Argument preview: A global search for money

The Supreme Court opens its final argument session of the Term next Monday, and it begins with a one-hour argument at 10 a.m. on the latest round in the long-running controversy over default on Argentine bonds.  Arguing for the government of Argentina in Republic of Argentina v. NML Capital Ltd., with twenty minutes of time, will be Jonathan L. Blackman of the New York City office of Cleary Gottlieb Steen & Hamiltion.  If, as is expected, the Court permits the U.S. government to argue as an amicus in support of Argentina, its views will be presented by Deputy Solicitor General Edwin S. Kneedler, with ten minutes.  Investors seeking to collect on defaulted bonds will be represented by Theodore B. Olson of the Washington, D.C., office of Gibson Dunn & Crutcher, with thirty minutes.

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Background

Amid a name-calling public relations battle, the prolonged legal saga over Argentina’s dealings with investors from the U.S. and around the world opens another chapter in the Supreme Court next week.  In some ways, this is a prelude to a much more dramatic chapter that will unfold later at the Court.  But the outcome of this one could importantly shape the later one.

Specifically at issue in next week’s case is how widely, perhaps even around the globe, investors may go in search of Argentine government assets that they can seek to claim to make up at least partly for that government’s refusal to pay anything at all on defaulted bonds.  The later case deals with lower court mandates on how Argentina is to make payments to its bondholders.

The underlying controversy actually goes all the way back to 1994, and it requires the courts to interpret the promises that the government of Argentina made at that time — and later — in an effort to sell bonds in the United States.  In floating the bonds in 1994, Argentina was seeking to raise money for public projects and programs.

The bonds it sold then, referred to as Fiscal Agency Agreement bonds, were issued along with the government’s waiver of all claims of immunity to lawsuits that could arise over those securities.  On the bonds it sold in the U.S., it agreed to let itself be sued in federal or state court in New York City, and agreed that the legal issues would be governed by the laws of New York.

About seven years later, in December 2001, Argentina faced a collapse of its domestic economy.  As one way of dealing with that crisis, it defaulted on about $80 billion of its debt, declaring a moratorium on repayments.  Bonds that were still in investors’ hands were not entirely worthless, if the holders could get Argentina to pay up.  Even though regarded as distressed assets, there was a market for them, and some investors bought interests in them when they learned of the default plan.  Among those investors was NML Capital Ltd., a hedge fund based in the Cayman Islands.

The fact that hedge funds would put their money into defaulted bonds has led Argentina and its supporters in this controversy to refer, in the publicity battle outside the courts, to those investors as “vulture funds.”  In turn, the investors and their supporters have adopted a lower court’s labeling of Argentina as a practitioner of “a diplomacy of default,” so that it now would have to pay exorbitant interest rates to raise money in U.S. markets — if it could borrow there at all.

Argentina did not just abandon the holders of the bonds it had sold in 1994, and its next move turned out to intensify the already heated court battle.  In 2005 and 2010, it moved to restructure the debt it owed outside the country.  To encourage holders of FAA bonds to swap them for new bonds, Argentina said it would not make any payments on bonds not exchanged.  Its legislature then passed a law (now referred to as the “Lock Law”) barring any kind of settlement with investors who refused the exchange.

About half of the investors holding FAA bonds agreed to the swap, at a rate of about twenty-five to twenty-nine cents on the dollar.

Among those who refused the exchange was NML Capital.  Beginning in 2003, it filed eleven lawsuits in federal court in New York, challenging the default and demanding payment.   Ultimately, NML won two judgments — one for about $1.6 billion, and another for $900 million (both figures include interest add-ons).  Argentina responded by saying that it would not make any payments on those judgments.

To enforce its right to be paid, NML asked a federal judge to put the judgments into formal effect by imposing the obligations on two bank accounts that Argentina had in the U.S. — at Bank of America and Banco de la Nacion Argentina’s New York City branch.

Then, in a move to help it follow the money, NML asked the judge to order the two banks to reveal how Argentina moved assets in and out of those bank accounts, and across the globe.  The judge did so, with some narrowing of the scope of the request, and the resulting “discovery” demands are now at the heart of the case that the Supreme Court takes up on Monday.

Argentina took the dispute over discovery to the U.S. Court of Appeals for the Second Circuit, arguing that American courts were intruding on its national sovereignty.  Besides, Argentina argued, U.S. law dealing with liability of foreign governments only allows a U.S. court to issue a judgment to seize assets within the U.S.  Thus, its lawyers contended, the demands for information cannot reach outside the U.S.

The Second Circuit upheld the judge’s orders, ruling that they did not threaten Argentina’s sovereignty because they were aimed at the two banks, not the nation’s government.  It also declared that there was a difference between asking for information and actually seizing assets.  Whether NML could actually ever demand assets located outside the U.S., the court of appeals said, was not at issue at this point.

