Supreme Court upholds discovery concerning Argentina’s worldwide property in debt-collection action by bondholder

On June 16, 2014, the Supreme Court of the United States affirmed a decision of the Second Circuit Court of Appeals that upheld an order of broad discovery concerning the global assets of the Republic of Argentina (Argentina).  In doing so, the Supreme Court held that the Foreign Sovereign Immunities Act (FSIA) does not prohibit postjudgment discovery of information concerning the extraterritorial assets held by a sovereign, even if those assets might ultimately be immune from execution under the FSIA.  Republic of Argentina v. NML Capital, Ltd., No. 12-842, 573 U.S. __(2014).

Factual Background and Procedural History

Argentina defaulted on its external debt in 2001.  Thereafter, Argentina sought to restructure its debt by negotiating with bondholders.  Argentina ultimately was able to persuade holders of more than 90% of its outstanding bonds to accept the restructuring;  the remaining bondholders opted for litigation.  Since then, the “holdout” bondholders have secured judgments worth more than $2 billion.

Over the course of more than ten years of litigation, the holdout bondholders have attempted to seek attachable (i.e. commercial) assets owned by Argentina to satisfy their judgments. However, these efforts have been largely unsuccessful. Frustrated by the delay in collection, NML Capital, Ltd. (NML), one of the holdout bondholders, served subpoenas on Bank of America and Banco de la Nación Argentina (BNA), which has a branch in New York, seeking information regarding Argentina’s financial transactions (wherever located), including information concerning transfers in and out of Argentina’s accounts and the transferors and transferees involved in those transactions.  Argentina and Bank of America moved to quash the subpoenas (BNA also refused to comply with its subpoena), and NML moved to compel production. 

The District Court granted NML’s motion to compel.  In so doing, Judge Griesa, who has been overseeing the decade-long litigation between Argentina and its creditors, held that NML’s requested discovery into Argentina’s assets outside the United States did not offend principles of foreign sovereign immunity.  Rather, the District Court was prepared to serve as a “clearinghouse” for information about Argentinian assets world-wide.  Crucially, the District Court did not limit the subpoenas to permit discovery only of assets used by Argentina for commercial purposes. 

Argentina appealed the District Court’s ruling to the Second Circuit.  The Second Circuit affirmed, holding that Argentina’s sovereign immunity was not infringed because the subpoenas at issue were addressed to private banks, not Argentina itself, and because, in the instant case, NML was seeking discovery about Argentina’s assets, rather than attempting to attach them. 

Argentina appealed and the Supreme Court granted certiorari.    

The Supreme Court’s Ruling

Argentina’s petition for certiorari asked the Supreme Court to consider only the narrow question of whether the FSIA “imposes [a] limit on a United States court’s authority to order blanket postjudgment execution discovery on the assets of a foreign state used for any activity anywhere in the world.”

During oral argument, Argentina conceded that discovery into commercial assets would be acceptable, but argued that discovery into assets that it considered non-commercial, such as military and political assets, infringed its sovereign immunity.  NML disagreed, arguing that whether information regarding assets could be discovered posed a question entirely separate from, and preliminary to, whether the assets discovered could subsequently be attached. 

The Supreme Court ruled for NML.  Writing for the majority, Justice Scalia first noted that the ordinary “rules governing discovery in postjudgment execution proceedings are quite permissive,” and generally permit very broad discovery into a defendant’s assets.  Justice Scalia then turned to the question of whether the FSIA “specifies a different rule when the judgment debtor is a foreign state.”  He concluded that it did not.  Justice Scalia explained that Congress passed the FSIA to provide a “comprehensive framework for resolving any claim of sovereign immunity,”  Republic of Austria v. Altmann, 541 U.S. 677, 699 (2004), such that “any sort of immunity defense made by a foreign sovereign in an American court must stand on the Act’s text.”  However, the Court found that “the Act says not a word on the subject” of postjudgment discovery against a sovereign.   Accordingly, because there is no provision of the FSIA “forbidding or limiting discovery in aid of execution of a foreign-sovereign judgment debtor’s assets,” NML’s discovery request was proper, and the Supreme Court thus affirmed the lower courts’ decisions.  As for Argentina’s argument that a court should not permit a discovery request that might cover foreign-state property that would enjoy immunity from execution, the Court rejected it wholesale, pointing out that “the reason for these subpoenas is that NML does not yet know what property Argentina has and where it is, let alone whether it is executable under the relevant jurisdiction’s law.”

Impact of the Decision

Discovery into a sovereign’s worldwide assets would provide judgment creditors with a powerful tool to obtain satisfaction of judgments against foreign sovereigns. The Supreme Court’s decision has removed a significant impediment to obtaining that discovery. While the decision might have been prompted in part by Argentina’s decade-long history of resisting the creditors’ judgments, it is likely to result in more discovery requests aimed at sovereign assets.  Nevertheless, the propriety of discovery requests will still have to be tested against “comity interests and the burden that the discovery might cause to the foreign state.”

Moreover, the Supreme Court expressly refused to consider whether the discovery in aid of execution provided for by Federal Rule of Civil Procedure 69(a)(2) can be applied extraterritorially—an argument that is likely to come up the next time the issue is litigated.   

Finally, the Supreme Court’s decision will almost certainly lead to more subpoenas being served on US-based financial institutions. For financial institutions located in New York, the Supreme Court’s decision places added significance on a question currently pending in the New York State Court of Appeals: the continued viability of the so-called “separate entity rule,” in light of Koehler v. Bank of Bermuda Limited, 911 N.E.2d 825 (N.Y. 2009).  For decades, New York courts have held that bank branches in different jurisdictions are “separate entities,” and thus a branch in New York cannot be compelled to turn over assets or provide information from branches outside New York because New York courts do not have personal jurisdiction over a bank’s non-New York branches.  In Koehler, however, the New York Court of Appeals, New York state’s highest court, ruled that a New York court could attach extraterritorial assets held in a foreign bank over which it had personal jurisdiction.  The implication of the case for the separate entity rule was unclear, as the foreign bank had conceded that New York courts had jurisdiction over it.  In Motorola Credit Corp. v. Standard Chartered Bank, the Second Circuit certified a question to the New York Court of Appeals seeking clarification of the status of the separate entity rule.  740 F.3d 108 (2d Cir. 2014).  That case is currently being briefed.  If the Court of Appeals strikes down the separate entity rule, then judgment creditors may have further means at their disposal to seek discovery into, and then attach, the commercial assets of foreign sovereigns.