when the

amount restrained in the accounts and the other seven

accounts reached twice the amount of the judgment. It fol-

lows, in their view, that the restraining notice did not have

any further operation after the June 18, 2002 Court of

Appeals order. Thus, according to the contention of Pertam-

ina and the Republic, after the division of the res of

$277 million plus interest, there is nothing further available

to KBC to secure its judgment beyond the $21 million por-

tion of the $277 million plus a small amount of interest.

These positions of Pertamina and the Republic are not

supported by either the facts or the law. No court has held

that KBC’s rights are limited to a $21 million share of the

$277 million on the basis that the $277 million was a res

belonging to two property owners or on any other basis. As

to the June 18, 2002 ruling, all that the Court of Appeals did

was to fix a limit on the amount of money which Bank of

America could withhold. The Court did not decide anything

about who would or would not have property rights or secu-

rity rights in that amount of withheld money. The issue of

property rights was to be determined on the appeal. The

court said that the stay should “apply only to sufficient

funds to satisfy the judgment.” The amount of money should

be sufficient to satisfy the judgment but no more.

78a

The December 2002 decision of the Court of Appeals

phrased the question on appeal as follows:

The question on appeal concerns the ownership of the

funds in the Bank of America trust accounts. . . .

Karaha Bodas y. Pertamina, 313 F.3d 70, 75 (2d Cir. 2002).

In affirming the District Court ruling that Pertamina owned

only the Retention Fee portion of these accounts, the Court

of Appeals was dealing with the “trust accounts,” not with a

specified fund or res of $277 million or thereabouts. This is

made clear in numerous parts of the opinion. See, e.g., id. at

78, 79, 83, 93. The Court, referring to its June 18, 2002

order, stated:

Finally, we modified the stay to apply only to those

funds that would be necessary and sufficient to sat-

isfy a judgment.

Id. at 84. Thus the Court of Appeals did not indicate in any

way that KBC’s rights were limited to some fraction of a

$277 million res.

After losing its argument that KBC was entitled to exe-

cute on al] the funds nominally payable to Pertamina, KBC,

in its February 2003 motion, raised as one of the issues the

duration of the restraint, which is the subject of the present

opinion. As described earlier, at a hearing on May 23, 2003

and in an order of May 30, the District Court, while not

finally deciding the question, issued a direction having

prospective effect, that “beginning now and from this time

forward, the restrained funds [$277 million plus interest)

will be considered security for all Retentions earned by Per-

tamina in connection with the projects involved in the

accounts subject to the stay.”

79a

This was flatly contrary to the idea that KBC’s rights

were limited to certain property rights in a $277 million res.

While the Court of Appeals in December 2003 refused

to take jurisdiction of an appeal and denied mandamus—

all without an extensive opinion—it made a significant

pronouncement, which was clearly consistent with the

approach of the District Court in its May ruling. The Court

stated:

Further, we note that nothing in our prior orders in

this case prevented the district court from restrain-

ing incoming funds that belong to Pertamina, up to

the amount of the judgment due to appellee Karaha

Bodas Company, LLC (“KBC’”).

Thus there are the most solid grounds for concluding that

KBC’s restraining notice is not limited in its application to

a portion of a finite res, consisting of the $277 million plus

interest. The $277 million is an amount of money held by

Bank of America. It was a portion of the $503 million which

was blocked at a time when the restraint was being applied

to all funds payable to Pertamina and before the ownership

of the account was decided. The $277 million fund exists

because that amount of money is “sufficient ... to satisfy

the judgment,” in the words of the June 18, 2002 Court of

Appeals order.

It is necessary now to return to the matter of restraint of

Retention Fees in the adjudicated accounts. For reasons

explained earlier in this opinion, we do not look to the

$277 million to determine how much Retention Fees were

subject to restraint. By virtue of the operation of the restrain-

ing notice and § 5222(b), all Retention Fees entering the

adjudicated accounts from February 22, 2002 to the present

have been subject to restraint, up to the amount of the judg-

80a

ment plus interest (as of November 2003 $290 million). The

amount of Retention Fees subject to the restraint was

$178 million as of December 31, 2002 and may have

increased by about $10 million per month thereafter. Under

§ 5222(b) Bank of America is responsible for placing a hold

on and accumulating restrained funds. But Bank of America

had in place a fund, which was $277 million as of June 18,

2002 and which has grown to adjust for interest. Provided

that the Retention Fees are sufficient, the time will come (or

has come) when the amount of Retention Fees subject to

restraint is exactly the amount in the Bank of America fund.

