Guest Post: Argentina v. NML Capital – Does the Foreign Sovereign Immunities Act Mean More Than It Says?

by Michael Ramsey

[Michael D. Ramsey is the Hugh and Hazel Darling Foundation Professor of Law at the University of San Diego Law School. Professor Ramsey previously prepared an analysis of this case for the Judicial Education Project, for which he was compensated.]

The Supreme Court considered on Monday whether a U.S. court can order disclosure of Argentina’s worldwide assets.  Perhaps surprisingly, the answer should be yes.

The underlying facts of Republic of Argentina v. NML Capital are straightforward.  Argentina issued bonds, which were bought by private investors including NML, and then defaulted.  In the bond contracts, Argentina waived its sovereign immunity and consented to jurisdiction in New York.  After the default, NML sued Argentina in New York, as the bond contracts contemplated.

The Foreign Sovereign Immunities Act (FSIA) says that foreign governments can be sued in the U.S. only in circumstances listed in the statute.  One of those circumstances is when the sovereign waives its immunity by contract.  So there’s no question that NML could sue Argentina.

The question, rather, is what NML could do once it won (as it did) and Argentina still refused to pay (as it did).  The FSIA also says that creditors cannot execute on (seize) foreign sovereign assets in the United States to satisfy a judgment unless the assets are being used in a commercial capacity.  NML asked the trial court to order two New York banks that handle Argentina’s finances to disclose what they knew about Argentina’s assets (commercial or otherwise).  Argentina, supported by the U.S. executive branch, claims this violates the “spirit” of the FSIA.

It doesn’t.  The FSIA (Section 1609) specifically protects non-commercial sovereign assets only against “arrest attachment and execution.”  It does not say assets are immune from disclosure.  There’s a good reason it doesn’t: to figure out which assets are used for commercial purposes, and thus subject to execution, first one needs to know what assets exist.  It obviously won’t do to have Argentina – or Argentina’s bankers – make an unreviewable judgment as to which assets are commercial and not disclose the others.  And in other respects, the FSIA (Section 1606) says, a non-immune sovereign shall (subject to exceptions not relevant here) “be liable in the same manner and to the same extent as a private individual under like circumstances.”

Thus, as a number of Justices appeared to recognize at oral argument, the key law isn’t the FSIA but Rule 69 of the Federal Rules of Civil Procedure, which govern ordinary litigation in federal court.  Rule 69 allows a federal court to order discovery in support of execution, which is what the trial judge did here.  The rule doesn’t have any limits on the type of property or the geographic limits – rather, its leaves the matter to the discretion of the court.  In private litigation, courts acting under Rule 69 routinely require disclosure of assets outside the jurisdiction or arguably not subject to execution.

At oral argument, some Justices seemed troubled that Argentina (or other sovereigns) might have to disclose the location of sensitive diplomatic or military assets.  It’s a fair concern, but no reason to make the FSIA say something it clearly does not.  First, district courts are adept at balancing all sorts of competing interests that arise in discovery disputes and in allowing only discovery appropriate under the circumstances; Rule 69 gives them plenty of discretion to do so.  Second, the only disclosures the trial court required here are of financial transactions (and the order isn’t even directed to Argentina, but rather to third-party banks); no one is asking Argentina to disclose the location of, for example, specific military assets.  And third, presumably disclosures could be made confidentially to the court as needed for particular assets.

Moreover, NML claims that Argentina has shown its willingness to abuse institutions like the Bank of International Settlements to shield its assets from creditor judgments.  That’s what NML’s attorney Ted Olson was speaking of when he said at one point during Monday’s proceeding that Argentina could slap an air-force label on a commercial airplane in order to shield that asset.  He wasn’t talking about NML attaching non-executable assets, he was simply pointing out the danger of creating loopholes in the discovery process that would allow Argentina to deny discovery on assets that creditors would be entitled to.

This goes to the heart of why NML has a need for the disclosures.  Argentina has openly refused to pay the judgment against it.  NML is entitled to execute on Argentina’s commercial assets in the United States, and may be able to execute on some non-commercial assets elsewhere (in jurisdictions that lack the U.S.’s commercial limit).  To do so, it needs to know what assets exist, and it cannot rely on Argentina’s self-reporting of which assets are commercial.

Ultimately the rule of law, especially in international transactions, depends on courts holding parties to their promises and providing a way to enforce judgments.  If Argentina didn’t want to be subject to U.S. court enforcement, then it should not have waived its immunity and consented to jurisdiction (but, of course, then it would have had much more difficulty selling its bonds).  Argentina could still avoid unwanted disclosures by doing what it is supposed to do anyway: pay the entirely valid judgment against it.

