Attachment of foreign state’s property in the U.S.

United States 2nd Circuit Court of Appeals Reports

EM LTD. v. REPUBLIC OF ARGENTINA, 06-0403-CV (2nd Cir.
1-5-2007) EM LTD., Plaintiff-Appellant, v. REPUBLIC OF
ARGENTINA, Defendant-Appellee. NML CAPITAL, LTD .,
Plaintiff-Appellant, v. THE REPUBLIC OF ARGENTINA,
Defendant-Appellee. NML CAPITAL, LTD., Plaintiff-Appellant,
v. THE REPUBLIC OF ARGENTINA, Defendant-Appellee, BANCO
CENTRAL DE LA REPUBLICA ARGENTINA,
Interested-Non-Party-Appellee. Nos. 06-0403-cv, 06-0405-cv,
06-0406-cv. United States Court of Appeals, Second
Circuit. Argued: August 29, 2006. Decided: January 5,
2007.

Plaintiffs appeal from an order of the United States
District Court for the Southern District of New York
(Thomas P. Griesa, Judge) vacating restraining notices and
orders of attachment imposed with respect to an account of
the Banco Central de la Rep??blica Argentina at the Federal
Reserve Bank of New York on the ground that those assets
were protected from attachment by the Foreign Sovereign
Immunities Act of 1976.

Affirmed.

DAVID W. RIVKIN (Dennis H. Hranitzky, Jason R. Abel, on
the brief), Debevoise & Plimpton LLP, New York, NY, for
Plaintiff-Appellant EM Ltd.

ROY T. ENGLERT, JR., Robbins, Russell, Englert, Orseck &
Untereiner LLP, Washington, DC (Alan E. Untereiner,
Robbins, Russell, Englert, Orseck & Untereiner LLP,
Washington, DC; Robert A. Cohen, Dechert LLP, New York, NY,
on the brief), for Plaintiff-Appellant NML Capital, Ltd.

JONATHAN I. BLACKMAN (Carmine D. Boccuzzi, Michael J.
Byars, on the brief), Cleary Gottlieb Steen & Hamilton LLP,
New York, NY, for Defendant-Appellee The Republic of
Argentina.

JOSEPH E. NEUHAUS (Laurent S. Wiesel, Claire E. Coleman,
Julia M. Guaragna, Sergio J. Galvis, on the brief),
Sullivan & Cromwell LLP, New York, NY., for
Interested-Non-Party-Appellee Banco Central de la Rep??blica
Argentina.

SERRIN TURNER, Assistant United States Attorney (Michael J.
Garcia, United States Attorney, Kathy S. Marks, Assistant
United States Attorney, United States Attorney’s Office for
the Southern District of New York, New York, NY; Peter
Keisler, Assistant Attorney General, Douglas N. Letter,
Irene Solet, Department of Justice, Washington, D.C.;
Arnold I. Havens, General Counsel, Department of Treasury,
Washington, D.C.; John B. Bellinger, III, Legal Adviser,
Department of State, Washington, D.C., on the brief),
United States Attorney’s Office for the Southern District
of New York, New York, NY, for Amicus Curiae United States
of America in support of Appellees.

BARRY M. SCHINDLER (Thomas C. Baxter, Jr., General Counsel,
James P. Bergin, Andrew C. Huszar, on the brief), Federal
Reserve Bank of New York, New York, NY for Amicus Curiae
Federal Reserve Bank of New York in support of Appellees.

Before: WINTER, CABRANES, and POOLER, Circuit Judges.

