Jay Newman is a former senior portfolio manager at Elliott Management and an author. He has some, cough, ‘history’ with Argentina.
In a bizarre wrinkle of fate, three American judges hold the fate of a nation in their hands. The United States Court of Appeals for the Second Circuit will soon decide whether a $16bn judgment against the Republic of Argentina should stand.
For reference: Argentina is negotiating a $20bn lifeline from the IMF, $16bn is more than a quarter of the government’s 2024 budget — and reserves are negative $6bn. If upheld, the ruling would scuttle president Javier Milei’s efforts to remake his country’s political system.
Fortunately for the Argentine people, the Second Circuit has ample grounds to vacate the lower court decision in Petersen vs Argentina — a case that never belonged in a New York court in the first place.
The judgment arose from Argentina’s 2012 expropriation of shares in Yacimientos Petrolíferos Fiscales (YPF), an Argentina-based energy company. The Argentine government was a minority shareholder at the time, but then-president Cristina Fernández de Kirchner’s administration accused YPF’s majority shareholder—Repsol, a Spanish company — of prioritising distributions to shareholders instead of reinvesting capital to develop oil and gas production from the recently discovered Vaca Muerta shale formation. Exercising its public policy prerogative, president Kirchner’s government found that Repsol’s failures threatened Argentina’s energy security and its economic independence.
Takings of property — whether by the exercise of eminent domain or imposition of regulatory restrictions — are actually business as usual for governments. It’s the very definition of sovereignty: governments make the rules governing property rights, investment, and legal recourse for actions that take place within their territory. In the US, the Fifth Amendment of the Constitution governs takings: private property shall not “be taken for public use, without just compensation.” American victims of eminent domain can sue in Federal court for compensation.
Argentina has a comparable framework. Complaints pursuant to Argentina’s 1977 General Expropriation Law are the exclusive remedy, and Article 28 prohibits legal actions outside of that process. Once the Kirchner government exercised its prerogative, shareholders of YPF had the right to seek compensation — and some did, utilising the General Expropriation Law framework. They could also have pursued arbitration under the Spain-Argentina bilateral investment treaty. For their own reasons, the Petersen plaintiffs decided to forum shop — and gamble on the possibility of bamboozling an American judge.
They’ve gotten lucky — until now.
Legal proceedings should have remained in Argentina, because the dispute is purely local — comprising a microcosm of Argentine society and politics. It touches on practically every facet of Argentine civic life, from its historical development, governmental powers, legal regime, substantive law, energy policy, and legislatively declared public interest. To wit:
• The Argentine legislature created YPF in 1922. It’s an Argentine corporation that operates in Argentina. It’s governed by Argentine law, and develops Argentina’s natural resources and supplies domestic energy;
• The claims arise under YPF bylaws and were brought by former YPF shareholders against other shareholders — a type of claim without precedent in Argentine law;
• Petersen — the company that owned the claims before the current plaintiffs acquired them in a secondary market transaction — was originally created, owned, and controlled by Argentine nationals;
• Argentine legislation and executive decrees authorised the expropriation, including express legislative findings of the public interest in ensuring a domestic supply of energy at reasonable cost;
• Victims of the expropriation have clear, viable remedies under the Argentine constitution, Argentina law, and treaty.
You’d do well to wonder how a senior US judge got sucked into the vortex of a dispute with a foreign nation having nothing to do with the US — and everything to do with Argentina. No matter: it’s now up to the Second Circuit to clean up the mess.
Litigation against governments sometimes involves tough judgment calls relating to jurisdiction and sovereign immunity. Not so here. It’s one thing for New York courts to judge a sovereign that agreed to be sued in New York: most dollar bond contracts for sovereign debt contain express waivers of immunity. Absent express agreement, the bar is high before American courts provide service to opportunistic litigants.
Whether American courts have legitimate basis for adjudicating disputes involving foreign sovereigns and foreign law is a matter of forum non conveniens and comity. Forum non conveniens invokes a court’s discretionary power to decline cases in which another jurisdiction or court has the right expertise. Baseline, cases involving novel questions of Argentina law relating to the government’s commercial obligations belong in Argentine courts.
More problematic, after finding Argentina to be an adequate “alternative forum for this litigation,” the judge ignored Argentina’s request that she reject the complaint as a matter of comity. According to the Second Circuit: “international comity takes into account the interests of the United States, the interests of the foreign state, and those mutual interests the family of nations have in just and efficiently functioning rules of international law.’’ A case in which the plaintiffs had multiple opportunities to seek redress — hinging entirely on the interpretation of Argentine law — only ever belonged where it began.
There’s more to this legal mischief.
Forum non conveniens and comity weren’t the only things the trial judge got wrong. New York law requires that when damages are measured in a foreign currency — like Argentine pesos — the judgment amount is converted into dollars by reference to the value of the local currency on the day judgment is entered (the judgment-day rule).
In a clear error, the judge calculated damages based on the value of the peso on the day of the breach (the breach-day rule). If the Second Circuit won’t tell a senior judge that she abused her discretion in getting forum non conveniens and comity wrong, it could obviate most of Argentina’s pain by correcting this purely legal error in calculating damages.
Because the peso has depreciated against the dollar over the 12 years since 2012, application of the judgement-day rule would produce an award vastly smaller than $16bn — closer, in fact, to $100mn. Calculating damages correctly is the low hanging fruit, since the Second Circuit will review the formula de novo. There’s no principled reason to coddle a judge who abused her discretion, but proper maths that produces a correct sum would be of considerable solace to Argentina and avoid fracturing Milei’s fragile peace.
It’s not only a matter of saddling Argentina with an unjust, crushing burden. As numerous — powerful — amicus briefs filed by the US government, four other sovereign nations, and legal scholars make clear, the credibility of US courts, and the US legal system is at issue.
Imagine the justifiable vitriol that would fill these pink pixels if Argentine courts — or those of other nations — opportunistically entertained lawsuits against the US based on events that took place here, governed by American law.
It can only end badly if the appellate court condones the profligate assertion of dominion over domestic disputes with foreign states — much less matters governed by a state’s own laws. The fate of one nation’s economic revitalisation project — and the probity of another’s judicial system — hang in the balance.
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