The Argentine Central Bank is not an alter ego of the Republic of Argentina

In a case filed by holders of sovereign bonds in default aimed at satisfying favorable judgments by attaching the funds held by the Argentine Central Bank (Banco Central de la República Argentina, hereinafter the “Central Bank”), the United States Court of Appeals for the Second Circuit reversed Judge Griesa’s decision issued in 2013 which had resolved that the Central Bank is an alter ego of the Republic of Argentina and therefore could be subject to enforcement of the judgments passed against the Republic of Argentina.

1. Background: the attempts to collect by attaching Central Bank’s assets

The case in re: “EM Ltd. et. al. v. Banco Central de la República Argentina et. al.” was filed by holders of sovereign bonds issued in 1994. As a result of the economic, social and financial crisis occurred in Argentina at the end of year 2001 these bonds were defaulted on and comprised the universe of bonds which Argentina restructured in the 2005 and 2010 exchange offers.

The plaintiffs did not accept the exchange offers, which implied a haircut and/or a deferral, and decided to litigate instead to collect the full amount owed under such bonds. These creditors (holdouts) obtained judgments against Argentina in the US courts. For more information about the background, precedents and decisions issued by the US courts in the litigation between the holdouts and the Republic of Argentina (in re: “NML Capital, Ltd. v. Republic of Argentina”), please see our articles published in Marval News Nos 131, 133, 140 and 141.

This case is another attempt by the plaintiffs to enforce the judgments issued in their favor. They requested that the Central Bank be declared an “alter ego” of the Republic of Argentina, which would allow them to enforce their judgments through the Central Bank.  A favorable ruling would allow them to attach funds held by the Central Bank.

This is not the first time that the plaintiffs have attempted to collect their judgments against Argentina through the attachment of the Central Bank’s assets. Their first attempt was in 2005, soon after the Argentine Executive Branch issued Decrees Nos 1599/2005 and 1601/2005, which authorized the use of the freely available reserves (those which are held in excess of the amount needed to support Argentina’s monetary base) to pay obligations undertaken with international monetary authorities, and provided for the repayment of Argentina’s debt with the International Monetary Fund, respectively. Please see our articles published in Marval News Nos 91 and 92 for more information on the background related with the use of the Central Bank reserves for the repayment of sovereign debt.

To support their first attempt, the plaintiffs claimed that those decrees implied a transfer of property of funds from the Central Bank to pay debts of the Republic of Argentina. In 2007, the Court of Appeals rejected the request. While this first case was pending the plaintiffs filed a separate action seeking a declaratory judgment that the Central Bank was liable for Argentina’s debts since the Central Bank was Argentina’s alter ego, and also requested attachment orders over the funds held by the Central Bank in its account with the Federal Reserve Bank of New York (“FRBNY”). This second case was also rejected by the Court of Appeals on the grounds that those funds were protected by the immunity of execution under the Foreign Sovereign Immunities Act (“FSIA”).

Unlike the two former cases, this third claim was set out by the plaintiffs more broadly given that here their aim was to obtain a judgment which would enable them to attach any asset of the Central Bank –not only the funds deposited with the account in FRBNY-, in any jurisdiction –not only New York, and even outside of the United States-.

2. The debate revolving round the sovereign immunity; Judge Griesa’s ruling

The plaintiffs argued that the Central Bank had waived its sovereign immunity on two grounds. First, they alleged that there was an implied waiver by the Central Bank because, as Argentina’s alter ego, it should be deemed that Argentina’s express waiver of immunity in the Fiscal Agency Agreement which governs the bonds should be imputed to the Central Bank. Second, they alleged that the Central Bank waived its immunity by engaging in “commercial activity” in New York through its FRBNY account.

Under the FSIA, the rule is that foreign states and their agencies or instrumentalities (such as the  Central Bank,) are immune from the jurisdiction, attachment and execution by the US courts unless an exception provided in the FSIA applies. The discussion in this case was focused on two exceptions provided under such law, where the foreign state and/or its instrumentality lose their immunity. The first one is the express waiver exception to invoke its sovereign immunity; and the second one is the exception applying when the claim is based on a commercial activity carried out in the United States.

By means of a decision dated September 26, 2013, Judge Griesa granted a favorable decision to plaintiffs concluding that the Central Bank had waived its sovereign immunity on the grounds that two exceptions provided under the law applied. The Judge resolved that: (i) the express waiver made by the Republic of Argentina in the Fiscal Agency Agreement which governs the bonds shall be imputed to the Central Bank for being Argentina’s alter ego; and (ii) the use of the account by the Central Bank constituted “commercial activity” in the United States as provided by the FSIA.

3. The Court of Appeals’ ruling

In a decision dated August 31, 2015, the Court of Appeals reversed Judge Griesa’s ruling.

