Amicus Curiae Brief — Grupo Mexicano De Desarrollo, SA v. Alliance Bond Fund, Inc.

Supreme Court, U.S.

FILED

0. 98-231 JAN 14 1

N

CLERK

IN THE

Supreme Court of the United States

OcToBER TERM, 1998

GRUPO MEXICANO DE DESARROLLO, S.A.; DESARROLLO

DE INFRAESTRUCTURA, S.A. DE C.V.; OBRAS Y

PROYECTOS, S.A. DE C.V.; DESARROLLO URBANO

INTEGRAL, S.A. DE C.V. and DESARROLLO INDUSTRIAL

LATINO AMERICANO, S.A. DE C.V.,

Petitioners,

vs.

ALLIANCE BOND FUND, INC.; ALLIANCE WORLD DOLLAR

GOVERNMENT FUND II, INC.; ALLIANCE GLOBAL DOLLAR

GOVERNMENT FUND, INC.; ELLIOT ASSOCIATES, L.P.;

AVALON TOTAL RETURN FUND, L.P.; THE VARDE FUND,

L.P.; THE VARDE FUND II-A, L.P.; THE VARDE FUND II-B,

L.P.; THE VARDE FUND III-A, L.P.; THE VARDE FUND III-B,

L.P. and THE VARDE FUND IV-A, L.P.;

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF OF AMICUS CURIAE THE DOMINICAN

DANIEL W. KRASNER

Counsel of Record

ERIC B. LEVINE

WOLF HALDENSTEIN ADLER

FREEMAN & HERZ LLP

Attorneys for Amicus Curiae

270 Madison Avenue

New York, New York 10016

(212) 545-4600

QUESTION PRESENTED

Should a United States district court be restrained by

principles of comity from issuing a preliminary injunction

freezing property of a foreign defendant outside the United

States that is unrelated to the plaintiff's claim, when the basis

of the injunction is the defendant’s payment of bona fide claims

of foreign creditors in accordance with the debtor-creditor laws

of the defendant’s foreign sovereign?

TABLE OF CONTENTS

Question PresemteG . oo. cceccsestebeun enn

Table ef Comeeets nc cccccuéeuseueueee

Tabdle of Cited Amthorities ...iccccccedtccheusann

Interest of the Ameicus Curige ....cccccccccccscccs

Introduction and Summary of Argument ...........

Argument

eeeaeseaoees eoeenegcua eu egc Bees ee 2 2 See ee ee

The Exercise Of Judicial Power Beyond A Court’s

National Boundaries Must Be Constrained By

Principles Of Coaaity. ... 0s 0ss00beeeemeneee

A.

Every Nation Enjoys The Right To Exercise

Sovereign Power Within Its Territorial

BDOURGRTIGS .. nc ccccscketdesunueneeen

Exercising Judicial Remedies Extraterritorially

Implicates Principles Of Foreign Sovereignty

And International Comity .............

Exercising Judicial Control Over

Extraterritorial Assets In The Context Of A

Financially Troubled Foreign Company

Threatens To Conflict With Local Authority

And Reorganization Regimes ..........

Conclusion

Contents

Extraterritorial Application Of Such

Injunctions With Respect To Foreign

Sovereign Assets Would Undermine The

TPP iin debe bebbcaeakssecccesce

The Existence Of Jn Personam Jurisdiction

Does Not Alleviate The Need To Consider

Principles Of Comity .................

Page

16

iv

TABLE OF CITED AUTHORITIES

Page

Cases:

Amey v. Colebrook Guaranty Sav. Bank, 92 F.2d 62 (2d

Gh De - dds chadensdubcdeukis Cleese 20

Asahi Metal Industry Co. v. Superior Court, 480 U.S.

See GOD 0.6066 cunbobundnwedelteeni 3, 18

Babanaft Int'l Co. S.A. v. Bassatne [1990] Ch 13 (Eng.

Sal cctreecddb chante send duntesesoweaa 21

Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398

SUED nccondtvnanuneenk kee beta 3

Chemical Bank v. Haseotes, 13 F.3d 569 (2d Cir. 1994)

1s pabde Cannes hie aenind cae Gel dane 13

Derby & Co. v. Weldon [1990] Ch 48 (Eng. C.A.) ... 21

Derby & Co. v. Weldon (nos. 3 and 4) [1990] Ch 65 (Eng.

Gola. canacedadshh Sone deeb ee 21

EEOC vy. Arabian Am. Oil Co., 499 U.S. 244 (1991) .. 7

Hilton v. Guyot, 159 U.S. 113 (1895) .............. 3, 6,8

McCulloch v. Sociedad Nacional de Marineros de

Honduras, 372 U.S. EE Bett ie Berens 7

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

i, Gre Ges Ge on cdderarcsrnudecnsin: 9

Cited Authorities

Page

Murray v. Schooner Charming Betsy, 6 U.S. [2 Cranch]

Ge EN ab 0c Stas ebieccdedicacweteccnees 20

Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981) .... 9

Republic of Haiti v. Duvalier [1990] QB 202 (Eng.

