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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1999
- **Citation:** 527 U.S. 308

## Text

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

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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

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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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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.

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0219%3A09. Public record. Not legal advice.