Instead of literally withholding Retention Fees, at least

after June 18, 2002, Bank of America had the $277 million

fund in place, as a substitute for the withholding duty it

would otherwise have had. Fees, as they entered the adjudi-

cated accounts, should be deemed to be withheld in the

Bank of America fund. For instance, if $1 million in Reten-

tion Fees entered the adjudicated accounts on July 1, 2002,

Bank of America did not literally need to withhold those

funds, but $1 million of the funds already held should be

considered as becoming Retention Fees withheld by Bank

of America. Thus, as of December 31, 2002 the $178 mil-

lion Retention Fees subject to restraint should be consid-

ered $178 million in Retention Fees withheld by Bank of

America as part of the $277 million (plus interest) fund. The

same would apply to further Retention Fees up to the limit

established by the Court of Appeals. The amount of these

further Retention Fees is yet to be determined.

For these reasons, the court holds that KBC is entitled to

restrain, and execute on, the amount of all Retention Fees

passing into the adjudicated accounts beginning February

22, 2002 up to the amount of the judgment plus interest.

8la

Further Proceedings

The December 17, 2003 order of the Court of Appeals

noted that the District Court should “act without delay” and

should move “forward expeditiously” to determine the

amount of restrained funds owned by Pertamina versus the

amount owned by the Republic.

The record shows the various proceedings in the District

Court designed to resolve the above issue, going back well

before the December 17 order. The District Court will con-

tinue in that direction, fully mindful of the admonition of

the Court of Appeals. Unfortunately, the matter is unusually

complex, and issues of fact and law keep surfacing which

require further proceedings to resolve.

Conclusion

KBC’s February 2003 motion is denied as moot, because

the issues raised have been presented in one or mo. of the

other motions. Pertamina’s February 2003 motion to stay

- execution is denied. The Republic’s April 2003 motion

seeking release of $262 million is denied. KBC’s June 2003

motion is largely granted by virtue of the decision in this

opinion.

Because of the uncertainty surrounding the calculation of

Retention Fees after January 1, 2003, the court is deferring

any ruling about actual turnover of funds. Although the

court has concluded that KBC will be entitled to execute

on at least the $178 million Retention Fees for 2002, more

than $100 million is in dispute pending the resolution of

questions regarding 2003 Retention Fee earning by Perta-

mina. Because there appears to be a substantial probability

that Retention Fee earnings since January 1, 2003 will,

together with the $178 million, be equal to all, or nearly

82a

all, of the amount of the judgment plus interest, the court

cannot at this time release any restrained funds to the

Republic.

Dated: New York, New York

January 29, 2004

/s/ THOMAS P. GRIESA

THOMAS P- GRIESA

U.S.D.J.

83a

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

THIS SUMMARY ORDER WI_L NOT BE PUBLISHED

IN THE FEDERAL REPORTER AND MAY NOT BE

CITED AS PRECEDENTIAL AUTHORITY TO THIS OR

ANY OTHER COURT, BUT MAY BE CALLED TO THE

ATTENTION OF THIS OR ANY OTHER COURT IN A

SUBSEQUENT STAGE OF THIS CASE, IN A RELATED

CASE, OR IN ANY CASE FOR PURPOSES OF COL-

LATERAL ESTOPPEL OR RES JUDICATA.

At a stated term of the United States Court of Appeals

for the Second Circuit, held at the Thurgood Marshall

United States Courthouse, Foley Square, in the City of

New York, on the 17th day of December, two thousand and

three.

Docket No. 03-7705

Filed December 17, 2003

PRESENT:

HON. RICHARD J. CARDAMONE,

HON. PIERRE N. LEVAL,

HON. SONIA SOTOMAYOR,

Circuit Judges.

84a

KARAHA BODAS COMPANY, LLC,

Petitioner-Appellee,

V.

MINISTRY OF FINANCE OF THE REPUBLIC OF INDONESIA,

Respondent-Appellant,

V.

PERUSAHAAN PERTAMBANGAN MINYAK

DAN GAS BUMI NEGARA (“PERTAMINA”),

Respondent.

For Appellant: CAROLYN B. LAMM, White &

Case LLP (Frank Panopoulos

and R. Shawn Gunnarson, on the

brief), Washington, D.C.

For Appellee: CHRISTOPHER F. DUGAN, Paul,

Hastings, Janofsky & Walker

LLP (Bruce D. Ryan, James E.

