It's easy to understand why two Fir Tree hedge funds wanted
to stop the Republic of Ireland from selling off billions of
dollars in assets that Ireland took over when it nationalized
Anglo Irish Bank in 2009. The funds, headquartered in the
Cayman Islands, own $200 million in Anglo Irish notes. Fir Tree
purchased the notes in 2005, when the bank was a private
enterprise, in an agreement that called for New York courts to
handle any disputes over the investment. So when Ireland began
to implement a program of liquidating Anglo Irish assets, Fir
Tree's lawyers at Jenner & Block sued in Manhattan federal
court, claiming that Ireland had breached the funds' agreement
with Anglo Irish and that Fir Tree's investment was in peril.
The case raised a fascinating question: Does a sovereign
government's attempt to stabilize its banking system fall under
the commercial-transactions exception to the bar on U.S. suits
against foreign sovereigns? Anglo Irish's lawyers at
Freshfields Bruckhaus Deringer said no. They argued that Fir
Tree can't sue Anglo Irish in the U.S. because the bank is now
an instrument of the state, and Ireland is acting as a
sovereign in disposing of bank assets.
In a carefully-reasoned 40-page ruling Monday, U.S.
District Judge Paul Gardephe agreed that the proposed asset
sale doesn't fall under the commercial exception to the Foreign
Sovereign Immunity Act. The judge denied Fir Tree's injunction
motion and dismissed the case because he doesn't have
In the big picture, Gardephe's ruling could turn out to be
hugely significant as Europe deals with its debt crisis. That's
bad news for investors in foreign bank notes -- but there are
some peculiarities of the Fir Tree case that leave the door
ajar for U.S. noteholders.
The judge didn't waste much time analyzing whether the
nationalized bank is an instrument of the state. Ireland
acquired all of the equity in Anglo Irish, so almost by
definition the bank is shielded by foreign sovereign immunity.
That finding shifted the burden to Fir Tree to prove that the
proposed asset sale falls under an exception to the FSIA. The
hedge funds' Jenner lawyers argued two theories: that Ireland
had waived foreign sovereign immunity and that the asset sale
is commercial behavior that's not covered by the law.
Fir Tree might have prevailed on its first theory because
of a 1950 treaty between Ireland and the United States --
except that the hedge funds are based in the Cayman Islands.
Gardephe also rejected the hedge funds' arguments that Ireland
had waived immunity via Anglo Irish's pre-nationalization
agreements with Fir Tree.
That left only the commercial exception theory, which
Gardephe spent most of his opinion analyzing. The judge agreed
that Anglo Irish's asset liquidation is commercial activity,
even though "the Irish government undoubtedly had a sovereign
objective in causing the bank to take these actions." But to
fall under the exception to foreign sovereign immunity, Fir
Tree also had to show that Anglo Irish acted in the United
States or took action that had a direct effect in the United
States. Here, again, the hedge funds fell short. The proposed
asset liquidation, Gardephe concluded, hasn't yet had an effect
on Fir Tree beyond increased risk that the bank won't make good
on the hedge funds' notes. And that effect, he said, is felt in
the Caymans -- where the funds are based -- and not in the
Would Gardephe's decision have come out the same way if Fir
Tree were based in the United States? Anglo Irish counsel
Walter Stuart of Freshfields declined to comment beyond the
firm's press release, and Fir Tree counsel Paul Smith of Jenner
didn't respond to email or phone messages. But two of the
judge's findings specifically depended on the hedge funds'
Cayman base: his ruling that the U.S. treaty with Ireland
doesn't apply to Fir Tree and his ruling that any direct effect
of the proposed asset sale isn't felt in the United States.
As the judge said, the Fir Tree case was "a moving target
both as to the facts -- which have rapidly changed -- and the
legal authorities." Some day, investors who own notes in
nationalized Greek or Italian banks may look hard at those
Cayman caveats as they file their own suits.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
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