NML Capital v Rep of Argentina, 09 Civ. 7013 (S.D.N.Y. 2/15/11), represents another effort by a creditor owed money by Argentina attempting to recover its judgment against funds in the hands of Argentine entities other than the Republic of Argentina itself. Here the entity is called Energla Argentina SA, or ENARSA. The grounds for the action are that Argentina has “recoverable interests in” the funds held by the entities.

Here the District Court denied the effort and dismissed the complaint, but with leave to replead. The critical distinction made by the District Court concerning who could or could not recover under such circumstances presents an important principle in international practice and the principal-agent issues raised in our Part I posting on the subject of the principal-agency conundrum.

To recover against ENARSA, the complaint alleged that this “nominally independent sociedad anonima was in fact a “de facto administrative agency, a mere extension of the Argentine Ministry of Planning”. The complaint alleged that ENARSA sold natural gas at low prices for the benefit of Argentine citizens, that Argentina subsidizes ENARSA for its losses, that Argentina exercises control over ENARSA – indeed, Argentina “dictates the quantity, price of purchase, and price of sale of ENARSA’s natural gas transactions”, and that Argentina exercised both management and financial control over ENARSA.

Yet the District Court required more, based on the same U.S. Supreme Court decision, First National City Bank v. Banco Para El Comerciao Exterior De Cuba (Bancec), 462 U.S. 611 (1983), relied on by the District Court in our Part I posting.  Here the District Court found that the allegations concerning commercial activities (necessary to demonstrate subject matter jurisdiction under an exemption under the FSIA) and concerning personal jurisdiction generally depended on demonstration of the “pivotal question regarding alter ego”.  In Bancec, the Supreme Court addressed a “typical governmental instrumentality”, which the non-U.S. sovereign controls in ways quite similar to the ways Argentina was alleged to control ENARSA. The District Court here, however, ruled that more was needed to demonstrate the existence of a principal-agent “alter ego” – that is, for example, that the instrumentality was established to shield the sovereign from liability, or that the instrumentality ignored corporate formalities, or that the sovereign “directed the instrumentality to act on its behalf”, and it did so. Mere conduct as a controlling shareholder was not enough, thus suggesting that a principal-agent-plus standard was being applied.  And, the District Court here said, in other cases where courts have found the alter ego relationship to exist, the District Court found that the “foreign government intervened in the affairs of the instrumentality, sometimes with a deceptive purpose, to a degree more extreme that what is shown with regards to ENARSA”.  The District Court acknowledged that Argentina is engaged in “serious wrongdoing” by not paying the judgments; but it found the complaint deficient in alleging that “ENARSA has been used to further this objective”.

The complaint was therefore dismissed for want of subject matter and personal jurisdiction, with leave to replead.  And using the nomenclature of our previous posting, the District Court here appears clearly to be requiring principal-agency-plus, plus somewhat more.