Republic of Argentina v. Weltover, Inc.
119 L. Ed. 2d 394, 504 U.S. 607, 1992 U.S. LEXIS 3542 (1992)
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Rule of Law:
A foreign state's issuance of debt instruments is a "commercial activity" under the Foreign Sovereign Immunities Act (FSIA). A subsequent failure to pay on that debt, when the designated place of payment is in the United States, constitutes an act causing a "direct effect in the United States" sufficient to waive sovereign immunity under the FSIA's commercial activity exception.
Facts:
- To stabilize its currency, the Republic of Argentina created a program in 1981 to assume the risk of currency depreciation for Argentine borrowers in foreign transactions.
- When Argentina lacked sufficient U.S. dollar reserves in 1982, it refinanced these debts by issuing government bonds called "Bonods," which were payable in U.S. dollars.
- The Bonods allowed creditors to elect London, Frankfurt, Zurich, or New York as the place of payment.
- Respondents, two Panamanian corporations and a Swiss bank, held $1.3 million in Bonods and designated New York as the place for payment.
- Argentina made some interest payments into the respondents' New York bank accounts.
- In May 1986, when the Bonods matured, Argentina concluded it lacked sufficient foreign exchange and unilaterally extended the time for payment via a Presidential Decree.
- Argentina subsequently failed to pay the principal on the respondents' Bonods in New York as required by the terms of the bonds.
Procedural Posture:
- Respondents sued the Republic of Argentina and its central bank in the U.S. District Court for the Southern District of New York for breach of contract.
- Argentina moved to dismiss for lack of subject-matter jurisdiction under the Foreign Sovereign Immunities Act (FSIA), lack of personal jurisdiction, and forum non conveniens.
- The District Court, a court of first instance, denied Argentina's motions.
- Argentina, as appellant, appealed the decision to the U.S. Court of Appeals for the Second Circuit, an intermediate appellate court.
- The Court of Appeals affirmed the District Court's decision, holding that jurisdiction was proper.
- The U.S. Supreme Court granted Argentina's petition for a writ of certiorari to review the appellate court's decision.
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Issue:
Does a foreign state's unilateral rescheduling of debt payments on bonds denominated in U.S. dollars and contractually payable in New York constitute an act taken "in connection with a commercial activity" that causes a "direct effect in the United States," thereby stripping the foreign state of sovereign immunity under the Foreign Sovereign Immunities Act?
Opinions:
Majority - Justice Scalia
Yes. A foreign state's unilateral rescheduling of debt on bonds payable in New York is an act connected with a commercial activity that causes a direct effect in the United States, subjecting the state to suit under the Foreign Sovereign Immunities Act (FSIA). The court's reasoning is twofold. First, the issuance of debt is a "commercial activity." The FSIA mandates that the character of an activity be determined by its 'nature,' not its 'purpose.' While Argentina's purpose was sovereign (to stabilize its economy), the nature of issuing debt is an activity regularly engaged in by private parties in the marketplace. Second, the default had a "direct effect" in the United States. A "direct effect" is an immediate consequence of the defendant's activity and does not need to be "substantial" or "foreseeable." Because New York was the designated place of performance for the contractual obligations, Argentina's failure to remit payment to the designated New York bank accounts was an immediate consequence of its default.
Analysis:
This decision significantly clarifies two key elements of the FSIA's commercial activity exception. By strictly enforcing the 'nature' over 'purpose' test, the Court established that when a sovereign state enters the private marketplace, it will be treated like a private actor, regardless of its public policy motivations. Furthermore, the Court provided a clear and broad definition of "direct effect," rejecting a more stringent standard and focusing simply on whether the U.S. was the place of contractual performance. This ruling makes it significantly easier for creditors to sue foreign governments in U.S. courts for defaulting on debt instruments payable in the United States, thereby strengthening New York's position as a global financial center.
