Court Rules Argentine Central Bank Reserves Immune

H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication by Sergio J. Galvis and Joseph E. Neuhaus. Sullivan & Cromwell represented the Central Bank of Argentina in the case which is discussed below.

In an important sovereign immunity decision, the United States Court of Appeals for the Second Circuit recently ruled that the immunity provided to central bank assets in the Foreign Sovereign Immunities Act (the “FSIA”) does not depend on whether the central bank is “independent” from the parent state. Rather, ruling on an issue of first impression, the Court held that the immunity depends only on whether the assets are used for “central banking functions.” The Court therefore vacated attachments that bondholders of the Republic of Argentina had obtained on approximately $100 million of reserves of the Central Bank of Argentina (known by its initials in Spanish as “BCRA”) held at the Federal Reserve Bank of New York (the “FRBNY”). NML Capital, Ltd. v. Banco Central de la República Argentina, No. 10-1487- cv(L), — F.3d —, 2011 WL 2611269, at *19-20 (2d Cir. July 5, 2011). Sullivan & Cromwell LLP represented BCRA in the case.


In December 2001, in the midst of a severe financial crisis, Argentina defaulted on certain of its sovereign debt obligations. The plaintiffs in the case, NML Capital, Ltd. and EM Ltd., are hedge funds that acquired bonds during the period surrounding the default. Suing in the United States District Court for the Southern District of New York, the bondholders obtained judgments against Argentina based on the Republic’s waiver of its sovereign immunity in the instruments underlying the bonds. The bondholders then sought to enforce the judgments by moving to attach the central bank’s reserves held at the FRBNY.

The FSIA’s so-called “central bank exemption,” 28 U.S.C. § 1611(b)(1), provides that the property of a foreign state is immune from attachment and execution if “the property is that of a foreign central bank or monetary authority held for its own account, unless such bank or authority, or its parent foreign government, has explicitly waived” the central bank’s immunity. The plaintiffs sought to avoid this exemption based principally on an “alter ego” theory. In a 1983 decision known as “Bancec,” the United States Supreme Court held that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such,” and that one cannot ordinarily be held liable for the debts of another. [1] The Court held that this rule could be disregarded, however, (1) “where a corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created”; and (2) where recognizing the instrumentality’s separate status “would work fraud or injustice.” [2]

In April 2010, the trial court granted plaintiffs’ motion to attach the central bank’s account at the FRBNY, finding that the government of Argentina exercised pervasive control over BCRA and its assets, and had engaged in “fraud and injustice” in refusing to pay on the bonds, so as to meet the Bancec test. [3] This, the trial court held, meant that “the funds in the account were in reality the funds of the Republic” and thus were not “‘held for [the central bank’s] own account’ within the meaning of § 1611.” [4]

The Second Circuit’s Decision

The Court of Appeals for the Second Circuit (which encompasses New York and other Northeastern states) reversed the lower court and vacated the attachments.

In an opinion by Judge José A. Cabranes, the Court disagreed that “a court facing the question of whether the assets of a central bank are attachable property under the FSIA must first decide whether the central bank is entitled to the presumption of independence from its parent state under Bancec.” [5] Rather, the Court held that the central bank exemption, § 1611(b)(1), “immunizes property of a foreign central bank or monetary authority held for its own account without regard to whether the bank or authority is independent from its parent state pursuant to Bancec.” [6] Analyzing the text and legislative history of the statute, the Court reasoned that “the statute seems to anticipate the possibility that property held by the central bank may also be property of the sovereign state.” [7] Moreover, the Court observed, “when Congress passed the FSIA, it had no reason to believe that foreign central banks and monetary authorities would be independent of their parent states because, at that time, most were not.” [8] Indeed, the Court noted that, “by some calculations” BCRA is “more independent than the Federal Reserve System, the central bank of the United States, and more independent than the Bank of England.” [9] Citing the FSIA’s legislative history, the Court reasoned that “it makes no sense to assume that Congress would enact a statute designed to prevent ‘significant foreign relations problems’ which failed to immunize a significant portion of the central bank reserves in the United States at that time.” [10]

