Banking & Financial Services Alert

After the Republic of Argentina (“Argentina”) defaulted on its external debt in 2001, NML Capital, Ltd. (“NML”), one of Argentina’s bondholders, prevailed in 11 debt-collection actions that it brought against Argentina in the Southern District of New York. In aid of executing the judgments, NML sought discovery of Argentina’s property, serving subpoenas on two nonparty banks, Bank of America (“BOA”) and Banco de la Nacion Argentina, an Argentinian bank with a branch in New York City, for records relating to Argentina’s global financial transactions.

BOA, joined by Argentina, moved to quash the subpoenas, arguing that each transgressed the Foreign Sovereign Immunities Act (“FSIA”) because they would permit discovery of Argentina’s extraterritorial assets. The FSIA confers on foreign states two types of immunity. The first, termed by the court as “jurisdictional immunity,” was waived by Argentina in its bond indenture agreement with NML. The second, term by the court as “execution immunity,” generally shields “property in the United States of a foreign state,” and therefore, not necessarily the extraterritorial property of a foreign state. Because the two available avenues to immunity did not apply to Argentina’s particular fact scenario (i.e., an attempt for discovery in aid of execution of a foreign-sovereign judgment debtor’s assets), the United States Supreme Court (“Court”) held that the FSIA did not immunize Argentina from post-judgment discovery of information concerning its extraterritorial assets.

In making its decision, the Court assumed without deciding that a court would be empowered to order discovery of assets beyond its jurisdictional reach, and this issue is currently in front of the United States Second Circuit Court of Appeals.

Additionally, the decision highlights what appears to be a gap in the FSIA where a foreign sovereign waives immunity, owes money under valid judgments, does not pay, and apparently has no executable assets in the United States.

In concluding its opinion, the Court acknowledged this issue, but stated that any apprehensions related to it were better directed to the “political branches,” and specifically, the legislature. In the midst of a global economy where governmental defaults are increasingly more common, this issue might present itself again in the near future.

Financial institutions should take care when receiving or responding to subpoenas and other legally driven requests for information. As the Court’s decision demonstrates, the question of whether, or of how, to comply with such subpoenas or other requests is often a highly complex one, and at times, might not have a clear answer.

To the extent you have any questions about the Court’s order, or about the process of responding to a subpoena generally, please contact Clint Losego, Aaron Tandy, or Stephanie Quiñones.

Read more related to this topic: Ruling on Argentina gives investors an upper hand (New York Times, 6/19/14)

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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.

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