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From Securities Regulation Daily, December 23, 2014

Argentina fails to quash hedge funds’ discovery requests

By John M. Jascob, J.D.

The Republic of Argentina has failed to persuade a Second Circuit panel to quash certain post-judgment demands in the ongoing battle between Argentina and its hedge fund creditors over payment on the nation’s defaulted bonds.  In a summary order issued today, the appellate court held that even if the hedge funds' subpoenas reached diplomatic property immune from attachment under international treaties, Argentina's “self-serving legal assertion” of immunity did not entitle it to withhold otherwise discoverable information (NML Capital, Ltd. v. Republic of Argentina, December 23, 2014).

Argentina was appealing from an order of Judge Thomas P. Griesa of the Southern District of New York, who had granted the hedge funds’ motions to compel with respect to discovery demands that the funds had served on Argentina and non-party banks in an attempt to collect on the judgment. Immediate appellate review was proper under the collateral order doctrine, the Second Circuit held, because Judge Griesa’s order would conclusively resolve important issues of sovereign immunity that were separate from the merits and unreviewable from final judgment.

Supreme Court decision. At the outset, the Second Circuit rejected Argentina’s contention that the Foreign Sovereign Immunities Act prohibits discovery of sovereign property that is potentially immune from attachment, noting that the U.S. Supreme Court had already dispensed with this argument. On June 16, the Supreme Court ruled that the statute did not immunize Argentina from the post-judgment discovery of information concerning its extraterritorial assets. The fact that Argentina’s diplomatic or military property could enjoy immunity does not mean that the hedge fund creditors would be unable to execute on other types of property, the high court held (See the Securities Regulation Daily Wrap Up for June 16, 2014).

International treaties. Next, the Second Circuit rejected Argentina’s argument that the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations—treaties to which the United States and Argentina are signatories—prohibit attachment of diplomatic and consular property and discovery of diplomatic and consular documents. Even if Argentina’s treaty interpretations are correct, the appellate court noted, the hedge funds’ discovery demands need not be quashed. Insofar as the discovery demands reach diplomatic or consular property that is immune from attachment, Argentina should object if and when the hedge funds actually seek to execute on such property. If the discovery demands reach documents that may be privileged or “inviolable” under the treaties, Argentina should present its objections to the district court in the form of assertions of privilege or inviolability.

Military property. Similarly, Argentina failed to persuade the court that the hedge funds’ discovery demands should be quashed because they reached military property immune from attachment under the Foreign Sovereign Immunities Act and international law. The Second Circuit reiterated that the potential immunity of property from attachment does not preclude discovery of that property. Moreover, discovery may be necessary for the parties to properly litigate the existence of such immunity.

Closely-tied entities. Finally, the appellate court rejected Argentina's argument that the discovery demands were overbroad because they reached entities and individuals that are not alter egos of the Republic of Argentina and, therefore, not liable for the sovereign’s debts. Even if an entity is not an alter ego, the court reasoned, it may nevertheless hold attachable assets on behalf of Argentina. Furthermore, an entity that is closely tied to Argentina may possess information about Argentina’s assets, even though it is legally distinct and does not own or hold those assets itself. To the extent that Argentina’s objections also encompass assertions of head-of-state or foreign official immunity under federal common law, Argentina should present those objections in the same manner as it does objections under the international treaties, the appellate court held.

Grace and comity. The Second Circuit stressed, however, that Argentina—like all foreign sovereigns—is “entitled to a degree of grace and comity.” These considerations are of particular weight when it comes to a foreign sovereign’s diplomatic and military affairs, the court noted. Accordingly, the Second Circuit urged the district court to closely consider Argentina’s sovereign interests in managing discovery, and to prioritize discovery of documents that are unlikely to prove invasive of sovereign dignity.

The case is No. 13-4054(L).

Attorneys: Roy T. Englert, Jr. (Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP) for Aurelius Capital Master, Ltd., ACP Master, Ltd., Aurelius Capital Master, Ltd., Blue Angel Capital I LLC and Aurelius Capital Partners, LP. Robert A. Cohen (Dechert LLP) and Matthew McGill (Gibson Dunn & Crutcher LLP) for NML Capital, Ltd. Jonathan I. Blackman (Cleary Gottlieb Steen & Hamilton LLP) for Republic of Argentina.

Companies: Aurelius Capital Master, Ltd.; ACP Master, Ltd.; Aurelius Capital Master, Ltd.; Blue Angel Capital I LLC; Aurelius Capital Partners, LP; NML Capital, Ltd.

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