SoD KcccccecedudancessakduGananeaereestues 21

Romero v. International Terminal Operating Co., 358

ek SO EE <6 cue eusensuduebesert desebbous 8,9

Société Nationale Industrielle Aérospatiale v. United

States District Court, 482 U.S. 522 (1987) .... 3, 8, 16, 19

Steele v. Bulova Watch Co., 344 U.S. 280 (1952) .... 7

The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972)

epidesu uatee etal Weuhta was astese bun evades 9

The Paquete Habana, 175 U.S. 677 (1900) ......... 6

The Schooner Exch. v. McFaddon, \\ U.S. [7 Cranch]

PEED. «db, Un ca 86 bGbencee Ebbets vane lanct 6,9

Ultramar Energy Ltd. v. Chase Manhattan Bank, N.A.,

599 N.Y.S. 2d 816, 191 A.D. 2d 86 (lst Dep't 1993)

seach dénenvenncon hk iackanetanawwebea tie cobs 14

United States v. First Nat'l City Bank, 379 U.S. 378

SE 6 ni-dsc wt atn td nek ens cebieatundin 18, 19, 20, 21

Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F.2d 633 (2d

Ge ED dav Goncs’ Scarhabucenriansevenanvaes 10

—_

ee a Se eS ee ee

vi

Cited Authorities

Page

United States Statutes:

RG ROOT Adare ple nc0ds Jusddskieank eee wkd 14

Be es OF PEE o> wctaudassaduacchecetasn. 12

28 U.S.C. § 1602, ef seg. (1998) ............0000c. 5

Be a OE. wheat venduecknJauebkaeas, 17

oe ee ED Si nva sche oonsek Gas escent. 17

ee es ED nitided ke ckbbsies Kdcotadiokal 17

United States Bankruptcy Code § 507 ............. 14

Rules:

Federal Rule of Civil Procedure 64 ................ 17

Federal Rule of Civil Procedure 65 .............. 10, 17,21

Other Authorities:

Argentina Civil Code Arts. 31, 35, 52, 53, Bankruptcy

SOP GA GEE baits shone dc kdss tle 13

Argentina Civil Code Arts. 3875-3938, Bankruptcy Law

RD ND 6's bin nda bvadeaeubarbibeddcas 14

Chile Civil Code Art. 1446, Bankruptcy Law Arts. 64,

Ge: + .hbnetnn 64h osithhedteanbdasdiscateaocden 13

Chile Civil Code Arts. 2465-2491 ..... 00.00.00... 14

vil

Cited Authorities

Page

Dominican Republic Civil Code Arts. 2092-2113, Code

of Commerce Arts. 546-548... 2.0... cece 14

Dominican Republic Civil Code Art. 2098 .......... l

Dominican Republic Civil Code Art. 2101 .......... l

Guatemala Code of Civil and Merchant Procedure Arts.

379-397, Code of Commerce Arts. 233, 682, 872 .. 14

Mexican Constitution, Section XIII of Article 23

a in 6 ed aine 6 i eh ides cal bee weal eg 6 Meu tree 14

rs Me Ee on oun ehencasaeaneadacees® 14

Mexico Civil Code Art. 1798, Bankruptcy Law Arts. 83,

SE 36 chute cucceuaklss dab 05usneenede eects 11, 13

PT A De OE ce cdecacnestesacenenvar 13

Peru Civil Code Arts. 1118-1131, 1055-1090, Legislative

Decree 845 of Sept. 21, 1996 Art. 24 ............ 14

Peru Legislative Decree 845, arts. 19, 118 .......... 13

Uruguay Civil Code Arts. 2368-2371, Code of

SD URE, TPS TSe wc tccicgndecccesvves 14

Restatement (Second) of Foreign Relations Law of the

IGE, . < oscéeedcaubeveduneaneeyes 20

1

BRIEF OF THE DOMINICAN REPUBLIC,

AMICUS CURIAE, IN

SUPPORT OF PETITIONERS

INTEREST OF THE AMICUS CURIAE

Amicus, The Dominican Republic, a nation that has long

enjoyed friendly relations with the United States, has a

compelling interest in this case, because the decision under

review is a serious intrusion by the United States courts into

the sovereign rights of other nations, particularly their rights

to enforce their own debtor-creditor regimes over property of

their citizens within their territory.'

Like most nations, the Dominican Republic has enacted

laws governing debtor-creditor relations, priorities among

creditors, insolvency and bankruptcy. Like the United States

Bankruptcy Code, these laws regulate the manner in which the

limited assets of financially distressed debtors may be allocated

among their creditors, either in consensual debt restructurings

or formal insolvency proceedings. These rules contain elements

of both party autonomy—generally, before the declaration of

bankruptcy, a debtor under the law of the Dominican Republic

is free to manage its assets and to pay any of its bona fide

creditors to the exclusion of others—and legislativeiy

prescribed priorities for such obligations as taxes owed to the

state, Dominican Republic Civil Code Art. 2098, and wages

owed to employees for the past and current year, Dominican

Republic Civil Code Art. 2101. Other nations, of course, have

similar rules.’

1. The parties have consented to the filing of this brief amicus

curiae. Letters indicating their consent have been filed with the Clerk

of the Court. No party to this action or their counsel authored this brief,

in part or in whole. No person or entity other than the amicus curiae

made a monetary contribution to its preparation or submission.

2. See n. 7 infra.

2

The decision of the Second Circuit freezing property

outside the United States of a non-United States debtor by means

of a preliminary injunction at the behest of a group of United

States creditors (to which the district court later added a

mandatory injunction ordering the frozen property to be

transferred to the same self-selected creditor group)’ fails even

to recognize the existence of the debtor-creditor regime of the

nation where the debtor and its property are located, much less

extend any comity to that nation’s rules or the national interests

and policies behind them. The Second Circuit's decision treats

the power of federal courts sitting in diversity cases to issue

extraterritorial injunctions over property of non-United States

defendants outside the United States no differently than their

power over property located within the United States. Its

opinion contains no suggestion of concern for foreign nations,

foreign creditors, foreign laws or international law. There is

no indication that the Second Circuit considered the interests

of the international community, or of the United States itself,

in avoiding conflicts over encroachments on other nations’

rights to regulate property in their own territories, despite this

Court's many decisions requiring sensitivity and caution when

United States courts exercise jurisdiction in ways that impinge

on other sovereigns.