Petition for certiorari

Argentina took the case to the Supreme Court in January of last year.  It asked the Justices to decide a single question: because the Foreign Sovereign Immunities Act of 1976 allows a court to seize property from a foreign government only if it is located in the U.S. and is used for commercial activity, does a U.S. court have the authority to order disclosure of information about that nation’s assets anywhere in the world?

The petition said there was a conflict in the appeals courts on that question, including a contrary decision by the U.S. Court of Appeals for the Seventh Circuit, which the Supreme Court had declined to review in 2012.  Moreover, it argued, the U.S. government has been on the side of foreign governments on the discovery issue.

NML Capital countered that the Court should remain on the sidelines, contending that the split between the Second and Seventh Circuits was a “shallow” one, that the Seventh Circuit should be given a chance to reconsider, that the discovery orders were aimed only at commercial banks rather than at Argentina itself, and that, in any event, the Second Circuit was right about the discovery demands.

The Court, as it had done in the Seventh Circuit case, asked the Justice Department for its views on Argentina’s challenge.  Last November, the Department replied, urging the Court to hear the case, contending that the Second Circuit’s ruling was wrong.

While the government brief stressed that the U.S. does not condone Argentina’s repeated refusal to satisfy federal court rulings against it, and that it believes Argentina should work to “normalize relations” with all of its creditors, it nevertheless contended that the lower courts had gone too far in allowing a global pursuit of information about Argentina’s assets.

Siding explicitly with Argentina’s argument that both discovery and potential seizure of assets are allowed only for property within the U.S., the government said the lower court was wrong to treat those concepts as separate.  The Second Circuit ruling, it added, has led other judges to order “general asset discovery,” not just against private third parties, but against foreign states directly.

Argentina followed up that filing with a new brief, saying that later developments have included a court order targeting government property, including “sensitive military and diplomatic property.”

And NML, taking its own turn to respond, suggested that the government had switched positions on whether the Court should get involved, and asserted anew that its demands for information targeted only commercial banks, not a sovereign nation.

The Court on January 10 agreed to review Argentina’s petition.  Justice Sonia Sotomayor, a former Second Circuit judge, had remained out of two earlier cases in which the Court had denied petitions by Argentina, but so far she has given no indication that she would not participate in this case.

While the Court is moving toward review of the discovery question, the lower courts in New York have moved on to take further action on the Argentine default controversy.  If Argentina is going to make any payments to those who swapped their bonds in the debt restructuring, those courts have now ruled, it must make equal payments to the holders of the defaulted bonds.  In other words, if Argentina pays off the holders of the exchange bonds, it must provide one-hundred-percent payment to holders of the defaulted bonds, too.  Argentina promised to do exactly that when it sold the defaulted bonds, those courts have concluded.

That has led to a new petition by Argentina and one by a group of investors who hold the later series of exchange bonds, with these investors voicing fears that the lower court orders will lead to default on those instruments, too.

Responses to those new petitions are now due on May 7.  The Court may not act on those until after it has ruled on the discovery issue.  If the Court ultimately were to review and uphold those later orders, the ruling that it issues on the discovery question in the current case may have an influence on the ability of investors like NML Capital to enforce any rights that they are granted.

Briefs on the merits

The Argentine government’s brief on the merits pursued twin themes:  the need for U.S. courts to tread softly in interfering with a foreign government’s power to manage its own affairs, and the need for U.S. courts to stay within the specific boundaries of the 1976 law that codifies the concept of foreign government immunity from lawsuits in U.S. courts.

On the first point, Argentina treated the discovery question as interchangeable with the power of a court to seize assets owned by a foreign government.  Because a judicial attempt to go after government assets is a serious threat to sovereign interests, the brief contended, a process that enhances the chances that such a seizure would be ordered should be treated as a similar threat.  It is one thing, the filing said, for a court to issue an order against a foreign government that resolves a legal claim; it is something else entirely to initiate an effort to collect on that judgment.

“The political branches,” the brief said, “struck a delicate balance between the rights of creditors and the foreign relations imperative of respecting foreign sovereigns.”  That statement is the key to the second main thrust of the Argentine brief, on the interpretation of the FSIA of 1976.

That law, the brief contended, is limited to claims of two characteristics of foreign government property:  assets located physically in the U.S., and assets used for a commercial activity inside the U.S.  That limitation, Argentina argued, also defined the scope of any process leading to seizure of foreign government assets.

“Congress authorized enforcement proceedings,” the brief said, “only to the extent they are directed to that narrow category of sovereign property.”  That, it added, is what federal appeals courts had ruled consistently — until the Second Circuit, in this case, broke ranks.  The Second Circuit’s error, the brief asserted, was in its finding that the 1976 Act does not address specifically the scope of discovery as part of a process of attaching sovereign assets.