Berger, Quisaira Almanzar Whit-

ney, and Lamia R. Maria, on the

brief), Washington, D.C.

For Respondent: MATTHEW D. SLATER, Cleary,

Gottlieb, Steen & Hamilton

(Jonathan I. Blackman and Justin

S. Anand, on the brief), Wash-

ington, D.C.

85a

SUMMARY ORDER

UPON DUE CONSIDERATION of this appeal from a

judgment of the United States District Court for the South-

ern District of New York (Griesa, J.) it is hereby

ORDERED, ADJUDGED AND DECREED that the

appeal of the judgment of the district court is DISMISSED

for lack of jurisdiction and that the petition for a writ of

mandamus is DENIED.

Respondent appellant the Ministry of Finance of the

Republic of Indonesia (the “Ministry”) appeals from a

May 30, 2003 memorandum and order of the United States

District Court for the Southern District of New York

(Griesa, J.) relating to a hearing held on various motions of

the parties.

The Ministry claims that the district court’s order

wrongfully attached as security for a debt of another party

funds belonging to the Ministry, in contravention of the

Foreign Sovereign Immunities Act of 1976, 28 U.S.C.

§§ 1330, 1602-1611 (“FSIA”). According to the Ministry, the

order provides that from May 30, 2003 forward, certain

restrained funds that include funds belonging to the Min-

istry will serve as security for a judgment debt of respon-

dent non-appellant Perusahaan Pertambangan Minyak Dan

Gas Bumi Negara (“Pertamina”). Thus the Ministry con-

tends that its property is denied the immunity from attach-

ment and execution to which it is entitled under the FSIA.

Further, the Ministry argues on appeal that such alleged

treatment disregards the mandate of this Court in Karaha

Bodas Company, L.L.C. y. Perusahaan Pertambangan

Minyak Dan Gas Bumi Negara (“Pertamina”), 313 F.3d

70 (2d Cir. 2002), cert. denied, 123 S.Ct. 2256 (2003).

86a

Notwithstanding the conventional principle that an order

granting security is not appealable, see Caribbean Trading

& Fidelity Corp. v. Nigerian National Petroleum Corp.,

948 F.2d 111, 114 (2d Cir. 1991), an order granting secu-

rity might be appealable where the order presents an

important issue of law, see Result Shipping Co. v. Ferruzzi

Trading USA Inc., 56 F.3d 394, 398 n.1 (2d Cir. 1995);

Banque Nordeurope S.A. v. Banker, 970 F.2d 1129, 1130-

31 (2d Cir. 1992), or imposes an exceptional burden, see

Caribbean Trading & Fidelity Corp., 948 F.2d at 114 (jus-

tifying nonappealability of orders granting attachment on

premise that attachment orders are not generally overly

burdensome); Drys Shipping Corp. v. Freights, Sub-

Freights, Charter Hire, 558 F.2d 1050, 1052 (2d Cir. 1977)

(same). Either of these situations could potentially be pre-

sented by an order that impinges on a legally protected

immunity, such as the immunity of a foreign sovereign.

See Caribbean Trading & Fidelity Corp., 948 F.2d at 116

(noting importance of congressional policy underlying

FSIA immunity from pretrial attachment and concluding

that orders granting attachment of property of foreign sov-

ereign are immediately appealable) (Mahoney, J., concur-

ring); cf. Stephens v. National Distillers & Chem. Corp.,

69 F.3d 1226, 1229-30, 1234 (2d Cir. 1996) (holding that

the FSIA prevents restraints that are the functional equiva-

lent of attachments); S & S Mach. Co. v. Masinexportim-

port, 706 F.2d 411, 418 (2d Cir. 1983) (dissolving

injunction that prohibited negotiation of letters of credit by

a foreign sovereign).

Here, however, we find no basis upon which to assert

jurisdiction over this appeal because the district court has

yet to determine what amount, if any, of the restrained funds

is owned by the Ministry. As a result, the district court’s

87a

order has had no legal effect, nor does it determine with

finality any aspect of the motions of the parties such as the

amounts of the restrained funds owned by Pertamina.

Rather, factual disputes remain outstanding and the district

court has indicated that it will hold further hearings and

receive additional briefings to make a final determination of

the Retention. We therefore find that the district court’s

order is not appealable as a final order, as an injunction sub-

ject to interlocutory appeal under 28 U.S.C. § 1292(a)(1), or

as a collateral order under Cohen v. Beneficial Industrial

Loan Corporation, 337 U.S. 541 (1949). Lacking jurisdiction

over the appeal, we dismiss.