These concerns go to the heart of the way United States

courts interact with foreign jurisdictions and foreign laws in

the ever-increasing number of multi-national disputes that come

before them. The Dominican Republic submits this brief to

assist the Court in addressing them.

INTRODUCTION AND SUMMARY OF ARGUMENT

This Court has always been sensitive to the interests of

foreign nations in its decisions regarding the jurisdiction and

3. Cert. Pet. App. 59a.

3

powers of the United States courts. In areas ranging from the

deference due to acts of foreign governments within their own

territories under the act of state doctrine, see, e.g., Banco

Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964), to

restricting the scope of personal jurisdiction to avoid

unreasonable burdens on the international system, see Asahi

Metal Industry Co. v. Superior Court, 480 U.S. 102 (1987), to

accommodating United States discovery rules to the evidence-

gathering systems of foreign states, see Société Nationale

Industrielle Aérospatiale v. United States District Court, 482

U.S. 522 (1987), this Court has recognized that the interests of

foreign nations must be carefully weighed in determining how

far to extend the reach of United States jurisdiction, procedures

and remedies in civil litigation.

Each of these areas involves, in whole or in part, an

underlying concern for comity. While “ ‘[c]omity’ in the legal

sense, is neither matter of absolute obligation, on the one hand,

nor mete courtesy and good will, upon the other,” Hilton v.

Guyot, 159 U.S. 113, 163-64 (1895), this Court has traditionally

recognized that comity and the concerns underlying it must be

taken into account when United States courts decide disputes

that involve foreign nations, foreign persons or foreign property.

In deference to these concerns, this Court has determined in a

variety of contexts that, even where judicial power may exist

in the abstract, its exercise should be limited in order to avoid

affronts to other nations that also have an interest in a party to,

or the subject matter of, a dispute with transnational

connections.

The Second Circuit’s decision fails to heed, or even

consider, the Court’s teachings in this area. Its decision holds

that whenever a plaintiff in a United States court can show that

a financially distressed foreign debtor is paying its domestic

creditors, including government taxing authorities and wage

4

claims with priority under local law, a United States court may

enjoin the foreign debtor from making these payments and

freeze any or all of its foreign property to ensure satisfaction

of the United States plaintiff's claims. Although the Second

Circuit’s decision is couched in terms of “irreparable injury”

stemming from the “dissipation of assets,” Cert. Pet. App.

16a-18a, its opinion makes clear that this “dissipation” was

simply the payment by petitioners of the claims of one group

of legitimate creditors—the Mexican government, terminated

employees, trade creditors and Mexican banks and other

financial institutions—rather than another group of creditors.

The Second Circuit’s remedy for this “preference,” which was

not shown to be illegal under either United States or Mexican

law, was simply to turn it about and prefer the respondents

over the Mexican creditors. The Court of Appeals thus

sanctioned extraterritorial freezes of the foreign assets of

foreign defendants in virtually all cases where a foreign debtor

owes more money than it is able to pay.

The effects of this expansive assertion of the injunctive

powers of United States courts, if upheld by this Court, cannot

be minimized. The Second Circuit’s approach allows any

creditor who can obtain personal jurisdiction in the United

States over a foreign debtor—whether under a debt instrument

or otherwise—single-handedly to prevent that debtor from

either voluntarily restructuring its indebtedness to its local

creditors or acting consistently with the legal priorities and

obligations imposed upon it by local law with respect to the

repayment of its local debts. Its decision threatens to entangle

United States courts in the reorganization of financially troubled

foreign corporations even when, as in the instant case, they

have no property in the United States and therefore cannot be

the subject of either plenary or ancillary proceedings under the

United States Bankruptcy Code.

5

Since the Mexican debt crisis of 1982, numerous countries

throughout the world have been required to restructure both

their public sector and private sector debt in order to deal with

their own economic problems and the fluctuations of the global

economy. Upholding the Second Circuit’s decision would

decisively alter the balance among the parties to such

restructurings, by allowing any dissatisfied creditor not merely

to obtain a judgment for money due to it, but for all intents and

purposes to execute upon that judgment through the use of

extraterritorial injunctions directed at the debtor’s foreign

assets, in derogation of the rights of creditors who do not have

the benefit of a United States court order. Nor would the Second

Circuit’s decision be limited to private sector foreign debtors,

for its reasoning could be employed against sovereign debtors

as well, thereby undermining the protections afforded foreign

states and their agencies and instrumentalities under the United

States Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C.

§ 1602, et seg. (1998).

The Court should not allow these results. Extraterritorial

injunctions cannot be justified when their rationale and purpose

is to prevent foreign debtors from paying legitimate obligations

to foreign creditors. At a minimum, such injunctions, which -

clearly implicate the sovereign power of the nation where the

property that is the subject of the order is located, should be

limited to situations where the debtor is actually defrauding

creditors or secreting its assets. United States courts should

not reach into foreign jurisdictions to freeze assets merely so

that creditors who sue in United States courts can get a better

deal than foreign creditors.

6

ARGUMENT

THE EXERCISE OF JUDICIAL POWER BEYOND A

COURT’S NATIONAL BOUNDARIES MUST BE

CONSTRAINED BY PRINCIPLES OF COMITY.

