The Republic of Argentina v. NML Capital, Ltd.

Facts

In December 2001, the Republic of Argentina defaulted on its external debt payments. While several of Argentina’s bondholders agreed to restructurings, others, including NML Capital, Ltd. (“NML”), opted for legal action. In 2003, NML filed eleven claims against Argentina in the Southern District of New York seeking payment for the defaulted debt. The court based jurisdiction on a contractual provision where Argentina waved sovereign immunity. The court granted summary judgment for NML in six actions totaling more than $900 million, and decided five actions against Argentina for monetary damages over $1.6 billion. Because Argentina refuses to satisfy the judgments, since 2003, NML has pursued discovery of Argentinian property located in the United States and abroad to learn more about Argentinian assets in an attempt to attach and execute them. In 2010, NML served subpoenas on Bank of America (“BOA”) and Banco de la Nacion Argentina (“BNA”), two banks that are non-parties to the default actions against Argentina.

BOA received its subpoena in March 2010. The subpoena requested information on all accounts maintained by BOA that related to Argentina and information on all transfers related to Argentina through the SWIFT system. Furthermore, the subpoena defined “Argentina” broadly to include Argentina’s “agencies, instrumentalities, ministries, political subdivisions [and] employees,” as well as the current President and her late husband.

BNA received its subpoena in June 2010. The subpoena requested information on assets or accounts maintained by Argentina at BNA as well as debts owed by BNA to Argentina. This subpoena included in its definition of “Argentina” all state-controlled entities.

Argentina and BOA moved to quash the BOA subpoena. Additionally, both BOA and BNA set forth objections to the subpoenas while NML moved to compel their compliance.

On September 2, 2011, the district court denied the motion to quash the BOA subpoena and granted NML’s motion to compel. The court reasoned that the subpoenas did not impinge on Argentina’s sovereignty because they only sought information on Argentinian assets from third parties and did not attempt to attach the property, but the court also instructed NML to focus the discovery of assets abroad on information that could reasonably lead to attachable property.

After the court’s decision, BOA and NML agreed on further terms and BOA has begun producing information pursuant to them. However, even though BNA and MNL agreed on further terms for the subpoena, NML claims that BNA has not produced any documentation.

The district court ordered compliance by January 6, 2012. Argentina, but neither BOA nor BNA, appealed the order arguing that it violates the Foreign Sovereign Immunities Act (“FSIA”). On appeal, the United States Court of Appeals for the Second Circuit held that because the discovery order is directed at third-party banks and seeks to compel discovery and not attach property, it does not infringe on Argentina’s sovereignty and is thus not an abuse of discretion. After the Second Circuit denied rehearing, Argentina appealed to the United States Supreme Court. The Supreme Court granted certiorari on January 10, 2014 to determine whether a court can order discovery to help in the enforcement of a judgment against a foreign state with respect to all assets, regardless of location, or whether the order is limited to assets in the United States that are potentially subject to the FSIA.

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Discussion

This case presents the Supreme Court with the opportunity to consider whether a court can order post-judgment discovery of the assets of a foreign sovereign, regardless of the assets’ location, by subpoena of a non-sovereign third party. Argentina argues that compelling such discovery violates a long-standing practice granting foreign sovereigns with immunity in U.S. courts. NML counters that no violation of sovereign immunity takes place when the sovereign has contractually waived immunity. The Supreme Court’s decision will determine how far courts can compel third parties to provide information on sovereign assets abroad, raising U.S. foreign-policy concerns because of the possibility of reciprocal treatment abroad.

FOREIGN POLICY AND LENDER PROTECTION CONCERNS

The United States, in support of Argentina, argues that allowing U.S. courts to compel such an extensive discovery could negatively affect U.S. interests in foreign courts through reciprocal treatment. The U.S. maintains extensive holdings overseas as part of its global diplomatic and security operations. Since many countries base their own sovereignty decisions on reciprocal treatment abroad, permitting U.S. courts to grant such far-reaching discovery could subject the U.S. to the same type of treatment. Additionally, the requested discovery seeks information on assets belonging to diplomats in their personal capacity, presenting an intrusive inquiry into their personal holdings for no valid reason, since those assets do not belong to the foreign sovereign and thus cannot be attached or executed to satisfy the foreign sovereign’s judgments. Such intrusive inquiries, the United States argues, could have serious negative repercussions on possible bilateral agreements and banking relationships.

