The U.S. Supreme Court recently dealt a significant blow to Argentina’s continuing efforts to avoid paying some $2 billion in debt issued to bondholders over the last dozen or so years.

The suit was brought by NML Capital, Ltd. a U.S. hedge fund and one of Argentina’s bondholders that had purchased defaulted Argentinian bonds at a deep discount. NML had prevailed in 11 debt collection actions that it had brought in the Southern District of New York.

Thereafter, NML Capital alleged that Argentina favored its other bondholders over NML Capital, because the other bondholders had cooperated with Argentina’s efforts to discount its debt. Argentina paid the cooperating bondholders ahead of NML Capital, despite the existence of a pari passu clause, which promised bondholders equal treatment in repayment with other later-issued bonds.

Background

The lower court issued an order enjoining Argentina from preferring the cooperating bondholders to the detriment of NML Capital. The Court of Appeals for the Second Circuit agreed.

NML Capital also sought to undertake post-judgment discovery, serving subpoenas two nonparty banks for records relating to Argentina’s global financial transactions. Argentina objected to such discovery under the Foreign Sovereign Immunities Act of 1976 (FSIA), conceding while Argentina had contractually waived jurisdictional immunity by its express waiver in the bond indentures, that NML’s discovery fell within the penumbra of “execution immunity,” that which shields property owned by a foreign state located in the United States from attachment and execution.

Supreme Court Ruling

In a one-two punch, the Supreme Court first denied Argentina’s Petition for Writ of Certiorari seeking to overturn the injunction, and then issued a more detailed opinion upholding U.S. court’s jurisdiction to hear discovery matters under the FSIA. The Supreme Court’s opinion comes in the wake of Argentina’s attempts to restructure its debt. The effect of the decision could potentially create disruption in global markets as Argentina’s debt restructuring efforts continue.

The Supreme Court’s analysis of the discovery issue hinged on its consideration of the FSIA. The court first reviewed its historical underpinnings, finding that the FSIA replaced “an executive [branch] driven, factor-intensive, loosely common-law-based regime with a ‘comprehensive framework for resolving any claim of sovereign immunity.’” Therefore, the court concluded that any sort of immunity defense made by a foreign state must stand or fall based on the text of the Act.

In broad strokes, the FSIA provides sovereign states with two types of immunity: jurisdictional immunity and execution immunity. Jurisdictional immunity accords a foreign state the right to “be immune from the jurisdiction of the courts of the United States” except in specific circumstances.

In this instance, Argentina expressly waived jurisdictional immunity. Consequently, the Act makes Argentina liable “in the same manner and to the same extent as a private individual under like circumstances.”

The sole issue before the court was whether Argentina’s execution immunity was sufficient to cause the subpoenas to be quashed. The FSIA provides that “the property in the United States of a foreign state shall be immune from attachment, arrest and execution” with certain exceptions. The opinion provided significant discussion concerning the scope of both the immunity and the enumerated exceptions as provided in the Act. Argentina argued that immunity from execution necessarily entailed immunity from discovery in aid of execution.

The court pointed out that despite such an argument, “[t]here is no third provision [in the Act] forbidding or limiting discovery in aid of execution of a foreign-sovereign judgment debtor’s assets.” Consequently the court, in a seven-to-one decision, affirmed the lower court’s ruling, holding that the FSIA fails to expressly prohibit post-judgment discovery of extraterritorial assets. The court found that just because Argentina’s assets may be immune from discovery in the U.S. or abroad does not preclude discovery of the nature and extent of such assets.

Potential Domino Effects

The court’s holding stands in direct opposition to the federal government’s amicus brief, which urged the court to consider international relations consequences in affirming the lower court’s determination, arguing that the discovery orders such as this one will cause a substantial invasion of the foreign state’s sovereignty, undermine comity and provoke reciprocal adverse treatment of the U.S. in foreign courts. The court cast aside such considerations, stating that such arguments are better directed to the legislative branch.

Only the future will tell whether the decision will cause significant retaliatory backlash or whether it will adversely affect Argentina’s standing in the U.S. and global financial markets. It may bring creditors one step closer in what has been a decade-long battle to obtain recompense for their defaulted bond payments.

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The article, "Debt Piling Up in Argentina," also can be viewed online at The Record Reporter, an Arizona law and business publication. To view it, readers may be asked to register.