JOS?‰ A. CABRANES, Circuit Judge:

This appeal arises from the efforts of
plaintiffs-appellants NML Capital, Ltd. (“NML”) and EM Ltd.
(“EM”) (collectively, “plaintiffs”) to attach certain funds
held in an account of the Banco Central de la Rep??blica
Argentina (“BCRA”), the central banking authority of the
Republic of Argentina (“Argentina” or “the Republic”), at
the Federal Reserve Bank of New York (“FRBNY”) (the “FRBNY
Account”).[fn1] EM holds, and NML seeks, a judgment against
the Republic arising out of the Republic’s default on debt
obligations held by EM and NML. Even though plaintiffs do
not hold or seek judgments against BCRA, they contend that
they are entitled to attach $105 million of BCRA’s funds
held in the FRBNY Account (the “FRBNY Funds”). In
particular, plaintiffs argue that the Republic obtained an
attachable interest in the FRBNY Funds after the President
of the Republic issued two decrees that gave the Republic
the authority to use BCRA funds for repayment of the
Republic’s debts to the International Monetary Fund
(“IMF”), but that did not specifically designate the FRBNY
Funds for use in repaying the IMF. The United States
District Court for the Southern District of New York (Thomas
P. Griesa, Judge) vacated orders of prejudgment attachment
obtained by NML, and postjudgment restraining notices
obtained by EM, that had previously been ordered with
respect to the FRBNY Funds. This appeal followed.

We consider here whether the Republic’s actions associated
with the repayment of its debt to the IMF deprived the
FRBNY Funds of immunity from attachment under provisions of
the Foreign Sovereign Immunities Act of 1976 (“FSIA”)
related to the attachment of sovereign assets, 28 U.S.C.
§§ 1609-11. We affirm the order of the
District Court, concluding that the FRBNY Funds are immune
from attachment under the FSIA because, notwithstanding the
issuance of the decrees, the FRBNY Funds continue to be
owned by BCRA, a separate juridical entity from the
Republic, and are not available to satisfy a judgment
against the Republic. Moreover, we conclude that the
provisions of the FSIA allowing attachment of a foreign
state’s “property in the United States . . . used for a
commercial activity in the United States,” 28 U.S.C.
§ 1610(a); see also id. § 1610(d) (allowing
prejudgment attachment of a foreign state’s property “used
for a commercial activity in the United States”), would not
permit attachment of the FRBNY Funds even if the funds were
considered an attachable asset of the Republic. A
government’s repayment of its debt to the IMF is not a
“commercial activity,” and the record is barren of any
evidence that the FRBNY Funds were to be “used for”
repayment of the IMF.

BACKGROUND

I. Facts and Procedural History

In December 2001, in the midst of a financial crisis in
Argentina, the Republic announced a moratorium on its debt
service payments. Since that time, the Republic has not
made scheduled payments on the debt instruments at issue in
this litigation.[fn2]

On April 10, 2003, EM, a holder of defaulted Argentine
debt, filed an action against the Republic in the United
States District Court for the Southern District of New York
to recover more than $700 million in interest and principal
owed on an Argentine bond it had acquired. EM moved for
summary judgment, and the Court granted the motion on
September 12, 2003, awarding final judgment to EM in the
amount of $724,801,662.56. See EM Ltd. v. Republic of
Argentina, No. 03 Civ. 2507 (TPG), 2003 WL 22120745
(S.D.N.Y. Sept. 12, 2003), amended by EM Ltd. v. Republic
of Argentina, No. 03 Civ. 2507 (TPG), 2003 WL 22454934
(S.D.N.Y. Oct. 27, 2003).[fn3] We affirmed the judgment in
favor of EM on August 31, 2004. See EM Ltd. v. Republic of
Argentina, 382 F.3d 291, 292-94 (2d Cir. 2004).

NML, another holder of defaulted Argentine debt, filed suit
in the United States District Court for the Southern
District of New York on November 7, 2003, seeking to
recover funds due on approximately $170 million in
defaulted bonds that the Republic had issued. NML filed a
second action on February 28, 2005, seeking payment on
approximately $32 million in so-called “Argentine Floating
Rate Accrual Notes.” No judgment had been rendered in
either of NML’s suits at the time NML sought to attach the
FRBNY Funds.

