The expropriation of YPF was a centerpiece of President Kirchner’s populist economic agenda. As the alter ego of the state, the business’ assets would be subject to seizure.

New Sanctions Filing by Creditors

Post date : 06.18.2015 6:37 pm

Argentina’s “willful disregard” of a discovery order issued by the U.S. District Court for the Southern District of New York merits sanctions, says a filing made today by creditor NML Capital.  That motion is based on orders by the District Court, the Second Circuit Court of Appeals and a U.S. Supreme Court ruling that issued in June 2014.

In the fall of 2013, the District Court ordered Argentina to produce documents regarding assets that could be used to satisfy their judgments, and inquiries that certain entities controlled by Argentina, including YPF, ENARSA and BCRA, are its alter egos.

Argentina, of course, appealed, claiming that the Foreign Sovereign Immunities Act (FSIA) grants broad immunities from discovery. This past December, the Second Circuit Court of Appeals affirmed “in all respects” the District Court’s original discovery order. (The Court of Appeals waited until the resolution of a related case in the U.S. Supreme Court, which last year confirmed that Argentina does not have immunities from discovery.)  Despite these rulings, Argentina refuses to comply with the court’s order and has not produced any documents.  In doing so, the Republic has now exposed itself to sanctions by the Court, including the requests by NML that:

– Argentina be forbidden from contesting assertions that the discovery sought to demonstrate, including that Argentina’s property in the U.S. is being used for commercial activity and that YPF, ENARSA, BCRA are not alter egos of the Argentine government.

– The court deems that Argentina has waived any privilege related to producing documents.

– Argentina and its counsel should compensate NML for the expense of bringing Argentina in compliance with the discovery.

Argentina’s behavior is nothing short of outrageous. It uses the U.S. courts’ valuable time and energy to appeal unfavorable rulings, and then when Argentina loses those appeals, it simply refuses to obey. Argentina’s lawless conduct undermines the foundation of the U.S. judicial system.

One of the sanctions sought by creditors would preclude Argentina from contesting NML’s alter ego claims and from asserting immunities. The filing says that this sanction is just because Argentina has “thwarted this inquiry by willfully withholding information that goes to the heart of the alter-ego question.”

Later, the filing lays out a series of findings as to that alter ego status:

1. Argentina’s property in the United States is being used for commercial activity in the United States;
2. High ranking officials of Argentina also act as high-ranking officers, directors, or employees of BCRA, ENARSA and YPF, and vice versa;
3. BCRA, ENARSA and YPF report to Argentina and act on its behalf, and vice versa;
4. BCRA, ENARSA and YPF use their assets for the benefit of each other and for the benefit of Argentina;
5. BCRA, ENARSA, and YPF are responsible for the debts and obligations of Argentina, and vice versa;
6. Argentina determines all the important policies of BCRA, ENARSA and YPF, including policies related to borrowing, repayment of debts, interest rate setting, lending guidelines, monetary policy, and the accumulation of foreign reserves; and
7. Argentina regularly reviews, negotiates, approves guarantees, and pays the debts and obligations of BCRA, ENARSA and YPF, and vice versa.         

Presuming these facts as true and precluding Argentina from contesting them gets creditors considerably closer to attaching the assets of these entities in order to satisfy their judgments. The expropriation of YPF was a centerpiece of President Kirchner’s populist economic agenda. As the alter ego of the state, the business’ assets would be subject to seizure.

That should provide a lot for President Kirchner and her lawyers at Cleary Gottlieb to think about.  Argentina’s strategy of ignoring court orders has not been a winning gambit for the country.  Deciding to default, rather than to negotiate, has been a self-inflicted wound on Argentina’s economy, creating an unnecessary mess for the next President.

The Economist recently stated “the next president will have to deal with bondholders if the country is to borrow at reasonable interest rates.” But it’s not too late for this President of Argentina to change course and to negotiate a settlement with creditors, which would immediately put an end to all of this.