Facts
- Argentina created a Foreign Exchange Insurance Contract (FEIC) program to supply U.S. dollars to domestic borrowers for repayment of foreign debts despite currency devaluations.
- Lacking reserves to meet FEIC-related obligations, Argentina refinanced by issuing government bonds known as “Bonods.”
- The Bonods required payment of principal and interest in U.S. dollars and permitted payment by transfer in London, Frankfurt, Zurich, or New York at the creditor’s election.
- When the Bonods matured, Argentina unilaterally extended the payment schedule by presidential decree and offered substitute instruments to reschedule the debts.
- Bondholders rejected the rescheduling, demanded full payment, and elected New York as the place of payment.
- After Argentina declined to pay as demanded, the bondholders filed a breach-of-contract action in the Southern District of New York.
- Argentina and its central bank moved to dismiss based on sovereign immunity under the Foreign Sovereign Immunities Act (FSIA); the district court denied the motion, and the Second Circuit affirmed.
Issues
- Whether issuing and rescheduling the Bonods were acts “in connection with a commercial activity” under FSIA § 1605(a)(2), given Argentina’s asserted public-policy purpose.
- Whether Argentina’s unilateral rescheduling and resulting nonpayment had a “direct effect in the United States” under FSIA § 1605(a)(2) when the creditor elected New York as the place of payment.
Decision
- The Supreme Court unanimously affirmed the Second Circuit and held that the FSIA commercial-activity exception applied.
- Issuance of the Bonods was “commercial activity” because it was the type of market conduct a private party could undertake, and FSIA looks to the nature of the act, not its purpose.
- The unilateral rescheduling was an act taken “in connection with” that commercial activity.
- The rescheduling and nonpayment had a “direct effect in the United States” because payment was contractually performable in New York by the creditor’s election and nonpayment there was an immediate consequence of Argentina’s act.
- Argentina was not entitled to sovereign immunity, and the federal courts had jurisdiction under FSIA § 1605(a)(2).
Legal Principles
- Under FSIA, whether conduct is “commercial activity” turns on the nature of the act—whether it is the type of conduct by which private parties engage in trade or commerce—not the foreign state’s governmental or policy objectives.
- A foreign state acts commercially when it participates in the market as a private player rather than exercising regulatory or sovereign powers.
- For FSIA § 1605(a)(2), an effect is “direct” if it follows as an immediate consequence of the challenged act, without intervening contingencies.
- Nonpayment in the United States can constitute a “direct effect in the United States” when the contract makes the United States a place of performance (including by the creditor’s election) and the breach occurs there.
Conclusion
The Court held that Argentina’s bond issuance and unilateral rescheduling were commercial acts under the FSIA and that the resulting nonpayment in New York produced a direct U.S. effect, allowing the bondholders’ suit to proceed notwithstanding sovereign immunity.