Weltover, Inc. v. Republic of Argentina

• Decision Date: 13 August 1991
• Docket Number: D,No. 1446,1446
• Citation: 941 F.2d 145
• Parties: WELTOVER, INC.; Springdale Enterprises, Inc.; Bank Cantrade, A.G., Plaintiffs-Appellees, v. REPUBLIC OF ARGENTINA; Banco Central De La Argentina, Defendants-Appellants. ocket 91-7119.
• Court: U.S. Court of Appeals — Second Circuit

Page 145

941 F.2d 145

WELTOVER, INC.; Springdale Enterprises, Inc.; Bank

Cantrade, A.G., Plaintiffs-Appellees, v. REPUBLIC OF ARGENTINA; Banco Central De La Argentina,

Defendants-Appellants.

No. 1446, Docket 91-7119.

United States Court of Appeals,

Second Circuit.

Argued May 23, 1991.

Decided Aug. 13, 1991.

Richard J. Davis, New York City (Bonnie Garone, Allison Corey Miller, Weil, Gotshal & Manges, New York City, of counsel), for defendants-appellants.

Richard W. Cutler, New York City, for plaintiffs-appellees.

Before MESKILL, MINER and McLAUGHLIN, Circuit Judges.

McLAUGHLIN, Circuit Judge:

This appeal presents two issues of subject matter jurisdiction under the Foreign Sovereign Immunities Act of 1976 ("FSIA"). 28 U.S.C. §§ 1330, 1332(a)(2)-(a)(4), 1391(f), 1441(d), 1602-1611. We must first determine whether the act of a foreign sovereign in issuing debt instruments to foreign creditors for the stated purpose of controlling the nation's stock of foreign currency is "commercial activity" within the meaning of the FSIA. If it is Plaintiffs, Weltover, Inc. ("Weltover"), Springdale Enterprises, Inc. ("Springdale"), and Bank Cantrade, A.G. ("Bank Cantrade"), sued defendants, the Republic of Argentina ("Argentina" or "the Republic") and Banco Central de la Argentina ("Banco Central"), to recover principal and interest due on certain bonds ("Bonods") issued by defendants. Plaintiffs are holders of a number of these Bonods with a total face value in excess of $1.3 million. Weltover and Springdale are Panamanian corporations; Bank Cantrade is a Swiss bank. Each plaintiff elected, pursuant to a contractual option provided for in the Bonods, to have payment made in New York. Upon defendants' default, plaintiffs commenced the present action. Defendants moved to dismiss for lack of subject matter jurisdiction under the FSIA, lack of personal jurisdiction, and forum non conveniens. Judge Sprizzo denied these motions. Weltover, Inc. v. Republic of Argentina, 753 F.Supp. 1201 (S.D.N.Y.1991).

we must then consider whether that action has a sufficient nexus with the United States to justify the exercise of subject matter jurisdiction over the foreign sovereign in an American court.

Defendants now appeal just the district court's ruling that subject matter jurisdiction is proper under the FSIA. We have appellate jurisdiction pursuant to the "collateral order doctrine" of Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 545-47, 69 S.Ct. 1221, 1225-26, 93 L.Ed. 1528 (1949). See, e.g., Foremost-McKesson, Inc. v. Islamic Republic of Iran, 905 F.2d 438, 443 (D.C.Cir.1990) (denial of motion to dismiss for lack of subject matter jurisdiction under the FSIA is subject to interlocutory appeal under the "collateral order doctrine"). We affirm.

BACKGROUND

Argentina's economic woes provide the backdrop for this controversy. Since the 1970's, Argentina has accumulated vast public and private foreign debts. Because Argentine currency--which, prior to 1985, was based on the peso and is presently denominated in australs--is not accepted on the international market as a valid medium of exchange, Argentina depends on its reserves of United States dollars and other internationally recognized currencies to satisfy foreign debt.

The rapid accumulation of foreign debt in the 1970's began to deplete Argentina's reservoirs of internationally accepted currencies. To cope with this economic miasma, Argentina's Ministry of Economy adopted austere measures in the early 1980's. Banco Central, as the Central Bank of the Republic, was charged with implementing these economic and foreign exchange policies. Pursuant to the crisis-management measures adopted by the Ministry of Economy, Banco Central, in 1981, began adjusting the prevailing foreign exchange rates, which led to a severe devaluation of Argentina's local currency. Devaluation of local currency obviously made it more expensive for Argentine debtors to obtain needed foreign exchange to satisfy their debts.

