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From Securities Regulation Daily, April 21, 2014

Oral argument in Argentina bond case emphasizes foreign sovereignty

By Jim Hamilton, J.D., LL.M.

In a case involving the assets of a foreign state, Argentina, being subject to discovery by hedge funds and other creditors in a federal court, U.S. Supreme Court oral argument appeared sympathetic to the asset discovery concerns of the judgment creditors, while at the same time some justices emphasized that this case is about the scope of discovery against a foreign sovereign, not a private debtor (Argentina v. NML Capital, Ltd., April 21, 2014).

The Court is reviewing a Second Circuit ruling that post-judgment discovery under Federal Rule of Civil Procedure 69 in aid of enforcing a judgment against a foreign state can be ordered with respect to all assets of a foreign state regardless of their locations or uses.

District court as clearinghouse for all sovereign assets. Edwin Kneedler, U.S. Deputy Solicitor General, argued that the sweeping discovery order sustained by the Second Circuit in a case in which hedge funds and other judgment creditors were seeking discovery against the assets of Argentina based on the sale of bonds establishes a federal district court in the United States as a clearinghouse for all of Argentina's assets and transactions throughout the world, contrary to both the Foreign Sovereign Immunities Act (FSIA) and principles of comity and reciprocity. Responding to a question from Justice Scalia on the broadness of the scope of discovery, the official said that discovery cannot extend to property outside the United States.

Similarly, Jonathan Blackman argued for the Republic of Argentina that the sweeping worldwide forensic examination of foreign state property that the court of appeals approved targets sovereign property that the FSIA makes categorically immune from the process of U.S. courts. This far exceeds the enforcement powers of U.S. courts, he added, asking somewhat rhetorically how it can be appropriate for a U.S. court to be asking a foreign state to turn over information about property beyond the execution powers of the court.

Justice Kennedy noted that the discovery is about assets that can be executed on but are situated in other countries. The Deputy Solicitor General noted that the Government’s position is a categorical one and based on reciprocity in that the U.S. would be very concerned about a foreign court setting itself up as a clearinghouse for all U.S. assets around the world.

Justice Scalia was surprised that foreign countries have not filed amicus briefs in this case, if these issues so gravely affect their jurisdictions and the positions of all foreign sovereigns. He found it extraordinary that not one foreign sovereign filed an amicus brief with the Court supporting the Government’s position. Foreign sovereigns file amicus briefs all the time with the Court on issues concerning their prerogatives, he added, positing that if this is as horrific as the Government is painting it to be, the Court should have heard from them.

Execution or information. Theodore Olson, representing the creditors, said that the case is not about execution, but about information. The Federal Rules of Civil Procedure were not displaced by the Foreign Sovereign Immunities Act, he argued, and the issue at hand is information. The context of this case is that Argentina was able to sell bonds and raise money in the U.S. capital markets only by agreeing to be bound by U.S. law and the judgments of U.S. courts, and by waiving sovereign immunity and consenting to attachment in aid of execution. He added that many debtors move assets around to avoid judgments.

But Justice Ginsburg emphasized that this is a sovereign, not a private debtor, and the Foreign Sovereign Immunities Act provides immunity from execution except for commercial property in the United States.

The statute starts with blanket immunity against execution for the foreign sovereign, said the Justice, and then says that there is an exception for property in the U.S. The Justice also noted that the vast majority of the bondholders settled with Argentina. Yes they did, agreed Mr. Olson, because anybody who has ever litigated against Argentina knows that it probably may be less costly to just give in on whatever terms Argentina offers. But the fact is, he continued, that these are debts undeniably owing and sovereign immunity was waived by Argentina.

Justice Ginsburg noted that this argument goes to execution and FSIA says nothing about discovery. Mr. Blackman said that FSIA delineates the bounds of permissible discovery when it delineates the universe of executable property.

Justices Breyer and Scalia said that when you read Rule 69 on obtaining discovery, you can obtain it in aid of judgment or execution as provided in the rules. So, you look to the rule on discovery, they reasoned, which is certainly broad enough to encompass this situation. For example, said Justice Breyer, on the back of a bond Argentina said that it waived sovereign immunity, thus allowing for execution in the U.S. It does, in fact, say nothing about discovery in aid of execution. The rules do, he emphasized.

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