A. Every Nation Enjoys The Right To Exercise Sovereign

Power Within Its Territorial Boundaries

This Court has always approached extraterritorial

extensions of the powers of the United States with caution. This

caution is founded on both considerations of prudence and

principles of sovereignty embedded in the law of nations, which

has always been considered to be a part of the jurisprudence of

the United States. See The Paquete Habana, 175 U.S. 677, 700

(1900). Under the classic view of sovereignty, each nation has

the exclusive authority to exercise governmental power within

its territorial borders:

The jurisdiction of the nation within its own

territory is necessarily exclusive and absolute; it is

susceptible of no limitation, not imposed by itself.

Any restriction upon it, deriving validity from an

external source, would imply a diminution of its

sovereignty, to the extent of the restriction, and an

investment of that sovereignty, to the same extent,

in that power which could impose such restriction.

All exceptions, therefore, to the full and complete

power of a nation, within it own territories, must be

traced up to the consent of the nation itself.

The Schooner Exch. v. McFaddon, 11 U.S. [7 Cranch] 116, 135

(1812) (Marshall, C.J.); see also Hilton v. Guyot, 159 U.S. 113,

163 (1895) (“No law has any effect, of its own force, beyond

the limits of the sovereignty from which its authority 1s

7

derived.”). There can be no doubt here that the property over

which the Second Circuit effectively exercised dominion, albeit

in the procedural form of an injunction directed in personam at

the property's foreign owner, was subject to the sovereign power

of Mexico, not to the power of the United States.

B. Exercising Judicial Remedies Extraterritorially

Implicates Principles Of Foreign Sovereignty And

International Comity

The extraterritorial exercise of sovereign power—whether

legislative or judicial—threatens to infringe on the sovereign

power of another nation, thereby ultimately undermining the

sovereignty of all states, including the extraterritorial actor.

This Court has therefore moved with circumspection and care

in dealing witb situations in which the exercise of the power of

the United States may result in such infringement. In construing

the exercise of the legislative power embodied in Acts of

Congress, the Court has held, for example, that legislation

prescribing standards of conduct is always to be construed not

to regulate beyond the territorial boundaries of the United States

unless a contrary legislative intent appears. Steele v. Bulova

Watch Co., 344 U.S. 280, 282, 285 (1952). This judicial

presumption derives from this Court's desire to protect against

“unintended clashes between [U.S.] laws and those of other

nations which could result in international discord.” EEOC vy.

Arabian Am. Oil Co., 499 U.S. 244, 248 (1991) (citing

McCulloch v. Sociedad Nacional de Marineros de Honduras,

372 U.S. 10, 20-22 (1963)).

Likewise, the Court has consistently ruled that exercise of

the judicial power of the United States should be informed by

a respect for the laws and interests of other sovereigns. As the

Court long ago recognized:

8

The extent to which the law of one nation, as put

in force within its territory, whether by executive order,

by legislative act, or by judicial decree, shall be

allowed to operate within the dominion of another

natica, depends upon what our greatest jurists have

been content to call “the comity of nations.”

Hilton, 159 U.S. at 163 (emphasis supplied). The principle of

international comity refers to the “spirit of cooperation in which a

domestic tribunal approaches the resolution of cases touching the

laws and interests of other sovereign states.” Société Nationale

Industrielle Aérospatiale v. United States District Court, 482 U.S.

522, 544 n. 27 (1987).

Comity is not just a vague political concern favoring

international cooperation when it is in our interest to

do so. Rather it is a principle under which judicial

decisions reflect the systemic value of reciprocal

tolerance and goodwill.

Id. at 555 (Blackmun, J., dissenting).

The controlling considerations are the interacting interests of

the United States and of foreign countries, and in assessing them

we must move with the circumspection appropriate when this Court

is adjudicating issues inevitably entangled in the conduct of our

international relations. Romero v. International Terminal

Operating Co., 358 U.S. 354, 383 (1959). This Court has

admonished the lower federal courts to

demonstrate due respect for any special problem

confronted by the foreign litigant on account of its

nationality or the location of its operations, and for

any sovereign interest expressed by a foreign state.

Société Nationale, 482 U.S. at 546.

9

This sensitivity to the sovereign interests of other nations

is reflected in a variety of constraints that this Court has

recognized on the exercise of judicial power: the doctrines of

sovereign immunity (originally recognized by the Court in The

Schooner Exchange \ong before it was legislatively codified in

the FSIA), act of state, choice-of-law rules, and comity all

reflect the self-interest of the United States in respecting, at

the overlap of territorial boundaries, the relevant interests of

foreign nations. In light of these self-imposed constraints, the

Court has developed an entire body of case law for the purpose

of guiding the legitimate exercise of judicial power where the

potential for conflict with another sovereign exists. See, e.g.,

The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972)

(deferring to competence of foreign court selected by parties

to adjudicate claim); Romero, 358 U.S. 354 (declining to impose

Jones Act liability on foreign ship where vessel merely passed

through U.S. territorial waters); Mitsubishi Motors Corp. v.

Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) (deferring

to competence of arbitral tribunal); Piper Aircraft Co. v. Reyno,

454 U.S. 235 (1981) (deferring to competence of foreign courts

to resolve transnational claims).*

The Court of Appeals ignored this long tradition of caution

when it upheld a wholesale extraterritorial freeze of a foreign

defendant's property without any consideration for principles

of comity or the interests of the foreign sovereign of the territory

where the property was located. Although the Second Circuit

made a brie; reference to the principle that “injunctive relief

seeking to prohibit conduct outside the district court's

jurisdiction should be ‘exercised with great reluctance,’ ” Cert.