South Carolina and other U.S. states counter that to protect lenders, courts should have discretion to authorize discovery that will aid in the execution of their judgments against a foreign sovereign, especially when those cases were decided on the merits. This protection is important, the states argue, because it leads to confidence in sovereign debt markets by preventing opportunistic defaults and by forcing voluntary restructurings. However, if courts fail to enforce creditors’ rights in instances such as this one, where Argentina took a coercive take-it-or leave-it approach to restructuring, this could become the norm. By failing to provide creditor protections, the courts could seriously imperil the secondary market for sovereign debt by increasing the risk of lending to developing nations with poor credit ratings, effectively depriving them of the public debt market. Thus, the long-term interests of all nations are better served by having U.S. courts protect investors and thus promote confidence in investment, securing the U.S.’s place as the leader in global finance.

THIRD PARTIES AND SOVEREIGN IMMUNITY

The United States argues that sovereign immunity is a principle that has long been respected in international law, and one of the principle’s main goals is to protect sovereigns from the costs and inconveniences of litigation. Argentina argues that far reaching discovery can disrupt government functioning and that limits on discovery are necessary to prevent wasting government resources. This is even more important where, as here, the discovery encompasses a broad examination of a sovereign’s assets at the request of a private party. Furthermore, The Clearing House, in support of Argentina, argues that even when the discovery requests go to third parties, a sovereign incurs costs by protecting itself from discovery requests over the state’s financial affairs, especially with requests that are so broad and far reaching that they require financial institutions to perform searches over numerous branches across the world, creating excessive burdens on the sovereign and the financial institutions alike. Additionally, The Clearing House argues that such discovery requests can force financial institutions to violate the law of other countries when those countries have different bank and privacy laws that regulate the dissemination of financial information.

South Carolina and other U.S. states counter that Argentina made specific promises to investors that those investors would be able to have recourse against Argentina in U.S. courts in the event of defaults by waiving its sovereign immunity. This type of waiver is a recognized exception in international law to sovereign immunity. Furthermore, NML argues that these discovery efforts seek only to produce already existent business records from third-party banks, not from the state, thus relieving the state from any burden of production. Also, because these banks are not state instrumentalities, the state cannot claim immunity for these non-sovereigns. Finally, NML argues that Argentina had the opportunity to claim governmental privilege in order to block specific parts of the discovery order in order to protect state secrets, but it chose not to.

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Analysis

The Supreme Court will determine the permissible scope of post-judgment discovery against sovereign states. Specifically, the Supreme Court will determine what additional documents a foreign state must provide to an opposing party after a case judgment has already been delivered: (1) documents related to all assets of a foreign state regardless of the assets’ locations, or (2) documents related to assets located in the United States that are potentially subject to being taken as part of a judgment under the FSIA.To make this determination, the Supreme Court will have to analyze the text of the FSIA, which sets the legal standard for determining the appropriate level of immunity a foreign state is afforded in a civil action. The Supreme Court will also have to consider sovereign immunity and other federal interests.

Argentina claims that the FSIA limits post-judgment discovery to documents that relate to a property that is “potentially subject” to a judgment award. Argentina also claims that expansive post-judgment discovery of foreign-state property infringes on sovereign immunity and other federal interests. NML claims that the FSIA does not limit post-judgment discovery to documents that relate to a property that is “potentially subject” to a judgment award. NML also claims that expansive post-judgment discovery of foreign-state property accords with sovereign immunity and other federal interests.

INTERPRETATION OF THE FSIA

Argentina argues that the FSIA limits post-judgment discovery to documents that relate to a property that is “potentially subject” to a judgment award. Argentina argues that foreign sovereigns have historically been afforded broad immunity by United States courts. Argentina further argues that Congress intended discovery in aid of judgment enforcement to be limited to narrow circumstances, such as when the property at issue is potentially property of the foreign state and is being used for a commercial activity in the United States. Argentina argues that this immunity-based limitation on discovery is necessary to constrain the normally broad discretion that district courts have over the discovery process because such broad-ranging discovery “can be peculiarly disruptive of effective government.”

Argentina also claims that the lower court incorrectly ruled that the FSIA is silent on the permissible scope of discovery against sovereign states. Argentina argues that the FSIA is not silent with regard to the permissible scope of discovery because Sections 1609 and 1610 of the FSIA state that a foreign property, which is used for a commercial activity in the United States, shall not be immune from attachment in aid of execution. And even if the FSIA was silent on the issue, Argentina argues that an expansive grant of discovery into the FSIA’s purported “silence” is directly contrary to the common law principle of providing broad immunity to foreign sovereigns.