In the terms and conditions governing EM’s bond, the
Republic “irrevocably agreed not to claim and has
irrevocably waived . . . immunity to the fullest extent
permitted by the laws of [the] jurisdiction.” Terms and
Conditions Governing Bond Issued June 22, 2001, Joint
Appendix (“J.A.”) 54. The Republic also “consent[ed]
generally for the purposes of the Foreign Sovereign
Immunities Act to the giving of any relief or the issue of
any process in connection with any Related Proceeding or
Related Judgment, provided that attachment prior to
judgment or attachment in aid of execution shall not be
ordered by the Republic’s courts with respect to . . . the
assets which constitute freely available reserves.” Id. The
bonds that NML acquired contained similar waivers.

On December 15, 2005, Argentina’s President, N?©stor
Kirchner, issued two emergency executive decrees: Decree
1599/2005 and Decree 1601/2005 (the “Decrees”). Decree 1599
provided that BCRA reserves in excess of the amount needed
for the backing of the Republic’s “monetary base,” see Law
No. 23,928 of 3/27/91 art. 6, as amended by Law No. 25,561
of 1/7/02 art. 4, J.A. 447 (defining “monetary base” as
“composed of the monetary circulation [of Argentine pesos]
plus the demand deposits of the financial entities with
[BCRA], in checking accounts or special accounts”), “may be
used for payment of obligations undertaken with
international monetary authorities.” Decree 1599/2005 art.
1, J.A. 22. These excess reserves were dubbed “unrestricted
reserves” by the decree (“Unrestricted Reserves”).[fn4]
Decree 1601/2005 directed the Ministry of Economy and
Production (the “Ministry”) to take the necessary steps to
repay the Republic’s debt to the IMF out of the
Unrestricted Reserves. At the time of the Decrees, BCRA had
approximately $26.8 billion in reserves and needed $18.4
billion to cover the monetary base; thus, approximately
$8.4 billion in reserves became Unrestricted Reserves
pursuant to the Decrees. On December 29, 2005, the Ministry
issued Resolution No. 49, directing BCRA to repay the
Republic’s debt to the IMF and providing that, in exchange,
the Republic would give BCRA a non-transferrable note. See
Resolution No. 49 art. 1, J.A. 511 (“Let [BCRA] be
instructed in line with [the Decrees] . . . to repay the
debt incurred with the [IMF].”).

On December 30, 2005, EM moved in the District Court for an
ex parte order in aid of enforcing its judgment, and Judge
Barbara S. Jones, sitting in Part I, see Rules for the
Division of Business Among District Judges of the Southern
District of New York 5(b) (motions for “emergency matters
in civil cases” presented to the district judge sitting in
“Part I”), entered restraining notices, see 28 U.S.C.
§ 1610(c) (requiring that a court order the
attachment of, or execution against, the assets of a
foreign state or its instrumentalities); see also
Fed.R.Civ.P. 69(a) (“The procedure on execution . . . shall
be in accordance with the practice and procedure of the
state in which the district court is held . . . except that
any statute of the United States governs to the extent it
is applicable”); N.Y. C.P.L.R. § 5222 (establishing
procedure for service of restraining notices on parties
holding property of judgment debtor), with respect to
property of the Republic and the BCRA held at eight
garnishee banking institutions, including the FRBNY. NML
contemporaneously sought and obtained from Judge Jones ex
parte orders of prejudgment attachment and temporary
restraining orders concerning the same assets, see
Fed.R.Civ.P. 64 (providing that remedies involving “seizure
of . . . property for the purpose of securing satisfaction
of [a] judgment . . . are available under the circumstances
and in the manner provided by the law of the state in which
the district court is held”); N.Y. C.P.L.R. § 6201
(setting forth grounds for prejudgment attachment under New
York law).

On January 3, 2006, the Republic’s debt to the IMF was
repaid by BCRA using BCRA’s assets. The FRBNY Funds were
not used in connection with that payment, although the
parties dispute whether the funds might have been used for
this purpose in the absence of the court-ordered restraints
on the transfer of the funds.