Pet. App. 7a-8a, the Court of Appeals in truth exhibited no

reluctance at all to found a broad extraterritorial injunction

4. These constraints are, of course, in addition to those required

by constitutional principles of federalism in the interaction of United

States courts with the sovereignty of the states and state judicianes.

10

solely on the existence of in personam jurisdiction over the

defendant debtor and the broad powers that it found to be

implicit in Rule 65 of the Federal Rules of Civil Procedure. It

did not discuss, or apparently consider, the problems created

by a court exercising its power within the territory of another

sovereign nation identified long ago by the Second Circuit itself:

We realize that « court of equity having personal

jurisdiction over a party has power to enjoin him

from committing acts elsewhere. But this power

should be exercised with great reluctance when it

will be difficult to secure compliance with any

resulting decree or when the exercise of such power

is fraught with possibilities of discord and conflict

with the authorities of another country.

Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F.2d 633, 647 (2d

Cir. 1956). Instead, it permitted an injunction to freeze the

foreign assets of a foreign corporation in the midst of

restructuring its debt, without regard for the interests of the

foreign defendant's sovereign or its local creditors, in a manner

calculated to make such restructurings in other cases more

difficult or impossible.

C. Exercising Judicial Control Over Extraterritorial

Assets In The Context Of A Financially Troubled

Foreign Company Threatens To Conflict With Local

Authority And Reorganization Regimes

The effect of the district court's order was first to freeze—

and later to order the transfer of—the petitioners’ principal

assets in Mexico, thereby making their property unavailable to

pay claims of petitioners’ other creditors, including tax claims

by the Mexican government, severance claims of Mexican

employees and claims of Mexican bank creditors, that in the

aggregate were considerably greater than the claim held by

respondents. Cert. Pet. App. 4a. The record reflects that

petitioners were in financial distress and were seeking to

negotiate the restructuring of their debt to Mexican and foreign

creditors alike. The record also reflects that petitioners’ five

largest creditors, the Mexican government, Mexican banks,

Mexican financial institutions, trade creditors and terminated

employees, held obligations with a value six times greater than

those held by the group of United States creditors whose

interests the district court's order was designed to protect. /d.

Many nations, including Mexico and a number of other

countries in Latin America, do not have a statutory framework

like Chapter 11 of the Bankruptcy Code for reorganizing

financially troubled companies under judicial supervision rather

than liquidating them.’ Instead, companies in these countries

that need to restructure their debts must typically conduct

private negotiations with all interested parties to arrive at a

consensual solution. Litigation remains a possibility in these

countries for enforcing creditor rights, but the practical

impediments to realizing on the debtor's limited assets in most

cases channel creditor choice toward either negotiation with

the debtor or forcing liquidation proceedings. Such regotiations

are of course informed by the s‘aittory priorities mandated by

the debtor-creditor laws and insolveacy laws of the debtor's

sovereign, which would be applied if liquidation occurred.

These priorities, and more generally, the debtor-creditor

regimes of which they are a part, reflect the policies of the

5. E.g., The Dominican Republic, Guatemala, Uruguay, and Chile.

Mexico, for example, has a provision for suspension of payments

(suspension de pagos) as part of its bankruptcy law, see Mexican

Bankruptcy Law Arts. 408-411, but it is seldom used because a

suspension request must be accompamied by a completed restructuring

agreement and 1s otherwise subject to significant practical restrictions.

12

nation where the debtor and its property are located. With their

preference for voluntary debt restructurings negotiated between a

debtor and its creditors, whether domestic or foreign, they are

entitled to the same respect, as regards property within that nation’s

territory, that the United States would expect United States

bankruptcy policies and priorities to be accorded by foreign

sovereigns with respect to property in this country.

The Second Circuit's extraterritornal freeze decision 1s the

antithesis of this kind of respect for the operation of foreign legal

regimes within the territories of foreign states. By preventing

payment of foreign debts to foreign creditors out of the debtor's

foreign property, it disregards the debt pnorty schemes of foreign

law. More generally, it subverts the reor, snization regimes of

foreign countries with respect to assets within their yursdiction. If

a United States court can exercise the power to freeze all assets of

a foreign company, based solely on its submission to personal

jurnsdiction with respect to a particular credit agreement, the court

effectively freezes the restructuring process for all creditors,

irrespective of their priority or status. The Court of Appeals’

decision permits United States creditors to hold the reorganization

process of a foreign company hostage, even when, as here, most

of its creditors (and all of its pnority creditors) are foreign and no

resolution of its debts would be possible in any United States

proceeding.°

6. Since, as im this case, litigation over loan agreements wil! typically

not support federal question jursdiction, the only creditors who could sue a

private foreign debtor in federal court and obtain the kind of preliminary

rehef granted here are United States citizens, as the joinder of any alien

creditors as plaintiffs would defeat diversity jurisdiction. 28 U.S.C.

§ 1332(a)(2). Inasmuch as foreign debtors are likely to have at least as

many foreign creditors as United States creditors, no United States distnct

court will have before it all the creditors necessary to effect a complete

resolution of the debtor's obligations, even if 1t were otherwise appropriate

for a district court to act in effect as an insolvency tnbunal for a foreign

debtor that could not be the subyect of United States bankruptcy proceedings.