The Court also held that the central bank reserves at issue in this case constitutes property of a central bank “held for its own account” under § 1611(b)(1). Every lower court that had interpreted the phrase “held for its own account” applied a “central bank activities test” derived from the FSIA’s legislative history. The Second Circuit established the following, slightly modified test for determining whether specific property is owned by a central bank and “held for its own account”:

Where funds are held in an account in the name of a central bank or monetary authority, the funds are presumed to be immune from attachment under § 1611(b)(1). . . . A plaintiff, however, can rebut that presumption by demonstrating with specificity that the funds are not being used for central banking functions as such functions are normally understood, irrespective of their “commercial” nature. [11]

In this case, the record clearly established that the funds that had been attached at the FRBNY were accumulated in order to purchase pesos as part of BCRA’s efforts to control the value of its currency or were deposited as part of the dollar reserves that Argentine commercial banks are required to maintain. The Court held that “the accumulation of reserves to facilitate the regulation of the peso and the custody of cash reserves of commercial banks pursuant to central banking regulations are paradigmatic central banking functions.” [12]


The Second Circuit’s decision makes for a more predictable legal environment for foreign central banks that choose to maintain reserves in New York and presents a significant obstacle to creditors of a country who look to central bank assets in the United States to collect on unpaid judgments. The test that assets have been used for “central banking functions as such functions are normally understood” is a broad one. The Court specifically held that it could encompass commercial activity. [13] The Court noted that, in addition to the peso-regulating and reserve-holding functions of the actual dollars attached, BCRA’s account at the FRBNY had been used in the period leading up to the attachment for: currency settlement services for domestic Argentine banks, transfers on behalf of the Republic to international organizations such as the IMF and to Argentine missions abroad, transfers to certain foreign business service providers for expenses incurred by the Republic, and payments BCRA made on its own behalf for U.S. dollardenominated operating expenses such as purchasing currency paper. [14] It seems likely that each of these also meets the “central banking functions” test.

The decision also reinforces the preeminent role of the FRBNY as a holder of foreign dollar reserves. Indeed, both the FRBNY and the United States Government filed amicus briefs urging reversal. The FRBNY noted that it provides accounts for approximately 250 foreign central banks and monetary authorities, which hold nearly $3 trillion, representing more than half of the worldwide U.S. dollardenominated reserves. [15] The record in this case showed that BCRA had reduced its assets in the United States in part out of a concern that even a temporary attachment would disrupt its ongoing operations. This ruling by the Second Circuit – the jurisdiction in which the FRBNY operates – provides a greater level of assurance that central bank reserves will be protected from attachment by the parent state’s creditors.


[1] First National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 626-27 (1983).
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[2] Id. at 629-633.
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[3] EM Ltd. v. The Republic of Argentina, 720 F. Supp. 2d 273, 296-304 (S.D.N.Y. 2010).
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[4] Id. at 303-04 (quoting 28 U.S.C. § 1611(b)(1).
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[5] NML Capital, Ltd., 2011 WL 2611269, at *10.
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[6] Id.
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[7] Id. at *11.
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[8] Id. at *13.
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[9] Id. (emphasis in original).
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[10] Id. (citations omitted).
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[11] Id. at *17.
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[12] Id. The court also found that the Republic’s waiver in the bond instruments did not “‘clearly and unambiguously’” waive BCRA’s own immunity from attachment, as the court held was required for an effective waiver of central bank immunity under § 1611(b)(1). Id. at *18 (quoting EM Ltd. v. Republic of Argentina, 473 F.3d 463, 485 n.22 (2d Cir. 2007), cert. denied, 128 S. Ct. 109 (2007)).
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[13] 2011 WL 2611269, at *20.
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[14] Id. at *2 n.8.
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[15] Id. at *2 n.7.
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