In EM Ltd. v. Republic of Argentina, No. 11-4065-cv(L), the US Court of Appeals for the Second Circuit addresses questions of sovereign immunity and third-party discovery that are of interest to the international banking community. The court held that a judgment creditor of a foreign sovereign was entitled to discovery about the overseas assets of the judgment debtor (and that banks were required to comply with subpoenas seeking that information), even if the assets might be exempt from execution under the Foreign Sovereign Immunities Act (FSIA). 

The decision is the latest episode in a decade-long effort by NML Capital, a unit of hedge fund Elliot Management, to collect on approximately $1.6 billion of judgments arising from Argentina’s 2001 bond default.1 NML Capital had issued subpoenas to two banks, seeking to identify Argentine assets located outside of the United States. Argentina, joined by one of the banks, moved to quash. 

In the district court, Judge Griesa of the Southern District of New York denied a motion to quash, and required the parties to limit the requests to those reasonably expected to lead to attachable property. Argentina appealed, arguing that any discovery relating to non-US assets would violate the FSIA. Without reaching the unanswered question of whether the FSIA extends immunity to property held outside the United States, the Second Circuit held that discovery regarding such assets was proper, regardless of whether a New York court ultimately could order their turnover.2

At the outset, Judge Walker of the Second Circuit noted that both federal and New York courts permit broad post-judgment discovery in aid of execution, including discovery from third parties, even as to assets located outside the jurisdiction. The opinion then set forth two reasons why the discovery order did not infringe on sovereign immunity.3

First, the district court had permitted only discovery, not the attachment of sovereign property. The power to order discovery, the Second Circuit reasoned, does not depend on the ability to attach the property, but arises “from [the court’s] power to conduct supplementary proceedings, involving persons indisputably within its jurisdiction, to enforce valid judgments.”4

The court expressly rejected a Seventh Circuit rule that prohibits discovery into foreign sovereign assets unless a judgment creditor can identify specific assets and demonstrate that the assets are subject to execution under the FSIA.5 The court also distinguished its own ruling in an earlier iteration of this case, EM Ltd. v. Republic of Argentina, 473 F.3d 463 (2d Cir. 2007). That opinion, which addressed NML Capital’s efforts to attach assets of the Argentine central bank, was “primarily about attachment,” not discovery. The Second Circuit had denied discovery in that decision only because the central bank’s assets did not belong to the judgment-debtor Republic of Argentina, not because the assets were immune under the FSIA. 

Second, the Second Circuit ruled that the discovery did not implicate sovereign immunity because it was directed at third-party banks, not at Argentina itself. The assertion that the subpoenas would reveal sensitive information was an assertion not of sovereign immunity, but of privilege, which the FSIA does not protect. The court noted that a protective order and other mechanisms under the Federal Rules would adequately protect confidentiality.

This new ruling by the Second Circuit conflicts with the decision of the Seventh Circuit in Rubin v. Islamic Republic of Iran, 637 F.3d 783 (7th Cir. 2011). In departing from the reasoning of the Seventh Circuit, the Second Circuit has opened a new door for discovery from non-party banks with New York offices, albeit one that is limited to judgment creditors of foreign sovereigns. The court also rejected the proposition that identical principles govern the turnover of assets, and discovery for purposes of seeking turnover. It is possible that the Supreme Court may be called upon to resolve this apparent split of authority between the Circuits.

For more information, please contact Mark Hanchet at +1 212 506 2695 or Christopher Houpt at +1 212 506 2380.

1 NML Capital did not participate in a restructuring that was accepted by the majority of the investors.
2 Id. at *5.
3 Argentina had waived sovereign immunity in the bond indentures, allowing the court to “exercise its judicial power over Argentina as over any other party.”  Id. at  *6. 
4 Id. at *5.
5 Rubin, 637 F. 3d at 796.