To issue this decision, the Court of Appeals focused on whether Judge Griesa had erred in concluding that the Central Bank had waived its sovereign immunity. For such purposes, the Court of Appeals analyzed whether the two alleged exceptions under the law were applicable to this case given that, if they are not applicable, as a rule the Central Bank was entitled to invoke its sovereign immunity.

a. Express waiver exception: the alter ego doctrine and the Bancec test

With respect to the first exception, the Court of Appeals analyzed if the waiver to invoke sovereign immunity by the Republic of Argentina under the agreement governing the bonds could be imputed to the Central Bank.

To determine if an instrumentality of a foreign state turns into the alter ego of that state for the purposes of such instrumentality is liable for the claims against the sovereign, the Court of Appeals considered that the case had to be studied in light of the standards set by the United States Supreme Court in the precedent “First National City Bank v. Banco para el Comercio Exterior de Cuba” of year 1983, known as the Bancec case.

In the Bancec precedent, the Supreme Court recognized a “presumption of separateness”: a foreign government’s instrumentality established as a separate legal entity and independent from its sovereign, shall be treated as such, except if there is evidence that determines an “alter ego” relationship between the instrumentality and the sovereign which created it. As provided by the Supreme Court, the presumption may be overcome; therefore, an alter ego relationship may be established only if the two following requirements are met:

i) if the instrumentality is so extensively controlled by the sovereign that a relationship of principal and agent is created; and

ii) if the recognition of an instrumentality separate legal status would imply a fraud or injustice.

The Court of Appeals ruled that neither of these requirements were met in this case, and therefore the Bancec test was not satisfied.

The first requirement under the test is aimed at measuring the level of control exercised by the sovereign over the instrumentality. To meet such requirement, an intense evidence scrutiny is needed to find out if there is a significant and repeated control over the day-to-day operations of the instrumentality. In this case, the plaintiffs alleged aspects related to the appointment and removal of the Central Bank’s authorities, with the issuance of the decrees which enabled the use of the Central Bank reserves to pay sovereign debt and with the coordination of activities towards the implementation of an inflationary monetary policy. The Court of Appeals considered that these allegations were not sufficient to convince the tribunal of the existence of a “significant control” by the sovereign over the Central Bank with a control over the daily operations – as required by the Bancec test. The Court of Appeals ruled that most of the activities alleged by the plaintiffs are carried out habitually by most of the central banks.

With respect to the second requirement, the Court of Appeals concluded that it was neither evidenced that recognizing a separate legal status to the Central Bank would imply fraud or injustice, and pointed out that the purpose of this second aspect is to prevent the abuse of the corporate form by a sovereign. The Court of Appeals decided that the allegations of the plaintiffs were not enough to evidence this, in contrast with the flagrant frauds occurred in other cases such as Bancec, where Cuba had resolved to dissolve the bank and take complete control of its assets in 1961.

Consequently, given that the presumption that the Central Bank and Argentina are separate legal entities was not rebutted, the Court of Appeals concluded that the Central Bank does not constitute an “alter ego” of the Republic of Argentina for the purposes of this case. Therefore, the express waiver exception is not applicable.

b. Commercial activity exception

The Court of Appeals considered that the second exception to the Central Bank’s sovereign immunity alleged by the plaintiffs only applied when there is a certain degree of closeness between the gravamen claimed and the commercial activities performed in the territory of the United States by the foreign state or the instrumentality in discussion.

In this case, the gravamen alleged by the plaintiffs was that the Central Bank, as Argentina’s alter ego, should be deemed liable for the payment of the judgments related to the defaulted sovereign bonds.  The only commercial activity specified of the Central Bank in the claim was the use of its account in FRBNY to purchase US dollars, which were afterwards granted as a loan to Argentina who used them to pay other creditors, but not the plaintiffs.

The Court of Appeals resolved that the nexus between the gravamen and the commercial activity of the Central Bank in the United States was incidental, and was not enough to rebut the presumption under the FSIA which grants immunity to foreign states and their instrumentalities.

Additionally, the ruling stated that if the theory of the plaintiffs is adopted, the scope of the exception of immunity based on commercial activity will be expanded. This circumstance would weaken the immunity of jurisdiction or attachment traditionally recognized to foreign states instrumentalities; therefore, could result in the undesired effect that the foreign central banks withdraw their reserves from the United States to deposit them in other countries, with a negative impact on the economy of the United States and the global financial system.

Consequently, the Court of Appeals resolved that the Central Bank is entitled to invoke its own sovereign immunity as a defense, and neither exception to its immunity is applicable to this case. It reversed Judge Griesa’s decision and remanded the case instructing him to dismiss the plaintiff’s complaint.