The proper course is to permit the district court to receive ~

the additional evidence it has indicated is necessary to make

a final determination of the restrained funds owned by Per-

tamina. We trust that the district court knows, and will be

mindful of the fact, that if and when some portion of the

restrained funds is determined to be owned by the Ministry,

no portion of the Ministry’s funds can serve as security to

satisfy the debt of Pertamina. Further, we note that nothing

in our prior orders in this case prevented the district court

from restraining incoming funds that belong to Pertamina,

up to the amount of the judgment due to appellee Karaha

Bodas Company, LLC (“KBC”). Our prior orders only pro-

hibit the district court from restraining or allowing execu-

tion against any money determxed to belong to the

Ministry. See Karaha Bodas, 313 F... at 93 (directing the

district court “to continue the stay presently in force or to

substitute one similar until such time as the parties’ rights to

be disputed funds are finally determined”); Order, No. 02-

8014, 02-8015, 02-8016 (2d Cir. June 18, 2002). We have no

doubt that the district court will act without delay to deter-

88a

mine the amount of the restrained funds owned by Pertam-

ina.!

For the foregoing reasons, the appeal of the judgment of

the district court is DISMISSED and the petition for a writ

of mandamus is DENIED.

FOR THE COURT,

Roseann B. MacKechnie, Clerk

By: /s/ LUCILLE CARR

Lucille Carr

1 The Rule 28(j) submission made by KBC, indicating that

Pertamina intends to request its business partners to use unrestrained

accounts for future transactions so as to prevent further funds from

being restrained, raises issues appropriately addressed by the district

court as it moves forward expeditiously in resolving the amount of

restrained funds owned by Pertamina.

89a

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

21 MC-98 (TPG)

In the Matter of An Arbitration Between

Karaha Bodas Company, L.L.C.,

Petitioner,

—against—

Perusahaan Pertambangan Minyak

Dan Gas Bumi Negara (“Pertamina”), and

Ministry of Finance of the Republic of Indonesia,

Respondents.

MEMORANDUM AND ORDER

On February 22, 2002, this Court issued Writs of Exe-

cution and Orders to Show Cause pursuant to which the

Court, inter alia, permitted petitioner to issue restraining

notices pursuant to Rule 69 of the Federal Rules of Civil

Procedure and Article 52 of the New York Civil Practice Law

and Rules against accounts at several banks located in this

district, including Bank of America N.A. The Restraining

Notices were served on the banks, including Bank of Amer-

ica, on February 22, 2002.

On April 26, 2002 this Court entered an order resolving

questions about the ownership of funds contained in sev-

eral Bank of America accounts. In view of the imminent

appeal, the Court imposed a stay of its decision, meaning

90a

that funds would not be released from the accounts. The

Restraining Notices would continue in effect.

All parties appealed from the April 26, 2002 order. Prior

to the hearing of the appeal, the Ministry of Finance

moved in the Court of Appeals to vacate the stay imposed

by the District Court. In an order dated June 18, 2002 the

Court of Appeals denied the motion of the Ministry of

Finance, with the modification that the stay would apply

only to sufficient funds to satisfy the judgment that was

involved in these proceedings.

This Court will assume that the June 18, 2002 order of the

Court of Appeals was complied with and continues to be

complied with. No notice to the contrary has been given to

this Court. This would mean that funds are restrained up to

an amount necessary to satisfy the judgment.

Certain motions have recently been made to this Court

relating to the “Retention,” which has been declared by both

the District Court and the Court of Appeals to belong to Per-

tamina and not to the Republic of Indonesia, resulting in the

right of petitioner to execute on such Retention. However,

petitioner has not been allowed to actually receive payment

of funds constituting Retention. This is the result of the

Restraining Notices and the stay, referred to earlier.

In the course of a hearing held on May 23, 2003, a ques-

tion was raised as to the extent to which the restrained

funds actually apply as security for petitioner’s right to

receive the Retention. This issue has not been the subject of

any specific motion nor has it been decided. The Court will

not attempt in this Memorandum and Order to summarize

the lengthy and technical discussion which occurred at that

hearing. The Court will simply refer to pages 60-92 of the

transcript.

9la

Petitioner will now make a motion addressed to this issue.

