EM Ltd. v. Banco Central de la República Argentina, No. 13-3819-cv (L) (2nd Cir. Aug. 31, 2015) [click for opinion]

Plaintiffs own Fiscal Agency Agreement (“FAA”) bonds issued by the Republic of Argentina (“Argentina”). As part of this bond issue, Argentina explicitly waived its sovereign immunity. Since 2001, Argentina has refused to make any scheduled payments on the bonds. Plaintiffs filed multiple suits against Argentina in the Southern District of New York, obtaining judgments of approximately $2.4 billion. Plaintiffs attempted to satisfy these judgments by attaching funds held by Defendant, Argentina’s central banking authority.

Plaintiffs sought a declaratory judgment in the district court that Defendant was an alter-ego of Argentina and thus liable for Argentina’s debts. Typically, Defendant, as an instrumentality of the government, would enjoy sovereign immunity under the Foreign Sovereign Immunities Act (“FSIA”), and Defendant moved to dismiss the suit on that basis. However, Plaintiffs maintained Argentina had waived sovereign immunity pursuant to 28 U.S.C. § 1605(a)(1) (the express waiver exception) and 28 U.S.C. § 1605(a)(2) (the commercial activity exception). Plaintiffs argued that Defendant had become an alter-ego of Argentina, and thus also explicitly waived sovereign immunity, based on two decrees made by Argentina’s President: (1) reserves held by Defendant in excess of the amount needed to support Argentina’s monetary base could be used for payment of “obligations undertaken with international monetary authorities”; and (2) Defendant should take the necessary steps to repay Argentina’s debt to the IMF.

The district court denied Defendant’s motion to dismiss for lack of subject matter jurisdiction, agreeing with Plaintiff that Defendant had waived its sovereign immunity under the FSIA's express waiver and commercial activity exceptions. On appeal, the Second Circuit reversed, finding that neither of the statutory exceptions to the FSIA relied upon by the district court applied.

First, the Second Circuit observed that the statutory presumption in favor of honoring a foreign government’s determination that its instrumentality is accorded separate legal status can be overcome in two ways: (1) the instrumentality “is so extensively controlled by its owner that a relationship of principal and agent is created”; or (2) recognition of separate legal status would work a “fraud or injustice.”

With respect to the extensive control prong, the court noted the inquiry was fact-intensive but provided five factors courts had deemed relevant: whether the sovereign nation “(1) uses the instrumentality’s property as its own; (2) ignores the instrumentality’s separate status or ordinary corporate formalities; (3) deprives the instrumentality of the independence from close political control that is generally enjoyed by government agencies; (4) requires the instrumentality to obtain approvals for ordinary business decisions from a political actor; and (5) issues policies or directives that cause the instrumentality to act directly on behalf of the sovereign state.”

The court determined that whatever control Argentina exercised over Defendant was not tied to day-to-day operations, and was thus not extensive. The Second Circuit observed that other courts have consistently rejected arguments that the appointment or removal of an instrumentality’s officers or directors, standing alone, overcomes the presumption; Defendant’s legal advisers and Board of Directors reviewed and approved the course of action contemplated by Argentina’s directives; and governments and central banks often consult and coordinate actions with respect to monetary policy.

The court next turned to the “fraud or injustice” prong and noted that the common thread in cases analyzing this prong is the abuse of the corporate form. The court noted that Plaintiffs’ allegations fell “far short of the flagrant frauds and injustices exhibited in these other cases.” The court characterized Plaintiffs’ claims as alleging that it would be a fraud or injustice to allow Argentina to use funds from Defendant to pay preferred creditors. The court rejected this argument and held that there is nothing irregular or fraudulent about Argentina recognizing a preference to repay one set of creditors over another.

Plaintiffs also alleged that Defendant waived sovereign immunity through the “commercial activity” exception. Under this exception, a foreign state does not enjoy immunity in an action based on commercial activity in the United States if there is a degree of closeness between the gravamen of the complaint and the commercial activities. Plaintiffs alleged, inter alia, that Defendant’s use of its Federal Reserve Bank of New York account to purchase dollars was commercial activity sufficient to meet the exception. The court rejected this argument and held that the commercial activity lacked any nexus with the gravamen of Plaintiffs’ complaint. In so holding, the court noted that adopting Plaintiffs’ theory would dramatically expand the scope of the commercial-activity exception, threatening every country’s claim of sovereign immunity.

Brandon Graves of the Washington, DC office contributed to this summary.