13

Nor can the Second Circuit's “irreparable injury” rationale

for acting in a manner so destructive of respect for foreign

nations’ legal regimes and foreign debtors’ debt restructuring

efforts withstand analysis. The Second Circuit ruled that the

petitioners’ payment of other creditors was a “dissipation” of

assets that caused irreparable injury to the respondents

justifying the grant of preliminary injunctive relief. To reach

this result, it distinguished its prior decision in Chemical Bank

v. Haseotes, 13 F.3d 569, 572-73 (2d Cir. 1994) (per curiam),

which held that an irreparable injury cannot be shown when

the transferor legitimately sought to pay off creditors, rather

than frustrate an eventual judgment. But here, according to the

Second Circuit, the debtor “was improperly establishing a

priority of creditors.” This reasoning was gravely flawed.

In fact, the “less than benign” actions attributed to

petitioners by the Court of Appeals—“establishing a priority

of creditors” that did not give respondents first place, Cert.

Pet. App. 18a—were perfectly legitimate. As a general principle

of Mexican law, as is the case in many countries,’ before a

company is declared bankrupt by a judicial authority,’ it is free

to manage its assets and to pay any of its bona fide creditors to

the exclusion of others. There is no suggestion in the record

that any of petitioners’ Mexican creditors were not bona fide,

and the petitioners were therefore entirely within their rights

in paying the legitimate claims of these creditors. Indeed, under

New York law as well, which governed the notes held by

respondents, it is completely permissible for a debtor, outside

7. E.g., Argentina: Civil Code Arts. 31, 35, 52, 53, Bankruptcy

Law Arts. 16, 107; Chile: Civil Code Art. 1446, Bankruptcy Law Arts.

64, 72; Mexico: Civil Code Art. 1798, Bankruptcy Law Arts. 83, 408-

411, Peru Civil Code Arts. 3, 76; Legislative Decree 845, arts. 19, 118.

8. In the case of Mexico, a company's freedom to manage its assets

will also be restricted once it has filed for suspension of payments.

14

of bankruptcy, to pay one bona fide creditor rather than another.

Ultramar Energy Lid. v. Chase Manhattan Bank, N.A., 599

N.Y.S. 2d 816, 819, 191 A.D. 2d 86, 90-91 (1st Dep't 1993).

The only body of law that would proscribe an insolvent debtor's

paying one creditor in preference to another would be the United

States Bankruptcy Code (and only to the extent of providing,

in certain circumstances, for the debtor in possession or

bankruptcy trustee to recover preferential payments for the

benefit of all of its unsecured creditors, see 11 U.S.C. § 547),

but petitioners neither were nor could have been the subject of

any case or proceeding under the Bankruptcy Code.

Not only were any payments that may have preferred

certain bona fide creditors over others permitted under the laws

of Mexico and most other countries, including the United States,

but the “priority of creditors” that the Court of Appeals decried

was required, to a significant extent, by Mexican law. Section

XXIII of Article 123 of the Mexican Constitution expressly

creates a super-priority in favor or workers and employees for

salaries due during the year preceding bankruptcy. In addition,

the Mexican fiscal code establishes a priority in favor of tax

liabilities. C.F.F. Art. 149. These types of legislative priorities

in allocating the limited assets of financially distressed debtors

are fundamental aspects of Mexican debtor-creditor law, as they

are under the legal systems of most nations.

9. In this respect, Mexico is no different from most other countries

of Central and South America that have a priority structure established

by law. See, e.g, Dominican Republic: Civil Code Arts. 2092-2113,

Code of Commerce Arts. 546-548; Guatemala: Code of Civil and

Merchant Procedure Arts. 379-397, Code of Commerce Arts. 233, 682,

872; Peru: Civil Code Arts. 1118-1131, 1055-1090, Legislative Decree

845 of Sept. 21, 1996 Art. 24; Uruguay: Civil Code Arts. 2368-2371,

Code of Commerce Arts. 1732-1760; Argentina: Civil Code Arts. 3875-

3938, Bankruptcy Law Arts. 239-250; Chile: Civil Code Arts. 2465-

2491. Nor is it unlike the priority system prescribed in the United States.

Cf United States Bankruptcy Code § 507.

15

The fact that the Court of Appeals viewed as an

“improper[ }.. . priority” a Mexican debtor’s decision to follow

Mexican law and pay Mexican taxes and Mexican employees

ahead of United States lenders speaks volumes for its parochial

vision and failure to extend comity to another nation’s legal

regime over property in the foreign state’s territory. One can

readily imagine how the United States would view a foreign

court’s decision that a United States national’s payment of

federal and state income taxes “improperly” created a “priority”

at the expense of foreign creditors, so as to justify the foreign

court in enjoining further use of the debtor’s United States

property for such “improper” purposes. Yet the Second Circuit

gave no thought whatever, it seems, to the comity implications

of its disdainful characterization of a Mexican debtor's

compliance with its obligations to pay taxes to its own sovereign

in Mexico, pay wages and severance to its employees and pay

the other legitimate claims of its local creditors out of its local

property.

Finally, and perversely, the lower court's injunctive

“remedy” sequestering the debtor’s foreign property simply

_ reversed the “preference” posited by the Court of Appeals, by

preferring United States creditors over non-United States

creditors with respect to property located outside the United

States and otherwise available to satisfy foreign creditors’

claims. The freeze of petitioners’ assets effectively prevented

satisfaction of the claims of Mexican creditors until the claims

of the United States creditors were decided. When the district

court then took the next step and ordered the assets to be

transferred to the United States creditors, it effectively

converted the unsecured United States creditors'® into fully

10. There is no dispute that respondents are unsecured creditors:

“Both the Notes and the Guarantees are unsecured obligations that rank

pari passu with all other present or future unsecured and unsubordinated

indebtedness of GMD.” Cert. Pet. App. 3a.