The issue will relate in large part, it appears, to Retentions

which have been earned by Pertamina in the past and up to

the present time. But there is also an issue about Retentions

which are earned by Pertamina beginning now and going

into the future. For the reasons stated on May 23, the Court

has decided to enter an immediate orde: “ealing with future

Retentions.

Accordingly, the Court directs that, beginning now and

from this time forward, the restrained funds will be consid-

ered security for all Retentions earned by Pertamina in con-

nection with the projects involved in the accounts subject to

the stay. The amounts of such Retentions will be subject to

findings by the Court on presentation of appropriate evi-

dence. This order is without prejudice to the rights of the

parties to assert their positions on the upcoming motion.

SO ORDERED.

Dated: New York, New York

May 30, 2003

/s/ THOMAS P. GRIESA

THOMAS P. GRIESA

U.S.D.J.

92a

[70] UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: Aug. 7, 2002.

Decided: Dec. 10, 2002.

Docket Nos. 02-7513(L), 02-7515(CON), 02-7547(XAP),

02-7715(CON), 02-7717(CON), 02-7723(XAP).

KARAHA Bopas ComPANY, L.L.C.,

Petitioner-Appellee-

Cross-Appellant,

v.

PERUSAHAAN PERTAMBANGAN MINYAK

DAN GAS BUMI NEGARA (“PERTAMINA”),

Respondent-Appellant-

Cross-Appellee,

Ministry of Finance of the Republic of Indonesia,

Non-Party-Appellant-Cross-Appellee.

Judgment creditor of oil and gas company owned and

controlled by Republic of Indonesia sought to execute

upon funds that were held in New York trust accounts and

derived from sales of liquefied natural gas (LNG)

extracted in Indonesia. The United States District Court

for the Southern District of New York, Thomas P. Griesa,

J., ruled that, pursuant to Indonesian law, Republic of

93a

Indonesia owned funds except for five percent retention

allocated to company. Parties and Ministry of Fi-[71]nance

of the Republic of Indonesia cross-appealed. The Court of

Appeals, Sack, Circuit Judge, held that: (1) Court of

Appeals would accept jurisdiction over appeal; (2) com-

pany waived its sovereign immunity from attachment in

United States courts; (3) New York’s choice of law rules

governed question of ownership of funds; (4) no actual

conflict existed between the laws of New York and laws of

Indonesia with respect to ownership of funds; (5) judg-

ment creditor failed to establish that it reasonably relied

upon company’s ownership of funds, such that it was enti-

tled to attach funds without regard to their legal owner-

ship; and (6) with the exception of retention, Republic of

Indonesia, rather than company, owned funds.

Affirmed with directions.

See also: 190 F.Supp.2d 936.

[74] Christopher F. Dugan, Jones, Day, Reavis & Pogue

(Gregory A. Castanias and Steven C. Bennett, of counsel),

Washington, DC, for Petitioner-Appellee-Cross-Appellant.

Matthew D. Slater, Cleary, Gottlieb, Steen & Hamilton

(Jonathan I. Blackman, J.J. Gass, and Justin Anand, of

counsel), Washington, DC, for Respondent-Appellant-

Cross-Appellee.

Carolyn B. Lamm, White & Case (Francis A. Vasquez,

Jr., and Frank Panopoluos, of counsel), Washington, DC,

for Non-Party-Appellant-Cross-Appellee.

94a

[75] Before: CALABRESI, POOLER, and SACK,

Circuit Judges.

SACK, Circuit Judge.

Respondent-appellant Perusahaan Pertambangan Minyak

Dan Gas Bumi Negara (“Pertamina”) and non-party-appel-

lant the Ministry of Finance of the Republic of Indonesia

(the “Ministry”) appeal from an April 26, 2002, memoran-

dum and order issued by the United States District Court

for the Southern District of New York (Thomas P. Griesa,

Judge) insofar as it permits petitioner-appellee Karaha

Bodas Company, L.L.C. (“KBC”) to execute against a por-

tion of the funds in several Bank of America trust accounts

that are listed in the district court’s order. KBC appeals the

same order insofar as it denies KBC’s motion to execute

against the remainder of the same funds. The question on

appeal concerns the ownership of the funds in the Bank of

America trust accounts, which derive from sales of

Indonesian liquefied natural gas (“LNG”), and whether

such funds can be attached under New York law, as appli-

cable pursuant to the Foreign Sovereign Immunities Act of

1976, 28 U.S.C. §§ 1330, 1602-1611 (“FSIA”). KBC’s

claim rests on the allegation that all such funds belong to

Pertamina, and on the alternative theory that KBC was

entitled to rely on Pertamina’s ownership thereof. Pertam-

ina and the Ministry respond that under Indonesian law,

the funds belong to the Republic of Indonesia.

