Guest Post: Argentina and the Foreign Sovereign Immunities Act, Round 2

[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 supporting the bondholders, for which he was compensated.]

In a new claim in the long-running battle between Argentina and holders of its defaulted bonds (see here), the question is whether a U.S. court can order Argentina not to pay some bondholders unless it also pays others.  Again, Argentina says the Foreign Sovereign Immunities Act (FSIA) protects it, and again it tries to make the Act’s text say something it does not.

To recap, a decade ago Argentina stopped making payments on some of its bonds, and the private bondholders (including NML Capital) sued Argentina in federal court in New York (as the FSIA and the contracts governing the bonds allowed them to do).  Argentina refused to pay the resulting judgments against it, so the bondholders are seeking enforcement.  One approach is to seek discovery of Argentina’s worldwide assets; whether a U.S. court can make such an order is the subject of the first Republic of Argentina v. NML Capital case, argued to the U.S. Supreme Court in April.

The bondholders’ second strategy involves a clause in the bond contracts known as the equal treatment or pari passu clause.  To oversimplify, after Argentina initially failed to make payments on the bonds, it persuaded many of the bondholders to accept new bonds, with substantially reduced payments (but some hope of salvaging part of their investment).  NML Capital (and a few others) refused to take the deal, and sued for full payment of the original bonds instead.  Argentina now wants to pay the new bondholders (that is, those who agreed to the refinancing) while refusing to pay the holders of the old bonds.

But that sort of discrimination among bondholders, the U.S. court held, violates the “equal treatment” clause in the original bond contracts: the clause says that the old bonds have to be treated equally to any new bonds, and clearly they aren’t.    Argentina had already said it wouldn’t obey a court order to pay on the old bonds.  So the holders of the old bonds asked the court for an injunction barring payment on the new bonds unless the old bonds receive equal treatment.  The district court granted the order and the Second Circuit affirmed.

Now Argentina is bringing this claim to the U.S. Supreme Court on petition for certiorari (scheduled to be considered at the June 12 conference).  As with the case involving the discovery order, its supposed shield is the FSIA.  But again, Argentina is trying to make the FSIA do something it does not.  Argentina concedes that the FSIA allows the bondholders’ suit: Argentina waived its sovereign immunity in the bond contracts, and the FSIA allows suit where immunity is waived (Section 1605(a)(1)).  The FSIA further says (Section 1606) that non-immune sovereigns are (subject to specific exceptions) liable to the same extent as private litigants.

The only plausible exception (and the only one Argentina argues) is that under the FSIA (Section 1609) non-commercial sovereign assets are immune from “attachment arrest or execution” even when the sovereign is otherwise not immune and even where the sovereign waives its immunity.  As with the discovery order, Argentina claims this provision implicitly protects it from injunctions regarding payment on its bonds.

But as with the discovery order (but even more so) the FSIA provision simply isn’t relevant.  The injunction is not an “attachment arrest or execution” of non-commercial sovereign assets.  Each of those is a procedure that freezes or seizes specific assets with a view to satisfying a judgment.  Here the court order doesn’t freeze or seize any assets.  It just imposes a limit on one action Argentina can take (paying the new bonds before the old bonds).  Under ordinary circumstances, no one would call that kind of a limit an “attachment arrest or execution.”  It’s an injunction, but the FSIA does not limit courts’ ability to issue injunctions to non-immune foreign sovereigns, so long as (per Section 1606) the injunction would be proper against a private party.

And as in the argument involving the discovery order, Argentina points to various supposed foreign policy implications as justification for stretching the FSIA’s text.  But the larger point is this: the Act’s language is clear – non-immune foreign sovereigns are treated as private litigants (subject to specific exceptions).  Private litigants are subject to injunctions to enforce judgments.  If Argentina doesn’t want to be treated as a private litigant, it should not waive its sovereign immunity.  If Argentina doesn’t want to be subject to an equal treatment requirement, it shouldn’t put an equal treatment requirement in its bond contracts.  Or, if it wants the flexibility to refinance a bond issue over the objections of a small number of bondholders, it should include a provision (as many sovereign bonds do) that a majority or supermajority of bondholders can impose a refinancing on holdouts (a so-called “collective action clause).  Of course, these measures might make its bonds harder to sell, and that’s a choice for Argentina to make.

So long as the Act’s rules are clear, foreign sovereigns can deliberately make those choices.  Matters only become difficult if the courts open the door to going beyond the Act’s text and thus unsettle its rules in application.  Then sovereigns don’t know the rules, and don’t know what choices they are making.

On this issue (unlike the discovery order) it’s less clear the Supreme Court will get involved.  There does not appear to be disagreement among the lower courts (such a disagreement presumably prompted the Court to hear the discovery case).  The court of appeals followed the FSIA’s text, and Argentina’s claims of foreign policy problems are overblown (because, as noted above, Argentina alone is responsible for it being in the position it is now in). Nonetheless, the pending discovery order case may complicate the Supreme Court’s decision on certiorari somewhat (depending, of course, on what the Court plans to do with the discovery case).

There’s been some controversy over whether Argentina is wrongly trying to evade the orders of the U.S. courts, and whether it is misrepresenting its actions to the Supreme Court (see here).  But I don’t think the Court needs to get into that question.  Sometimes bad actors nonetheless have good legal arguments.  This isn’t one of those situations.