To counter the devaluation problem, Banco Central implemented the Republic's Foreign Exchange Insurance Contract ("FEIC") program. The purpose of the FEIC was to provide a means by which private debtors could obtain the necessary U.S. dollars at a particular exchange rate, thus avoiding the devastating consequences of the continued devaluation of the local currency. Specifically, the FEIC allowed private Argentine debtors to pay Banco Central a pre-determined amount of local currency upon maturity of the foreign debt; Banco Central would issue the debtor the amount of U.S. dollars required to repay the foreign debt. The amount of local currency that the debtor was required to pay Banco Central was calculated at the exchange rate prevailing at the time the contract was executed, thereby lessening the impact upon the debtor of subsequent devaluations of the local currency.

This creative financing bought Argentina some time since the FEIC contracts did not come due until 1982. However, the continued economic crisis in Argentina found the Republic and Banco Central in 1982 with an insufficient stock of U.S. dollars to enable The Bonods--which are at issue here--provided for payment of principal and interest in U.S. dollars, with interest to be based on the London Interbank rate for Eurodollar deposits. Payment was to be made on either the New York, London, Frankfurt, or Zurich markets, at the election of the creditor. This refinancing program gave the foreign creditor the option of accepting the Bonods in satisfaction of the initial debt, thus releasing the private debtors and substituting defendants as the debtors, or maintaining the debtor/creditor relationship with the original Argentine debtor and accepting the Bonods as guarantees and the defendants as guarantors. For issuing some $1.3 billion in Bonods, Banco Central received a one-tenth of one percent service fee ($1.3 million) from the Secretariat of State for Finance to cover the service costs. Under Argentine foreign exchange regulations adopted by the Ministry of Economy, only Banco Central could pay the creditors in U.S. dollars.

                the private debtors to retire these old debts.   Defendants next decided to refinance these obligations by issuing two forms of debt instruments:  (1) bonds payable in U.S. dollars (Bonods), and (2) promissory notes
                

In the tumultuous years following issuance of these Bonods, Argentina's economic slide continued. On May 23, 1986, soon after initial payments of interest were made on the Bonods, the Republic determined that it was still unable to meet its foreign debt obligations. A Presidential Decree required the Ministry of the Economy to direct Banco Central to establish, yet again, alternative means to pay foreign debt instruments such as the Bonods. Pursuant to this Decree, Banco Central unilaterally extended the time for payments on the Bonods, labelling this a "rescheduling." Plaintiffs, holders of the Bonods, refused to accept this "rescheduling" of payment, and brought the present action to compel defendants to honor their obligations.

In denying defendants' motion to dismiss for lack of subject matter jurisdiction under the FSIA, the district court held that defendants' actions in issuing and "rescheduling" the Bonods fit within the "commercial activity" exception of section 1605(a)(2) of the FSIA. Weltover, 753 F.Supp. at 1205-07. Judge Sprizzo explored the nature of the act of issuing public debt and determined that it constituted "commercial activity." Id. at 1205-06. He went on to hold that there was a sufficient nexus between defendants' acts and the United States to justify the exercise of subject matter jurisdiction by an American court. Id. at 1206-07.

DISCUSSION

Traditional precepts of international law accord sovereign immunity to foreign countries and their agencies or instrumentalities. In its pristine form, the doctrine of sovereign immunity was absolute, but as governments increasingly entered the marketplace to undertake what had previously been private commercial enterprise, the doctrine began to erode. The FSIA now provides a means by which a foreign sovereign and its agencies or instrumentalities may be subjected to the jurisdiction of American courts. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434, 109 S.Ct. 683, 688, 102 L.Ed.2d 818 (1989). The Republic and Banco Central are foreign states within the meaning of the FSIA. See 28 U.S.C. § 1603(a) & (b). The parties do not dispute any of these basic principles.

The FSIA codifies the only exceptions to the traditional notion of absolute foreign sovereign immunity. See 28 U.S.C. §§ 1605-1607; see also H.R.Rep. No. 1487, 94th Cong., 2d Sess. 7, reprinted in 1976 U.S.Code Cong. & Admin.News 6604, 6605 ("House Report ") (FSIA codifies the "restrictive" theory of foreign sovereign immunity that was first adopted by the Department of State in the famous Tate Letter of 1952). When one of these exceptions applies, the foreign sovereign is stripped of immunity, and, pursuant to 28 U.S.C. § 1330(a), subject matter jurisdiction exists in the district court. See Amerada Hess Shipping Corp., 488 U.S. at 434, 109 S.Ct. at 688; Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 493, 103 S.Ct. 1962 We are called on to determine whether defendants' act of issuing the Bonods and subsequently failing to pay the bonds on time falls within the so-called "commercial activity" exception of the FSIA. 28 U.S.C. § 1605(a)(2). Specifically, section 1605(a)(2) provides:

                1971, 76 L.Ed.2d 81 (1983).   Whether the Republic and Banco Central may assert immunity thus turns on whether one of the FSIA's exceptions applies
                

(a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case--

....

(2) in which the action is based [i] upon a commercial activity carried on in the United States by the foreign state; or [ii] upon an act performed in the United...