We agree with the district court’s disposition of the own-

ership question. The district court correctly analyzed the

Indonesian law that controls the ownership of the funds

and correctly concluded that most, but not all, of the funds

belong to Indonesia. Accordingly, we affirm.

95a

BACKGROUND

The Parties

KBC describes itself as “a Cayman Islands limited lia-

bility company formed by two American power companies

and other investors, and is 90%-owned by U.S. investors.”

Petitioner-Appellee’s Br. at 2. The Ministry, acting on

behalf of the Government of the Republic of Indonesia, is

a “foreign state” within the meaning of the FSIA, 28

U.S.C. § 1603(a).! Pertamina is an oil and gas company

owned and controlled by the Republic of Indonesia. Perta-

mina engages in oil and gas exploration, extraction, pro-

cessing, marketing, transportation, and distribution. The

1971 statute creating Pertamina, Law 8 of 1971, explains

that the company’s goals are “to develop and carry out the

exploitation of oil and natural gas ... for the maximum

prosperity of the People and the State.”? Law of the

Republic of Indonesia Number 8 Year 1971, Art. 5. The

Indonesian government owns all of Pertamina’s equity and

controls a supervisory board, constituted pursuant to Law

8, that supervises Pertamina’s management.’ Pertamina,

28 U.S.C. § 1603(a) defines “foreign state” to include “a politi-

cal subdivision of a foreign state or an agency or instrumentality of a

foreign state.” Jd. None of the parties dispute that the Ministry is a for-

eign state for the purposes of the FSIA.

2 Pursuant to Government Regulation Number 27 of 1968, Perta-

mina was initially established as the National Oil and Gas Mining State

Enterprise, but was reorganized under Law 8. Prior to Law 8’s issuance,

the Republic of Indonesia had authorized different state enterprises to

extract and sell natural gas and oil pursuant to Articles 5 and 6 of Law

44 of 1960.

3 Pertamina is currently in a state of legal flux because of changes

in its organic statute. Under Law 22 of 2001, Pertamina must, within

two years, change “from a state enterprise to a state-owned limited

96a

for [76] purposes of the FSIA, is therefore “an agency or

instrumentality of a foreign state.”* 28 U.S.C. § 1603.

The KBC-Pertamina Geothermal Energy Contracts

In November 1994, KBC executed two contracts—-a

“Joint Operation Contract” and an “Energy Sales Contract”—

with Pertamina and another Indonesian state-owned entity,

Persero, for the development of geothermal energy extrac-

tion facilities in the Karaha area of West Java. In these

contracts, Pertamina waived “any ... right of immunity

(sovereign or otherwise) which it or its assets now has or

may acquire in the future.” See, e.g., Karaha Geothermal

Joint Operation Contract, Art. 21.7(c); Karaha Geothermal

Energy Sales Contract, § 15.8(c). Pertamina also “con-

sent(ed] in respect of the enforcement of any judgment

against it.” Karaha Geothermal Joint Operation Contract,

Art. 21.7(d); Karaha Geothermal Energy Sales Contract,

§ 15.8(d). The contracts did not contain any representa-

liability company.” Decl. of Sudargo Gautama 9/37. Law 22 repeals

Law 8 and Law 44, but leaves in place implementing regulations that

supplement those laws. Draft Law of the Republic of Indonesia Num-

ber 22 of 2001, Art. 66. But “Law 22/2001 has not yet been imple-

mented with respect to Pertamina.” Supp. Decl. of Sudargo Gautama

9.6. The parties’ experts on Indonesian law apparently agree that this

case should be decided according to the pre-Law 22 regulations. See

Decl. of Sudargo Gautama 4 36; Dec]. of Robert N. Hornick 4 14.

4 28 U.S.C. § 1603 includes any entity in which a government has

“a majority of ... shares or other ownership interest.” 28 U.S.C.

§ 1603(b). “A typical governmental instrumentality . . . is created by an

enabling statute that prescribes the powers and duties of the instrumen-

tality, and specifies that it is to be managed by a board selected by the

government in a manner consistent with the enabling law.” First Nat'l

City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611,

624, 103 S.Ct. 2591, 77 L.Ed.2d 46 (1983). Pertamina satisfies this

description.