The rule of law also depends on courts reading statutes to mean what they say, and not more than they say.  Argentina is asking the Court to find an immunity in the FSIA that simply isn’t there.  Argentina’s protection instead comes from Rule 69 – but it’s a protection that rests largely with the lower court, which knows the case better and is better able to balance competing equities on an on-going basis than the Supreme Court.  It may be helpful for the Court to ask district courts to use careful discretion in managing disclosure requests directed at a foreign sovereign under Rule 69. For instance, the Justices could recommend that district court judges ask the sovereign to create a privilege log (or a similar mechanism) for those assets, such as military property, that are extra-sensitive. This would balance the interests of the sovereign and the creditors. But creating a blanket protection against disclosure of assets under the FSIA is contrary to both the statute and the needs of the international rule of law.

http://opiniojuris.org/2014/04/24/guest-post-argentina-v-nml-capital-foreign-sovereign-immunities-act-mean-says/

3 Responses

  1. I tried to send a longer response, but these are good arguments.  However, after Kiobel some of the Justices seem to be unrestrained by federal statutory law and would override any federal statute that stands in the way of their personal predilections about “foreign affiars” and “comity” even when the political branches have chosen to not amend or obviate an extant federal statute.  Watch out!

  2. Excellent analysis, Mike.  My question for you is whether, as FRCP 69 “execution” itself implies (although titles aren’t relied on in interpreting), whether discovery preparatory to execution might not be considered “execution” as the word is used in FSIA.  That still leaves the troubling policy issue of leaving it up to Argentina to decide what is commercial or non-commercial as opposed to the federal judge.  On that question, wouldn’t for reciprocity’s sake (the US has lots of property around the world), it make sense for a US court like the Supreme Court, to say the state gets to choose?  As a practical matter, even if Argentina loses and is ordered to disclose under FRCP 69, it probably won’t and so NML will have to move for sanctions, subpoena banks etc. 

  3. Mr. Ramsey, allow me to disagree. The FSIA is indeed a “key law” in this case, the satute regulates the only circumstances in which a foreign sovereign -Argentina in this case- can be sued and executed upon in the U.S. That’s why Rule 69 FRCP (which includes “proceedings supplementary to and in aid of judgment or execution”) is displaced by the FSIA, the “federal statute” that “governs” in this matter (conf. Rule 69(a) FRCP). 
    It has been consistently stated by the 7th, 5th and 9th Cir. that the FSIA “plainly applies and limits the discovery process” when a party seeks discovery of a foreign state’s assets in aid of judgment enforcement and that post-judgment discovery concerning property of a foreign state should be ordered “circumspectly and only to verify allegations of specific facts crucial to the immunity determination,” which means, in the post-judgment context, immunity from attachment or execution. 
    A foreign State that submitts itself to the jurisdiction of the United States courts, as well as to the procedures and legal responsibilities associated with such jurisdiction, does so to the extent those procedures and responsibilities are related to its commercial activities in the United States. In this sense, discovery in aid of execution must be limited to property of the foreign state used for a commercial activity in the U.S., because only property fitting that definition falls within the enforcement jurisdiction of U.S. courts under Section 1610 of the FSIA. This conclusion applies equally to discovery served on a foreign state and discovery served on a third party concerning that foreign state’s assets since, in either case, the discovery is sought for the purpose of executing on the sovereign’s property.
    So, even if Rule 69 FRCP is applicable, the FSIA still forges the limits of what can and what can’t be done in cases where a sovereign is involved.  According to the FSIA only assets used for a commercial activity in the U.S. can be seized. Thus, there’s no need nor reason to disclose any sort of information about assets abroad or assets that are absolutely immune from execution under any legislation, whether domestic or international. 
    Regardless of whether Argentina did o “didn’t want to be subject to U.S. court enforcement”, the problem here is that there is certain property, e.g. military, consular and diplomatic, that cannot be executed under any circumstances. The issue then is not whether Argentina wants to be enforced, but what kind of property can be executed under U.S. law. And the problem here is that the discovery order is too broad as to include property that is not attachable in the U.S. nor anywhere in the world. So Argentina has a genuine right to oppose this order, at least in that which exceeds the limits of attachable property. The fact that such disclosures could be done confidentialy is irrelevant is this sense.

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