Calling upon the support it has received from the U.S. government, Argentina noted that the government has filed “no fewer than seven briefs in the past seven years,” expressly declaring that discovery orders must be confined to potential seizures of property that is not immune from seizure under the Act.  The government has said that broadening discovery will result in a reciprocal threat to “United States property worldwide,” the brief said.

The federal government’s merits brief, as an amicus in support of Argentina, closely tracked the Argentine government’s arguments on the scope of the 1976 Act.  Running through this statutory argument, though, is the government’s strong perception that a wide reach under court order for information on foreign government property would be a serious affront to sovereignty, and a threat of reciprocal pursuit in foreign courts of U.S. government property holdings.

“Broad, general discovery into presumptively immune foreign-state property,” the U.S. brief said, “would impose the very costs and burdens that the immunity is intended to shield against in the first place.”

Under the lower court orders that Argentina is protesting, the federal lawyers’ brief said, discovery could be compelled so as to gain information about “foreign-state property that a U.S. court could not possibly execute against” under the FSIA.

NML Capital’s merits brief conceded that Congress had provided “robust immunity” in U.S. courts to foreign governments, but argued that it did so within very defined limits.  While shielding foreign property from seizure except in limited circumstances, the 1976 Act, the NML brief said, has nothing at all to say about the discovery process once a party with a claim has been awarded a judgment against a foreign state.  In that situation, normal procedural rules apply, and those rules are generous in the amount of discovery they permit, the brief contended.

There is no doubt, the brief noted, that NML as an investor in defaulted bonds has won judgments against Argentina, and thus it should be allowed to move toward collecting on them.  It is doing so not against the government of Argentina, but against banks that have no claim to governmental immunity from such a process, the document asserted.

While the brief sought to answer the twin thrusts of Argentina’s merits argument, the NML document also energetically pressed its point that, when Argentina sold the debt instruments that are at the heart of this case, it surrendered any claim of immunity that it might otherwise assert — and did not carve out an exception for discovery orders.

On the claimed threat to foreign sovereignty, NML’s brief contended that Congress did all that it needed to do to shield foreign states with what it put into the FSIA, and it did not put it anything about discovery.  Moreover, NML asserted, quoting from a recent Supreme Court opinion: “Foreign sovereigns have no right to immunity in our courts.”  That statement, the brief said, is as true now as it was as long ago as an 1812 ruling.

Aside from drawing the considerable support that comes with a federal government amicus brief on its side, Argentina’s amicus support is limited to a single additional filing:  by The Clearing House, a bankers’ collective that sorts out payments, clearing, and settlements.  That brief complained of the “severe burdens” that broad discovery orders like those at issue impose on financial institutions.

NML Capital has just over a dozen amicus briefs on its side, ranging from twenty-one U.S. states seeking to protect the investments their state pension fund have made in foreign government debt instruments, to victims of terrorism seeking to ensure that they can move to enforce judgments that they have won in court against “state sponsors of terrorism.”

Also on NML’s side are a variety of other investors in defaulted Argentine bonds and in other foreign government debt, former legal officials at the State Department, business and economics research organizations, and professors who teach and do research on immunity questions.

Analysis

If the Court confined its review of this Argentine case to analysis of texts — the language of the Foreign Sovereign Immunities Act and the Federal Rules of Civil Procedure — this might be an easy case to decide.  And it also might be easy if the Court focused very closely on the specific terms of the waiver of immunity that Argentina made to potential investors when it sold them bonds.

On FSIA, the Court could draw seemingly simple conclusions about whether the Act does or does not cover discovery demands, and on whether there is a difference between a judgment and its enforcement.  It might also make up its mind whether FSIA is totally silent on the discovery issue.

And, on the federal rules, it could draw seemingly simple conclusions about how much discretion those rules give to federal judges to fashion discovery orders, to enforce already determined judgments.

But what overhangs this case, and makes the presence of the federal government loom considerably larger, is that this dispute is not just about the relationship between ordinary borrowers and creditors.  Rather, it involves an established national government which, though even its supporters acknowledge has become something of a scofflaw, has considerable stature as a sovereign in charge of its own affairs.

That is the underlying theme that runs throughout Argentina’s claims, and throughout the support it gets from the U.S. government.  Thus, one of the tasks of NML Capital and its lawyers in the case is to persuade the Court to look at Argentina in far less lofty terms, as a borrower that bargained away any legal immunity it might have and then, when times got tough, simply ran for economic cover.

The Court will be well aware that, while it is only Argentina and only those defaulted bonds that are before it in this phase of the controversy, anything it does will likely have an impact on the larger question of how foreign governments are to act when they come to U.S. capital markets in search of creditors.  Will their stature entitle them to some more leeway, or will it simply serve as a mask for sharp dealing?

In short, the Court knows that the world of commerce will be watching.  And, among other things, the world will be watching this particular case in search of hints as to how the Court might react when the next round comes up late in the Term, on U.S. courts’ power to command how a foreign government manages its external debt.