16

secured creditors. That the lower court failed even to address

the impact of this exercise of power over foreign property on

the interests of either Mexico or Mexican creditors is

symptomatic of its disregard for the “spirit of cooperation”

required when a court “approaches the resolution of cases

touching on the laws and interests of other sovereign states.”

See Société National, 482 U.S. at 544 n. 27.

In the last analysis, comity requires self-restraint. In a world

of independent sovereigns, each with its own laws over persons

and property within its territory, self-restraint is essential to

preventing collisions between nations and allowing the

international legal system to function in a way that

accommodates the interests of all of its legitimate actors. Here,

the Second Circuit failed to exercise such restraint.

Considerations of international comity make it inappropriate

for United States courts to issue orders that, in effect if not in

name, exercise jurisdiction over property outside the United

States belonging to non-United States defendants when the

defendants have done no more than pay their bona fide debts to

their local governmental and private sector creditors in

accordance with local law.

D. Extraterritorial Application Of Such Injunctions With

Respect To Foreign Sovereign Assets Would Undermine

The FSIA

Permitting extraterritorial injunctions under these

circumstances could have particularly dramatic implications

for actions brought in the United States against foreign

sovereign debtors. Since the Mexican debt crisis of 1982,

foreign sovereign debtors that have restructured their external

indebtedness have been sued in the United States federal courts

by dissatisfied creditors seeking to strengthen their hands in

od

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17

the restructuring process.'' The standard employed by the

Second Circuit to freeze assets outside the United States under

Rule 65 could easily be used to undermine the protections

afforded foreign states under the FSIA.

Under the FSIA, the power of United States courts to attach

property of foreign states and public sector corporations prior

to the entry of judgment is narrowly limited to circumstances

in which the foreign state or state corporation has explicitly

waived its immunity from pre-judgment attachment and, if there

has been such a waiver, only to property used for commercial

activity in the United States. 28 U.S.C. § 1610(d). A pre-

judgment freeze of the foreign state’s property in its own

country would completely circumvent the limitations on

attaching or otherwise interfering with the foreign state’s assets

located in the United States. Similarly, allowing post-judgment

mandatory injunctions requiring a foreign state to transfer to

the United States its property located abroad would also

subvert the requirement in the FSIA that the only property

subject to execution in this country is property already located

here and used for a commercial activity in this country. /d. at

§ 1610(a), (b).

The Court of Appeals decision could be used by aggressive

creditors to undermine and circumvent these Congressional

restrictions on attachment of foreign states’ property, because

it is explicitly couched in terms of injunctive power under Rule

65 rather than attachment under Rule 64, and holds that even

when no basis for attachment exists under Rule 64, injunctive

relief under Rule 65 may be granted under that court’s expansive

irreparable injury rationale. While we believe that existing

11. Cases currently pending or just recently concluded involving

creditor claims against foreign sovereign debtors in the United States

District Court for the Southern District of New York alone include suits

against Ecuador, Peru, Panama, and The Philippines.

construction of the FSIA should preclude these efforts, the Court

of Appeals decision creates uncertainty of a kind calculated to

produce grave friction with foreign states unless this Court

provides clear guidance to the contrary. The Court should

therefore make it clear that the Court of Appeals decision, even

if it should otherwise be affirmed, does not license

extraterritorial injunctions directed to property of foreign states

located outside the territory of the United States.

E. The Existence Of Jn Personam Jurisdiction Does Not

Alleviate The Need To Consider Principles Of Comity

The Second Circuit satisfied itself that the district court

had authority to order an extraterritorial injunction solely on

the basis of in personam jurisdiction over petitioners. However,

the ability to exert sovereign power over a litigant and its assets,

wherever located, is not, and never has been, sufficient to

warrant the exercise of such powers to the exclusion of

principles of comity.

Whether a court may assert in personam jurisdiction over

a foreign litigant, in the first instance, and, having done so,

whether the full panoply of judicial power should be exercised

with respect to that foreign litigant are questions that must be

answered in a fashion consistent with principles of comity.

Thus, Asahi teaches that in determining whether a court may

exercise in personam jurisdiction over a foreign defendant,

“ ‘(great care and reserve should be exercised when extending

our notions of personal jurisdiction into the international

field.’ " Asahi, 480 U.S. at 115 (quoting United States v. First

Nat'l City Bank, 379 U.S. 378, 404 (1965) (Harlan, J.,

dissenting)). Such care and reserve requires:

careful inquiry into the reasonableness of the

assertion of jurisdiction in the particular case, and

ee

19

an unwillingness to find the serious burdens on an

alien defendant outweighed by minimal interests on

the part of the plaintiff or the forum State.

Id.

Moreover, even after in personam jurisdiction has been

established, a court must nevertheless consider principles of

comity: this Court has required courts to undertake a

particularized analysis of the respective interests of the foreign

nation before imposing the discovery regimen of the United

States Rules of Civil Procedure where such a regimen would

infringe on the sovereignty of that foreign nation. Société

Nationale, 482 U.S. at 544.