97a

tions about KBC’s right to attach particular assets in case

of default or breach. And KBC points to no evidence, either

within the contracts’ text or in pre-contract negotiations,

that Pertamina made any representations regarding its own-

ership of LNG revenues or its obligation to provide a secu-

rity interest. Each contract also contained a choice of law

clause specifying Indonesian law and provided that dis-

putes would be resolved by an international arbitral tribu-

nal constituted under the Arbitral Rules of the United

Nations Commission on International Trade Law.

In 1997 and 1998, Indonesia experienced a fiscal crisis

that induced political instability and the eventual collapse,

on May 21, 1998, of the regime led by President Mohamed

Suharto. In the course of the crisis, on September 20, 1997,

the KBC projects were suspended by an Indonesian “Pres-

idential Decree,” along with approximately seventy-four

other government-related infrastructure projects. In Novem-

ber 1997, another decree permitted the KBC projects to

proceed again, but in January 1998, a third decree termi-

nated the KBC projects once more, despite lobbying by

KBC and Pertamina, among others.

Arbitration on the Geothermal Energy Contracts

On April 30, 1998, KBC commenced arbitration in

Geneva, Switzerland, alleging that the project’s termina-

tion constituted a breach of the geothermal energy contracts.

On September 30, 1999, the Swiss arbitral panel issued a

preliminary ruling rejecting Pertamina’s objections to arbi-

tration and concluding that all of KBC’s claims could be

addressed in a unitary proceeding. The arbitral panel also

rejected KBC’s motion to treat the Republic of Indonesia

[77] as a party to the geothermal energy contracts.

98a

In a December 18, 2000, award, the arbitral panel con-

cluded that KBC had been “prevented from pursuing the

performance of the binding contracts that it relie[d] upon

for reasons beyond its control ... [and] should not bear the

consequences thereof.” Final Award in an Arbitration Pro-

cedure Between KBC and Pertamina and Persero, at 31.

The arbitral panel awarded KBC damages for lost invest-

ments of $111.1 million and lost profits of $150 million

plus interest and fees. Jd. at 35-47. On February 1, 2001,

Pertamina filed an appeal in the Supreme Court of Switzer-

land. The appeal was dismissed on April 24, 2002. Perta-

mina also asked an Indonesian court to enjoin enforcement

and annul the award.°

Proceedings in the Southern District of Texas

KBC sought enforcement of the award in the United

States District Court for the Southern District of Texas

pursuant to the Convention on the Recognition and

Enforcement of Foreign Arbitral Awards, June 10, 1958,

implemented by Chapter Two of the Federal Arbitration

Act, 9 U.S.C. §§ 201-208. Rejecting Pertamina’s numerous

asserted defenses, the district court (Nancy Atlas, Judge)

entered final judgment on December 4, 2001, in the

amount of $261.1 million and interest at the rate of four

percent per annum for KBC.° Karaha Bodas Co. v. Perusa-

5 Pertamina filed suit on March 14, 2002, in Indonesia, requesting

both annulment of the arbitral award and an injunction preventing KBC

from enforcing the arbitral award. A court in Jakarta, Indonesia

enjoined KBC from taking action to enforce the judgment anywhere in

the world, threatening a $500,000 per diem fine for violations.

6 In response to the Indonesian order annulling the arbitral award,

see supra note 5, Judge Atlas issued her own injunction barring Perta-

mina from requesting enforcement of the Indonesian order. Tr. of

99a

haan Pertambangan Minyak Dan Gas Bumi Negara, 190

F.Supp.2d 936, 957 (S.D.Tex.2001). Pertamina’s appeal of

that order is pending before the Fifth Circuit.

KBC, in an attempt to enforce the judgment, then moved

before the Southern District of Texas to register that judg-

ment in other judicial districts within the United States

pursuant to 28 U.S.C. § 1963.’ KBC filed with the court,

among other papers, an affidavit alleging that Pertamina

had assets in seven New York banks. Judge Atlas held that

KBC had fulfilled the requirement of 28 U.S.C. § 1610(c)

that a party seeking to attach a foreign sovereign’s prop-

erty refrain for “a reasonable period of time” after judg-

ment, and permitted KBC to register the judgment in

Delaware, New York, and California federal district courts.

On February 15, 2002, Judge Atlas also granted KBC’s

motion for an ex parte writ of garnishment against Bank of

America.