On January 6, 2006, the Republic and BCRA moved by order to
show cause to vacate the attachments and restraining
notices (collectively, the “Restraining Notices”).
Following a conference held that day before Judge Griesa,
to whom EM’s and NML’s suits against the Republic had been
assigned, the parties agreed to modify the Restraining
Notices pending resolution of the order to show cause, and
on January 9, 2006, the District Court entered a
stipulation and consent order that amended the Restraining
Notices so that BCRA could conduct its day-to-day
operations. Pursuant to these amended attachments and
restraining notices (collectively, the “Amended Restraining
Notices”), the garnishee institutions were required to
maintain in any covered account a sum not less than 95% of
the amount on deposit at the close of business on January
6, 2006. Of the putative garnishee institutions, only the
FRBNY held any significant amount — namely, $105
million — that was subject to the Amended
Restraining Notices. EM and NML cross-moved on January 10,
2006 to confirm the Amended Restraining Notices, and, in
the alternative, EM sought discovery on five issues
relating to the validity of the Amended Restraining
Notices.[fn5]

II. The District Court’s Decision

Following submissions by the parties and oral argument, the
District Court vacated the Amended Restraining Notices by
oral decision on January 12, 2006. The District Court
described four separate grounds for its decision. First,
operating under the premise that assets owned by BCRA could
not be used to satisfy judgments against the Republic, it
rejected plaintiffs’ argument that the Decrees had the
effect of transferring ownership of the Unrestricted
Reserves in general, or the FRBNY Funds in particular, from
BCRA to the Republic. Plaintiffs had conceded at oral
argument on the parties’ cross-motions that the
Unrestricted Reserves were the property of BCRA, not the
Republic, before the issuance of the Decrees. The District
Court concluded that the Decrees had no effect on the
ownership of the Unrestricted Reserves, and certainly no
effect on the ownership of the FRBNY Funds; thus, the
Unrestricted Reserves and the FRBNY Funds remained the
property of BCRA. The District Court agreed that the
Decrees reflected the Republic’s power to direct BCRA to
take certain actions with respect to BCRA’s assets, but,
according to the District Court, the Republic’s ability to
exercise some control over BCRA did not mean that the
ownership of the FRBNY Funds changed hands from BCRA to the
Republic.

Second, the District Court held that even if it were to
treat the FRBNY Funds as if they were owned by the
Republic, plaintiffs would not be entitled to attach it
under the FSIA unless they were able to demonstrate that
the funds had become property of the Republic “used for a
commercial activity in the United States,” 28 U.S.C.
§ 1610(a)(1) (permitting postjudgment attachment of
a foreign state’s property “used for a commercial activity
in the United States” if the foreign state had waived
immunity from attachment); id. § 1610(d)(1) (same as
to prejudgment attachment).[fn6] The District Court
concluded that plaintiffs did not satisfy this requirement
here because the Republic’s payments to the IMF, which were
facilitated by the Decrees, constituted a “government
financial activity and not a commercial activity.”

Third, the District Court concluded that another provision
of the FSIA, 28 U.S.C. § 1611(b)(1), provided a
separate and independent basis for vacating the attachments
and restraining orders. That statutory provision protects
from attachment property “of a foreign central bank . . .
held for its own account,” unless the protection has been
explicitly waived by the central bank or the bank’s parent
foreign government.[fn7] In the view of the District Court,
the FRBNY Account “was, is, and continues to be the
property of the central bank used for central banking
functions,” and therefore, “the prohibition of Section 1611
on attaching those funds must apply.”

Fourth, the District Court rejected plaintiffs’ arguments
that there had been an explicit waiver of BCRA’s immunity
of the type that would be necessary to expose BCRA’s assets
to attachment under 28 U.S.C. § 1611(b)(1). The
District Court also implicitly denied EM’s discovery
request by vacating the Amended Restraining Notices without
authorizing further discovery.

On January 24, 2006, the District Court entered a written
order formally vacating the Amended Restraining Notices,
staying the order pending appeal, and certifying the order
for appeal pursuant to 28 U.S.C. § 1292(b).[fn8]

We expedited the appeal. The United States and the FRBNY
have appeared before us as amici in support of the Republic
and BCRA.