On August 31, 2015, the U.S. Court of Appeals for the Second Circuit ruled in favour of Argentina’s Central Bank in one of the many proceedings initiated by Argentina’s unpaid bondholders.[1] The decision in EM Ltd. and NML Capital Ltd v. Banco Central De La Republica Argentina[2] reinforces the statutory presumption in favour of States’ instrumentalities sovereign immunity, and sets a very high threshold to rebut it.

The case arises out of Argentina’s default in 2001 on approximately $80 billion of public debt, including bonds. In 2005, and again in 2010, the debt was restructured, with 91% of creditors agreeing to accept new repayment terms offering a considerably reduced return on their original investment. However, some creditors, including EM and NML, have sought to hold Argentina to the full value of the sums owed to them under the bonds since the default. Actions against Argentina have been brought in the New York Courts on the basis that the bonds’ conditions included the New York courts as the exclusive forum to resolve any disputes and included a waiver of Argentina’s sovereign immunity.[3]

From 2003 onwards, the plaintiffs have filed eleven actions against the Argentinian State before New York district courts, obtaining several favourable judgments for approximately $2.4 billion. [4] Since then, the plaintiffs have engaged in various attempts to enforce the judgements and collect Argentina’s unpaid debts.[5] In this instance, the plaintiffs’ ultimate purpose was to attach funds held in the Banco Central De La Republica Argentina’s (BCRA) account at the Federal Reserve Bank of New York (‘FRBNY’).

The Foreign Sovereign Immunities Act (‘FSIA’) immunizes foreign state property in the United States from attachment in U.S. courts, unless, inter alia, the sovereign has either waived its immunity or its property is used for a commercial activity within the U.S.[6] Given that Argentina had waived sovereign immunity in the bond conditions, EM and NML requested a declaratory judgment that BCRA was Argentina’s “alter ego” and liable to pay Argentina’s unpaid debts.[7]

At first instance, the plaintiffs were able to convince the district court that BCRA had waived its sovereign immunity under the FSIA’s exceptions. BCRA appealed the decision.

Was BCRA the “alter ego” of Argentina?

Under the FSIA, an alter ego relationship can be established by proving i) extensive control over the instrumentality or ii) if the recognition of the instrumentality’s separate legal status would work as a fraud or injustice. When analysing the first prong of the test, the court considered whether, in fact, Argentina had exercised “extensive control” over the BCRA. The test proposed by the court is clear: “whether the sovereign state exercises significant and repeated control over the instrumentality’s day-to-day operations.”[8] In trying to meet this test, the plaintiffs contended that Argentina had systematically eliminated BCRA’s legal independence by permitting the President of Argentina to appoint BCRA’s officers for an unspecified period without Senate approval and by removing BCRA governors who supported the bank’s independence from the executive branch. The court rejected this argument, holding that hiring and firing of board members or officers is an exercise of power incidental to ownership, and that “ownership is not synonymous with control of an instrumentality’s day-today operations.”[9]

Second, the plaintiffs argued that the independence of the BCRA had diluted when i) Argentina issued executive decrees to make it easier for the government to borrow from the BCRA and ii) Argentina and the BCRA coordinated their activities in implementing an “inflationary” monetary policy. The court rejected these arguments based on common practices among governments and central banks: “[C]entral banks commonly perform payment functions for their governments, […] government and central banks […] often consult and coordinate their actions with respect to monetary policy.”[10]

The plaintiffs also tried to meet the alter-ego test under its second prong, which required proving that the “recognition of BCRA as a separate entity would work as a fraud or injustice.”[11] The plaintiffs contented that the injustice in this case would be allowing Argentina to use funds to pay “preferred creditors while at the same time ‘stiffing’ plaintiffs’ claim.”[12] The court rejected this argument, finding that there is nothing fraudulent in recognizing a preference for repaying a creditor over another.[13] The court noted that there was no abuse of the corporate form because Argentina had not used BCRA to shield its assets from plaintiffs.[14]

Finally, the plaintiffs also asserted that the BCRA waived its immunity by engaging in commercial activity in New York through tis FRBNY account. The court stated that the commercial activity exception only applies if there is a “degree of closeness” between the gravamen [substance] of a plaintiff’s complaint and the commercial activity undertaken by the instrumentality.[15] According to the court, the element of relatedness of both claims was lacking because the alter-ego claim, based on the loans borrowed to Argentina, was incidental to BCRA purchase of dollars using the FRBNY account.[16] The BCRA could have used any account to purchase dollars and later give that money to the State.

In deciding this case, the Second Circuit relied on First National City Bank v. Banco Para El Comercio de Cuba (“Banec“).[17] Note that the FSIA protects attachment of property in the US owned by foreign States as well as by any of its instrumentalities and agencies. In Banec, the U.S. Supreme Court created a presumption that government instrumentalities are distinct and independent from the sovereign and should be accorded separate legal status.[18] Thus, when a State waives its immunity under the FSIA, its instrumentalities cannot be affected by that waiver because of their independent legal status. Therefore, the BCRA, as an instrumentality of the Argentinian State, was not affected by Argentina’s waiver. It was still covered by the FSIA protections and could invoke them as a defence whenever its assets where sought for purposes of attachment in any U.S. jurisdiction.

Having rejected all of the claims raised by the plaintiffs, the Second Circuit remanded the case to the district court with instructions to dismiss the complaint with prejudice. Therefore, the plaintiffs will not be able to attach any funds form the FRBNY account that the Argentinian Central Bank holds in the US.

But the battle is not over for EM and NML. Last year, the Supreme Court affirmed a discovery order filed by the NML against Bank of America and Banco de la Nación Argentina to obtain information concerning property belonging to Argentina or its instrumentalities and their financial transactions.[19] On the same day, the Court denied Argentina’s petition for certiorari, another United States Court of Appeals ruling that confirmed an injunction ordered against Argentina, prohibiting it from paying what is due on Exchange Bonds unless it also pays what is due under the defaulted bonds.[20] NML has also resorted to Nevada’s federal courts, seeking to attach funds from two entities allegedly involved in embezzlement and laundering of state funds.[21] A decision is still pending in that case.


The Second Circuit has set a very high standard for creditors seeking to establish that foreign government instrumentalities are alter egos of their parent government. Protection of New York as a global financial centre, is at least one motivation for the decision, as the Second Circuit made clear that weakening the immunity from suit or attachment traditionally enjoyed by the instrumentalities of foreign states could lead to withdrawal of central bank reserves from the United States.[22]