Proceedings in the Southern District of New York

On February 22, 2002, KBC presented the December 4,

2001, Southern District of Texas judgment to the United

States District Court for the Southern District of New York

for registration. The same day, the latter court issued an

ex parte writ of execution and order to show cause pur-

suant to Fed R. Civ. P. 69(a) and 28 U.S.C. § 1610(c)

“author[izing KBC] to execute upon any property of Pert-

amina within this jurisdiction in satisfaction of the out-

[78]standing final judgment, amounting, to date, in total to

March 29, 2002 Hearing Before Judge Atlas, at 5-6. Judge Atlas’s

injunction has been appealed to the Fifth Circuit.

7 28 U.S.C. § 1963 permits registration of a judgment “when

ordered by the court that entered the judgment for good cause shown.”

Id.

100a

the sum of $261,166,654.92 plus interest from January 1,

2001.” Pursuant to Fed.R.Civ.P. 69(a) and N.Y. C.P.L.R.

§ 5222(b),® the district court issued restraining notices,

which KBC subsequently served upon Bank of America

and several other banks.

The-Nature of the Disputed Funds

This appeal concerns fifteen trust accounts at Bank of

America.’ These accounts contain funds from the sale of

LNG extracted in Indonesia under arrangements called

Production Sharing Contracts (“PSCs”), which are gov-

erned by Indonesian law.

As mandated by Indonesian law, Pertamina enters into

PSCs with private oil and gas contractors for the extraction

of Indonesian crude oil and natural gas.'° The Republic of

Indonesia is not party to the PSCs, but it must approve

them. Under a PSC, the private contractor (the “PSC con-

tractor”) is responsible for all exploration, development,

extraction, production, transportation, and marketing oper-

8 Rule 69(a) provides, “Process to enforce a judgment for the

payment of money shall be a writ of cxecution. ... The procedure on

execution . . . shall be in accordance with the practice and procedure of

the state in which the district court is held. . . .” Fed.R.Civ.P. 69(a).

9 The district court’s analysis (and hence this appeal) does not

concern trusts “containing non-PSC Operating Income: the Musi II,

Exor I, Cilacap and the throughput fee portion of the East Java Pipeline

trusts.” Final Order {| 17. The district court concluded that the record

was “insufficient to determine whether KBC is entitled to execution

against these accounts.” /d. | 18.

10

Geothermal energy contracts and PSCs are different. Pertamina

entered into geothermal energy contracts with KBC for the purposes of

developing extraction facilities. Pertamina entered into PSCs with pri-

vate oil and gas contractors for the purposes of extracting oil and natu-

ral gas.

10la

ations related to a specified geographic area under Pertam-

ina’s management. As part of their compensation, PSC

contractors initially receive a share of the oil or natural gas

after extraction. They then transfer the remaining oil or gas

to Pertamina.

_ PSC contractors must deliver the extracted natural gas to

Pertamina, which then transports the gas for domestic sale

or for conversion into LNG at liquefaction plants. Pertam-

ina sells LNG to foreign buyers pursuant to long-term

sales contracts that contain choice of law clauses specify-

ing New York law as governing the contracts. LNG sales

were the “largest single source of Pertamina sales rev-

enue” in the last nine months of 2000. Decl. of Robert N.

Hornick 922. Buyers of LNG remit payment to specified

trust accounts in New York. In all such LNG sales, Perta-

mina, in its own name, purports to transfer title to the

LNG, or title to the refined product, to the buyer. Pertam-

ina warrants that it has “good title to the [LNG], free of all

liens and encumbrances of any kind.” Jd. 423(b). Rev-

enues from sales of natural gas are also sent to trusts in

New York. The trusts “distribute the proceeds in accor-

dance with trust agreements and ultimately to the [PSC

contractor] in accordance with their respective [PSCs].”

Decl. of Sahala L. Gaol 49. However natural gas is sold,

and whether or not it is liquefied, proceeds from sales are

first paid into trust accounts such as those at Bank of

America.

Bank of America is the trustee of the accounts deposited

with it. Before making any allocations or distributions, it

credits all LNG revenues from a particular project, or sub-

part of a project, to a general account. The general

accounts and other subaccounts are operated pursuant to

con-[79]tractual arrangements known as Trustee and Pay-

102a

ing Agent Agreements (“TPAA”) that define the trustee’s

obligations. TPAAs are signed by Bank of America, Perta-

mina, and relevant PSC contractors, but only Pertamina has

authority to direct payment. See, e.g., B

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