Source: https://corpgov.law.harvard.edu/2011/08/03/court-rules-argentine-central-bank-reserves-immune/
Timestamp: 2019-04-23 22:29:14+00:00

Document:
H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication by Sergio J. Galvis and Joseph E. Neuhaus. Sullivan & Cromwell represented the Central Bank of Argentina in the case which is discussed below.
In an important sovereign immunity decision, the United States Court of Appeals for the Second Circuit recently ruled that the immunity provided to central bank assets in the Foreign Sovereign Immunities Act (the “FSIA”) does not depend on whether the central bank is “independent” from the parent state. Rather, ruling on an issue of first impression, the Court held that the immunity depends only on whether the assets are used for “central banking functions.” The Court therefore vacated attachments that bondholders of the Republic of Argentina had obtained on approximately $100 million of reserves of the Central Bank of Argentina (known by its initials in Spanish as “BCRA”) held at the Federal Reserve Bank of New York (the “FRBNY”). NML Capital, Ltd. v. Banco Central de la República Argentina, No. 10-1487- cv(L), — F.3d —, 2011 WL 2611269, at *19-20 (2d Cir. July 5, 2011). Sullivan & Cromwell LLP represented BCRA in the case.
In December 2001, in the midst of a severe financial crisis, Argentina defaulted on certain of its sovereign debt obligations. The plaintiffs in the case, NML Capital, Ltd. and EM Ltd., are hedge funds that acquired bonds during the period surrounding the default. Suing in the United States District Court for the Southern District of New York, the bondholders obtained judgments against Argentina based on the Republic’s waiver of its sovereign immunity in the instruments underlying the bonds. The bondholders then sought to enforce the judgments by moving to attach the central bank’s reserves held at the FRBNY.
The Court of Appeals for the Second Circuit (which encompasses New York and other Northeastern states) reversed the lower court and vacated the attachments.
The Second Circuit’s decision makes for a more predictable legal environment for foreign central banks that choose to maintain reserves in New York and presents a significant obstacle to creditors of a country who look to central bank assets in the United States to collect on unpaid judgments. The test that assets have been used for “central banking functions as such functions are normally understood” is a broad one. The Court specifically held that it could encompass commercial activity.  The Court noted that, in addition to the peso-regulating and reserve-holding functions of the actual dollars attached, BCRA’s account at the FRBNY had been used in the period leading up to the attachment for: currency settlement services for domestic Argentine banks, transfers on behalf of the Republic to international organizations such as the IMF and to Argentine missions abroad, transfers to certain foreign business service providers for expenses incurred by the Republic, and payments BCRA made on its own behalf for U.S. dollardenominated operating expenses such as purchasing currency paper.  It seems likely that each of these also meets the “central banking functions” test.
The decision also reinforces the preeminent role of the FRBNY as a holder of foreign dollar reserves. Indeed, both the FRBNY and the United States Government filed amicus briefs urging reversal. The FRBNY noted that it provides accounts for approximately 250 foreign central banks and monetary authorities, which hold nearly $3 trillion, representing more than half of the worldwide U.S. dollardenominated reserves.  The record in this case showed that BCRA had reduced its assets in the United States in part out of a concern that even a temporary attachment would disrupt its ongoing operations. This ruling by the Second Circuit – the jurisdiction in which the FRBNY operates – provides a greater level of assurance that central bank reserves will be protected from attachment by the parent state’s creditors.
 First National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 626-27 (1983).
 EM Ltd. v. The Republic of Argentina, 720 F. Supp. 2d 273, 296-304 (S.D.N.Y. 2010).
 Id. at 303-04 (quoting 28 U.S.C. § 1611(b)(1).
 NML Capital, Ltd., 2011 WL 2611269, at *10.
 Id. The court also found that the Republic’s waiver in the bond instruments did not “‘clearly and unambiguously’” waive BCRA’s own immunity from attachment, as the court held was required for an effective waiver of central bank immunity under § 1611(b)(1). Id. at *18 (quoting EM Ltd. v. Republic of Argentina, 473 F.3d 463, 485 n.22 (2d Cir. 2007), cert. denied, 128 S. Ct. 109 (2007)).
 2011 WL 2611269, at *20.

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