NML counters that the FSIA does not limit post-judgment discovery to documents that relate to a property that is “potentially subject” to a judgment award. NML argues that district courts should not be ordered to conduct discovery circumspectly and only to verify allegations of specific facts crucial to an immunity determination. NML instead argues that, though a district court can voluntarily choose to exercise discretion in permitting discovery against a foreign sovereign, the FSIA should not broadly prohibit post-judgment discovery into a foreign state’s assets. NML instead argues that a district court should have the power to appropriately weigh the benefits of additional discovery against the intrusiveness to the foreign state of permitting such discovery because this power is consistent with the broad post-judgment discovery that is traditionally authorized by the Federal Rules of Civil Procedure.

NML also contends that the lower court correctly ruled that the FSIA is silent on the permissible scope of discovery against sovereign states. NML argues that Sections 1609 and 1610 of the FSIA do not address the specific issue of post-judgment discovery. NML argues that Congress intended the FSIA to provide broad discovery in aid of acquiring assets post-judgment, and this legislative preference of an expansive grant of discovery should answer the FSIA’s silence about the scope of post-judgment discovery. NML argues that Congress provided this broad jurisdiction to promote uniformity in decision-making, which was desirable since disparate treatment of cases involving foreign governments may have adverse foreign consequences.

SOVEREIGN IMMUNITY AND OTHER FEDERAL INTERESTS

Argentina claims that expansive post-judgment discovery of foreign-state property infringes on sovereign immunity and other federal interests. First, Argentina argues that expansive post-judgment discovery goes against the ideals of comity, or the principle of foreign sovereigns respecting each other’s sovereignty, because a court is ordering a worldwide “forensic examination” of all assets of a foreign state, including the property of a nation’s military, its diplomatic core, and its highest officials.

Second, Argentina argues that endorsing such discovery would undermine the federal interest in shielding foreign states from the burdens of litigation. Even if a third-party bank conducts the discovery, Argentina argues that such discovery will result in additional inconveniences to the foreign state, such as the following: (1) forcing the sovereign to defend itself in subsequent litigation; (2) yielding information that cannot justify an attachment proceeding but which a judgment creditor can use as a basis to seek still more intrusive discovery; and (3) forcing third parties to deem their burdens of discovery as a cost of doing business with a sovereign state, and to either pass those costs on to the state or refuse to do business with that state.

Third, Argentina argues that since some foreign states base their sovereign immunity decisions on the ideals of reciprocity, or the treatment that U.S. courts provide to foreign sovereigns, the Supreme Court’s interpretation of the FSIA will likely have a tangible impact on the treatment of the United States Government abroad.

NML counters that expansive post-judgment discovery of foreign-state property accords with sovereign immunity and other federal interests. First, NML argues that the United States has to balance the comity interests of foreign states with the federal interest in providing a forum for the final resolution of disputes and for enforcing these judgments. By ensuring that American judgment creditors may obtain the information necessary to enforce their judgments against foreign states, NML believes that the Supreme Court will respect that balance.

Second, NML claims that foreign states do not face “the cost and aggravation of discovery” when they do not bear the responsibility of personally responding to the discovery at issue. NML argues that the FSIA does not apply to non-sovereigns because sovereign immunity is only designed to give foreign states and their instrumentalities some protection from the inconvenience of suit. NML argues that, in this case, the United States court made requests for discovery to seek business records from third-party banks that those banks already possess. NML argues that Argentina thus did not have to take any action or produce any information. Further, NML refutes Argentina’s contention that discovery from non-sovereign third parties will inevitably spill over into equally intrusive discovery of the party itself because this spill over will only occur if the district court has jurisdiction over the foreign sovereign in that litigation – in which case, the state is not entitled to avoid this inconvenience.

Third, NML claims that Argentina is wrong to insist that the post-judgment discovery that was demanded under the circumstances of this case will lead to reciprocal adverse treatment of the United States in foreign courts. NML argues that the United States has a strong federal interest in ensuring the enforceability of valid debts under the principles of contract law, and in particular, the continuing enforceability of foreign debts owed to United States lenders. NML argues that if creditors cannot obtain the information needed to locate even non-immune assets to satisfy a judgment in their favor—despite having won the case on the merits—then enforcement against a recalcitrant sovereign such as Argentina becomes nearly impossible.

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Conclusion

In this case, the Supreme Court will determine the permissible scope of post-judgment discovery against sovereign states. Argentina claims that the FSIA limits post-judgment discovery to documents that relate to a property that is “potentially subject” to a judgment award. Argentina also claims that expansive post-judgment discovery of foreign-state property infringes on sovereign immunity and other federal interests. NML claims that the FSIA does not limit post-judgment discovery to documents that relate to a property that is “potentially subject” to a judgment award. NML also claims that expansive post-judgment discovery of foreign-state property accords with sovereign immunity and other federal interests. The Supreme Court’s decision will impact lower courts’ interpretation of the FSIA and the level of discovery foreign sovereigns face in the American legal system.

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