Similarly, this Court has on occasion considered whether

the exercise of certain judicial remedies merely because of the

existence of personal jurisdiction might be inappropriate in

certain circumstances:

The word, “jurisdiction,” is in this connection

somewhat equivocal; in one sense the judge had it;

the bank had personally appeared and was subject

to his orders, as far as any corporation can be; [the

judge] might sequester its property in Vermont, if

he could find any, or he might proceed against its

officers as for a contempt. But although [the judge]

thus had the power to prevent the defendant from

asserting its rights in Maine, it might still be

improper for him to do so. Courts do not always

exert themselves to the full, or direct parties to do

all that they can effectively compel, and such

forbearance is sometimes called lack of

“jurisdiction.”

20

United States v. First Nat'l City Bank, 379 U.S. 378, 388 (1965)

(dissent quoting Judge Learned Hand in Amey v. C olebrook

Guaranty Sav. Bank, 92 F.2d 62, 63 (2d Cir. 1937)).

The exercise of sovereign power with respect to assets

located within the territory of another sovereign nation presents

unique problems. It is qualitatively different from the regulation

of a narrow range" of extraterritorial conduct when the impact

of such conduct falls within the United States. Whereas

regulating the conduct of a party, vis-a-vis its relationship with

the United States, will often have a minimal impact on the

foreign country in which the party is located and the citizens

of that nation, affecting the status of property within another

nation has serious implications for that nation and third parties.

To prohibit a person's ability to take actions with respect to

property is to define that person's interest in that property. To

affect property, and title thereto, necessarily conflicts with local

authority because it constricts and changes the rights

appertaining to the property that had been recognized by the

local authority. Even in the context of extraterritorial regulation

of conduct, sovereign power is limited to the extent that it

conflicts with the local authority. Murray v. Schooner Charming

Betsy, 6 U.S. [2 Cranch] 64, 118 (1804) (“[A]Jn act of congress

ought never to be construed to violate the law of nations, if any

other possible construction remains.”).

Although United States v. First National City Bank, 379

U.S. 378 (1965), has been cited for the proposition that a court

with ‘personam’ jurisdiction over a party has the authority to

freeze property under its control, whether the property be

located within or without the tribunal's territorial jurisdiction,

that case is distinguishable. In First National, the party enjoined

was a United States citizen—a banking corporation chartered

12. Restatement (Second) of Foreign Relations Law of the United

States § 402.

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21

by the federal government. By contrast, petitioners here are

foreign citizens. First National also involved a defendant that

was removing its property from the United States to defeat a

tax lien by the Government on that very property, while here

there is no evidence that petitioners ever had property in the

United States. Moreover, the majority in First National

considered whether the district court’s order would violate local

law. First Nat'l, 379 U.S. at 384. Although petitioners consented

to personal jurisdiction of the United States court, they did so

for the sole purpose of adjudicating claims arising out of certain

financial instruments. Adjudication of those claims is separate

and distinct from the exercise of judicial control over the rights

and interests of the foreign party in assets located outside the

court's jurisdiction and wholly unrelated to the claims to which

petitioners submitted themselves to the authority of the court

to resolve.

Nor is the exercise of such a power necessary. Indeed, its

exercise 1s unusual" and reflects an erosion of the traditional

method of enforcing a judgment on property located outside the

Jurisdiction of the court: taking the judgment to the jurisdiction in

which the property in question is located. If Rule 65 were to provide

United States courts with the ability to freeze assets outside the

jurisdiction of the court, pending the outcome of the action for

purposes of insuring satisfaction of a potential judgment, there

would be no logical barrier to then simply ordering a defendant to

transfer the same assets into the jurisdiction to satisfy a final

13. Although the Second Circuit points to English Mareva injunctions

as an example of similar equitable relief, Cert. Pet. App. 15A, unlike the

case before the Court, the exercise of English judicial power over assets

outside the junsdiction, in recognition of the in rem affects of such orders

on third parties, has been limited to a few extraordinary cases, typically

involving fraud. See, e.g., Babanaft Int'l Co. S.A. v. Bassatne {1990} Ch 13

(Eng. C.A.); Republic of Haiti v. Duvalier [1990] QB 202 (Eng. C.A.);

Derby & Co. v. Weldon [1990] Ch 48 (Eng. C.A.); Derby & Co. v. Weldon

(nos. 3 and 4) {1990} Ch 65 (Eng. C.A.)

22

judgment.'* That is indeed what occurred in the present case, Where

after finding petitioners liable to the plaintiffs and entering

judgment in their favor, the district court issued a further

injunction ordering petitioners to assign their nights in one of their

principal assets, government notes issued to petitioners by the

United Mexican States, to their United States creditors. Cert. Pet.

App. 58a-59a.

Principles of comity and sovereignty demand that assertions

of United States judicial power over property outside the United

States must be limited. If this Court is prepared to recognize such

an extraterritorial power in special circumstances, the exercCige of

this power should be narrowly limited to circumstances Where

a party is defrauding creditors or secreting assets.

Extraterritorial injunctions should not be permitted becayge a

foreign debtor is paying legitimate debts to bona fide foreign

creditors in accordance with the law of its own nation.

14. With respect to the FSIA, under the Second Circuit's test, which

would require nothing more than the waiver of sovereign immunity and

consent to jurisdiction routinely included in sovereign lending

agreements, creditors of foreign states could fundamentally alter the

debtor-creditor and inter-creditor relationship by bypassing the very

protections Congress conferred on foreign sovereigns with respect to

prejudgment attachments of their assets.

23

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted,

DANIEL W. KRASNER

Counsel of Record

ERIC B. LEVINE

WOLF HALDENSTEIN ADLER

FREEMAN & HERZ LLP

Attorneys for Amicus Curiae

270 Madison Avenue

New York, New York 10016

(212) 545-4600