# Appendix — PT Pertamina v. Karaha Bodas Co., LLC (Nos. 05-1571, 05-1573) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386016_1020%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 2006 ## Text la UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT THIS SUMMARY ORDER WILL NOT BE PUBLISHED IN THE FEDERAL REPORTER AND MAY NOT BE CITED AS PRECEDENTIAL AUTHORITY TO THIS OR ANY OTHER COURT, BUT MAY BE CALLED TO THE ATTENTION OF THIS OR ANY OTHER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 4a 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 10a 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 lla 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 l4a 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- 2la 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 th [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386016_1020%3A2. Public record. Not legal advice.