The central bank of Argentina is not an “alter ego” of the government of that republic. The assets of the former, then, are not assets of the later, subject to seizure by a judgment creditor.
That, the latest landmark ruling in a controversy that has had a lot of them and may have several more, is a setback for NML Capital, the holdout bondholder in the litigation, which arose out of Argentina’s 2001 default.
NML has resembled Inspector Javert, Jean Valjean’s nemesis in Les Misérables, in the zeal with which it has pursued assets that might satisfy its judgment against Argentina in this matter.
The “alter ego” theory aimed at the Banco Central de la Republica Argentina (BCRA) was one of Javert’s more creative moves. BCRA is clearly an “agency or instrumentality of a foreign state” as that phrase is understood in the language of the Foreign Sovereign Immunities Act (FSIA.) But that character as an instrumentality is not good news for NML. That is, rather, the hurdle that NML seeks to overcome.
The reason? The FSLA makes such instrumentalities in the usual case immune from lawsuits in federal courts.
Why isn’t Argentina itself immune? In this case, it isn’t immune because it waived that immunity in the Fiscal Agency Agreement pursuant to which the bonds is question were issued. So, NML sought to get around the sovereign immunity of BCRA by arguing that it and the Republic were one entity, and that one entity was the one that had waived immunity.
Indeed, there are always close relations between a country and its central bank. As to Argentina: in December 2005, four years after the default, president Nestor Kirchner issued two emergency executive decrees that NML has cited in making its case for the alter ego theory. In the first decree, Kirchner said that reserves held by BCRA could “be used for payment of obligations undertaken with international monetary authorities.” In the second decree, the President ordered the Minister of Economy and Production to rake stapes to pay Argentina’s debt to the IMF out of those “unrestricted reserves.” The BCRA did pay the IMF on January 3, 2006.
The plaintiff hedge fund won this point before the district court. Perhaps anticipating that a contrary intuition might prevail on appeal, the district court judge, the Hon. Thomas Griesa, found that there was another good reason to deprive BCRA of its prima facie immunity here: it maintained an account with the Federal Reserve Bank of New York. This constitutes “commercial activity” within the U.S., which under the FSLA would subject it to civil liability and enforcement.
But on August 31st, a three-judge panel of the second circuit said that neither of those arguments carries the day, and BCRA remains within the protection of sovereign immunity.
As to the “alter ego” theory: a plaintiff wishing to make that point has to establish one of two things: either that the non-immune body so extensively controlled the immune body that a relationship of principal and agent existed; or that recognition of the immune body as a separate entity would work a fraud or injustice.
As to the first prong, the plaintiffs have failed, because the government of Argentina doesn’t “interfere in and dictate BCRA’s daily business decisions,” despite its indirect influence and the extraordinary executive orders cited above.
As to the second prong, plaintiffs again have failed, because BCRA’s independent status has not been employed to “block plaintiffs’ enforcement attempts against Argentina itself.”
This leaves us with the “commercial activity” issue; the mere existence of an account with the Federal Reserve Bank is just too slender a reed here. Or, in the more judicious language of the decision, it is “too incidental to the gravamen of plaintiffs’ claim.”
On a related policy issue: the appeals court approvingly quotes from an amicus brief from the U.S. expressing the concern that by creating such a rule, the U.S. courts would create an incentive for many foreign central banks to “withdraw their reserves from the United states and to place them in other countries” with potentially am “immediate and adverse impact on the U.S. economy and the global financial system.”
Javert (who was played by actor Russell Crowe in the 2012 movie after all) is ingenious and will surely come up with another approach.