This is not the latest Malbec-themed eco-lodge in Mendoza. The Supreme Court, led by Justice Scalia, determined in a 7-1 decision that Argentina’s hold-out creditors can use US courts to obtain information about the government’s assets all around the world. The case is called Republic of Argentina v. NML Capital (“NML”). NML was requesting information on the global transactions made for Argentina by Bank of America and Banco de la Nacion, including with individuals, defense ministries, subfederal governments, and more.
This information would be used to eventually attempt to ask courts (in the US and elsewhere) to attach Argentina’s assets to make up for what the creditors feel they are owed. In short, the Supreme Court’s authorized a global fishing expedition to find Argentine assets. This is an interesting contrast with the sharp limitations put on tax authorities using similar techniques to find laundered and tax-evaded income (see page 52 of this report, for instance).
NML is the latest in a long saga of investor and bondholder complaints related to steps that Argentina took following its 2001-02 financial crisis.
The case shows how US courts are becoming increasingly embroiled in sensitive foreign affairs issues. It comes on the heels of a March Supreme Court decision (BG Group PLC v. Republic of Argentina) that found that US courts will defer to investment arbitrators’ awards against sovereign states, even when (as Argentina and the Obama administration suggested in their losing argument) that the investor complainant hadn’t complied with the terms of the underlying investment treaty. Chief Justice Roberts, in a dissent, wrote that the majority “trivializes the significance to a sovereign nation of subjecting itself to arbitration anywhere in the world, solely at the option of private parties…”
The present case is a bit different.
First, the vote count differed. Justice Ginsburg went from joining the majority in BG to being the sole dissenter in NML. Roberts and Kennedy flipped from the minority to majority.
Second, the BG case put US courts in a passive role, that they would not correct potential errors of international arbitrators when the latter side with transnational investors. The NML case, in contrast, puts the full power of US courts in an active role on behalf of transnational investors.
Third, and related, NML is not related to an investment treaty (like BG), but rather to Argentina’s own government bonds, issued with clauses that allow bondholders to be submit complaints to US courts. A lower US court ruled last year that Argentina was obligated to pay out holdout bondholders, even though Argentina, the IMF and various governments argued that this would get in the way of orderly debt workouts. The Supreme Court refused to hear an appeal from that underlying complaint about the obligation to pay, but was willing to hear an appeal of a related decision about the types of documents that the creditors were entitled to.
There are similarities between NML and BG, beyond the fact that both involve Argentina and its financial crisis.
First, in both cases, the Obama administration took Argentina’s side on several major points, arguing that aggressive court-sponsored moves against sovereign countries could backfire against the US. In particular, it noted in the NML case that US law contains presumptions that sovereign assets are immune from the reach of plaintiffs in US courts, and that most countries don’t allow plaintiffs to demand that defendants produce massive amounts of internal documents (a process known in the US as “discovery”). Obama’s solicitor general argued that, unless NML could show that the documents it is requesting would be likely to lead to information about US-based assets that would be eligible for attachment under one of the exceptions under the US Foreign Sovereign Immunities Act, US courts should refuse wide-ranging discovery requests – especially on overseas assets. It argued that the FSIA was intended to lower the burden for sovereigns, at all stages of litigation. It clearly doesn’t want to have Argentine or Swiss authorities getting similar ideas about US assets.
Second, in both cases, what Richard Posner calls “legalism” trumped more contextual interpretation. Roberts, in his BG dissent, argued for some deference to sovereign governments, and Ginsburg did the same in NML. But they failed to persuade their colleagues. Argentina’s and Obama’s lawyers argued that the decisions would create repercussions in sovereign debt markets, and could even disrupt New York’s role as a favored location for governments to stash cash.
In both cases, the majority could avoid contemplating the broader context, and narrowly focus on legalistic issues. In Breyer’s BG opinion, he argued that the investment treaty wasn’t clear and US precedent was to defer to international arbitrators. In Scalia’s NML opinion, he could divorce the discovery proceedings from the foreign sovereign immunity questions, and reply that courts could determine – once the discovery process had yielded information – whether to attach any of these assets. He declaimed any court responsibility for weighing and balancing foreign policy considerations, and took a jab at the “political branches” (Congress and the executive) for creating enumerated exceptions to foreign sovereign immunity. He argued that this “forced our [the courts’] retirement from the immunity-by-factor-balancing business nearly 40 years ago”. If Obama is concerned about foreign policy blowback, he should get Congress to update the law, Scalia implied.
These decisions are plausible as a matter of law, as were the Obama administration’s arguments (both full of citations to precedent and legislative history).
But they also show a weakness in submitting fundamental political-economic questions to case-by-case adjudication. Judges don’t want to be blamed for balancing policy considerations and getting it wrong. They would rather “get it wrong” in a way that is at least legally defensible, which is usually a narrow decision without a lot of regard for context. They can always kick the difficult balancing act back to the other government branches. Of course, in an era of polarized politics, getting new legislation is not as easy as it used to be.
It’s a classic trilemma: you can have two of the three of adjudicator legalism, political gridlock, and context-sensitive policy, but not all three.