The Foreign Sovereign Immunities Act Doesn’t Protect Deadbeat Debtors

ArgentinaCross-posted at WLF’s Forbes.com contributor site

Argentina’s efforts to overturn adverse court decisions regarding repayment on its defaulted bonds have been reduced to a last-ditch effort to persuade the U.S. Supreme Court to review the case.  An often-overlooked obstacle to Argentina’s efforts to obtain such review:  the only federal issue that it can realistically raise in its petition for certiorari is a claim that the injunctive relief granted by the lower courts violates a federal statute, the Foreign Sovereign Immunities Act (FSIA).  A careful examination of this federal statute indicates, however, that FSIA does not prohibit the relief granted to holdout bondholders and that no federal court has ever interpreted the FSIA in the manner espoused by Argentina.

Congress adopted the FSIA in 1976 to establish clear rules regarding when foreign governments are entitled to assert sovereign immunity from the orders of American courts.  The statute replaced the former system under which courts looked to the Executive Branch on a case-by-case basis for guidance on sovereign immunity issues.  A key provision of the FSIA provides that a foreign government is generally immune from suit in U.S. court, but that its immunity is subject to waiver.  That general immunity provision is of no help to Argentina, however, because it explicitly waived its immunity in connection with the bonds currently at issue and agreed that disputed issues would be resolved in accordance with New York law.

Argentina argues that even though it was properly subject to suit in federal court in New York based on its non-payment, the court’s injunctions violated the FSIA.  Section 1609 of the FSIA provides that, with limited exceptions, property belonging to a foreign government is “immune from attachment, arrest, and execution” by a U.S. court.  Argentina argues that the injunctions issued in this case effectively “attach” its property in violation of the FSIA.

The U.S. Court of Appeals for the Second Circuit brushed that argument aside in its August 23, 2013 decision upholding the district court injunctions, concluding that the injunctions did not constitute an “attachment” of or “execution” on Argentine property.  It explained, “The injunctions allow Argentina to pay its [bond] debts with whatever resources it likes.”  The district court simply required Argentina, if it chooses to make regular payments to other bondholders, to make equivalent payments to the holdout bondholders too.  Indeed, the district court’s judgment did not require Argentina to make any payments.  That hardly sounds like an effort to attach property belonging to Argentina.

Argentina might persuade the U.S. Supreme Court to review the Second Circuit’s interpretation of the FSIA if its ruling conflicted with the interpretation of other federal appeals courts.  But Argentina has been unable to point to any such conflicting decisions.  Argentina argues that its cash reserves should be deemed to have been “attached” in violation of the FSIA, because the injunction imposes a restriction on how those assets may be distributed (i.e., it may not distribute cash to favored bondholders without also paying funds to holdouts), but no federal court has ever so held.

Of course the loudest objection raised by Argentina and its supporters to the decision below is that it might throw the sovereign debt market into turmoil.  A decision in favor of the holdouts in this lawsuit, the argument goes, will lead to more holdouts in future cases and thereby make it much more difficult for sovereign debtors to restructure their debt during a fiscal crisis.  As I have explained previously those concerns are ill-founded.  A detailed study released earlier this year by Moody’s found that Argentina’s 2005 debt exchange was one of only two in the past 20 years affected by holdout creditors.  That includes several successful sovereign debt exchanges completed after the district court ruled against Argentina in this case.  Indeed, the Second Circuit stated explicitly that the judgment in this case is the result of Argentina’s unique status as a deadbeat debtor willing to thumb its nose at its legitimate creditors, and thus the decision is of very limited precedential value in any future sovereign debt litigation.

More importantly, those policy concerns—which focus on the district court’s interpretation of the pari passu clause contained in the Argentine bond agreement—have nothing to do with the FSIA issue that Argentina will ask the Supreme Court to review.  The FSIA addresses the proper scope of injunctive relief issued against foreign nations, not the proper interpretation of pari passu clauses.

Argentina will raise its FSIA claims in a Supreme Court certiorari petition that it will likely file sometime in early 2014.  Argentina’s oft-expressed vow not to comply with any adverse decision in this case will not help its efforts to gain a sympathetic ear at the Court.  Moreover, Argentina cannot necessarily count on the U.S. government to support its petition:  the U.S. declined very publicly to support Argentina’s initial certiorari petition raising this issue (filed with the Court in June and denied in early October).  And given Congress’s determination that immunity issues should generally be decided on the basis of criteria set forth in the FSIA rather than through case-by-case determinations by Executive Branch officials, any support from the U.S. government will likely be insufficient to sway the Court.

In short, Argentina’s efforts to overturn the district court’s judgment may well come to naught in the relatively near future.

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