Capital v. The Repub. Of Argentina

NML CAPITAL, LTD., Plaintiff,

v.THE REPUBLIC OF ARGENTINA and ENERGIA ARGENTINA S.A., Defendants.

No. : 09 Civ. 7013 (TPG)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Dated: February 15, 2011

OPINION

This action represents another attempt by NML Capital, Ltd. ("NML") to hold a third party�this time Energia Argentina S.A. ("ENARSA"), an energy corporation majority-owned by the Republic of Argentina (the "Republic")�liable for its judgments against the Republic based on an alter ego theory. NML has judgments in numerous actions against the Republic arising from the Republic's December 23, 2001 default on its sovereign debt. There has been no payment of these judgments by the Republic and NML has been religated to seeking recovery against property. Because the Republic does not keep substantial funds or assets in New York, plaintiffs have been attempting to recover against funds in the hands of Argentine entities other than the Republic, on the theory that the Republic has recoverable interests in such funds.

For that reason, on August 7, 2009, NML filed a complaint againstthe Republic and ENARSA seeking a declaratory judgment that ENARSA is an alter ego of the Republic and further seeking a money judgment holding ENARSA jointly and severally liable for the Republic's obligations on the defaulted bonds, specifically on the judgments against the Republic, currently totaling more than $1.5 billion.

The Republic and ENARSA filed separate motions to dismiss the alter ego complaint. Defendants assert that the court lacks subject-matter and personal jurisdiction over ENARSA, and that the complaint fails to state a valid claim for relief. The Republic further asserts that NML has failed to join an indispensible party, ENARSA, by failing to effectuate proper service of process. As will be explained, the jurisdictional issues and the issue regarding the validity of the claim on the merits are all involved with the alter ego question.

The court concludes that NML has not made a showing that ENARSA is an alter ego of the Republic, and on that ground the complaint is dismissed, with leave to replead.

The Complaint

Although ENARSA is a nominally independent sociedad anonima, ¹the complaint alleges that it is a de facto administrative agency, a mere extension of the Argentine Ministry of Planning. ENARSA was established to insert the Republic into the energy industry. One of the prime functions of ENARSA is to sell natural gas at low prices for thebenefit of Argentine citizens. The Republic subsidizes ENARSA for the losses it incurs. It is alleged that the Republic has assets in New York and elsewhere in the United States in the form of debts, tangible property, and intangible property, held nominally in the name of ENARSA, which, according to the complaint, are available to be applied against NML's outstanding judgments because ENARSA is so thoroughly controlled by the Republic that it is an alter ego of the Republic.

The complaint alleges that there are three basic ways in which the Republic dominates ENARSA's activities.

1. Ownership and Management

ENARSA is almost entirely owned by the Argentine national government. The only other shareholders are Argentine provincial governments, which own less than 3% of ENARSA's shares. ENARSA was created in 2004 at the instigation of then-President Nestor Kirchner through the enactment of two laws: Law No. 25.943, which called for ENARSA's establishment and set forth its structure and purposes, and presidential Decree No. 1692/2004, by which the president approved of its bylaws.

Under Law No. 25.943, the Argentine national government must always own at least 53% of ENARSA's shares and cannot be placed in a minority situation by any changes in the bylaws or charter. Although this law also allows for 35% of ENARSA's shares to be sold to the public, they have never been sold or distributed to the public. In any event, such shares would have no voting rights, and no private investor could hold more than 3% of these public shares.

The complaint alleges that under the founding statute and decree, the Republic is to have five seats on a seven-person board of directors, the other two seats going to provinces. The complaint also contains a recitation of the powers of the board, provided for in the corporate bylaws, which are in fact stated in general terms but which are alleged to allow the board to engage in the day-to-day activities of ENARSA.

2. Compliance with National Policies and Government Regulations

It is alleged that ENARSA was established to give the state control over the energy industry in Argentina. Both of the founding laws (Law No. 25.943 and Decree No. 1692/2004) state that in its activities and operations ENARSA shall "comply with the policies of the national government." It is alleged that control by the Republic is exercised through the Argentine Ministry of Planning.

NML alleges that the Ministry of Planning dictates the quantity, price of purchase, and price of sale for ENARSA's natural gas transactions. By Decree 2067/2008, the Argentine President created a public trust fund to pay for natural gas to be imported by ENARSA when the Ministry of Planning declared that such imports were necessary to meet Argentina's natural gas demands. In 2009, the Ministry of Planning enacted a "Total Energy" program, which required that: (1) ENARSA must design a system to supply liquefied natural gas to the Argentine market to satisfy domestic demand; (2) ENARSA must purchase liquefied natural gas from international sources at international market prices; and (3) the Ministry of Planning and the Secretary of Commerce will set the price at which ENARSA can sell this liquefied natural gas in the Argentine market. NML offers one example of this program's application: in 2007, ENARSA was required to sell gas purchased from Bolivian sources to Argentine consumers at half the purchase price.

Executive Decree No. 267/2007 requires ENARSA to transport natural gas from the border between Argentina and Bolivia through certain Argentine provinces via a pipeline whose construction is funded by the Argentine government. This executive order followed an agreement between the Bolivian government and the Republic of Argentina requiring ENARSA and its Bolivian counterpart to sign a contract for the delivery of natural gas.

Also, the complaint alleges that the Republic signed an agreement with the government of Venezuela that required ENARSA and Venezuela's state-owned energy company to engage in joint exploration projects to find oil in Venezuela's Orinoco Belt and off the coast of Argentina. In addition, ENARSA is said to be tasked with supplying "gasoil" to the state-owned corporation that administers the electrical sector, at prices NML claims are highly beneficial to that entity. ENARSAis further required to purchase energy from plants using renewable sources under a program launched by the Argentine Secretary of Energy.

NML also refers to news article from 2007 which state that ENARSA chartered a private plane from Venezuela to Argentina for the purpose of transporting $800,000 in campaign contributions for Christina Fernandez de Kirchner's presidential campaign while her husband was president. NML claims that this "illicit campaign contribution" created an international scandal that resulted in a federal trial in Florida against several individuals who sought to bribe an official to prevent him from speaking about the campaign contribution.

3. Financial Control

NML alleges that ENARSA relies entirely on the Republic for funding because the Republic requires ENARSA to engage in unprofitable activity (offering natural gas to the public at a steep discount) and because ENARSA has never sold its shares to the public to encourage private investment.

ENARSA received almost all of its initial capital from the Republic, and the annual budget is provided by Congressional appropriation and approved by the Economy Minister. ENARSA is also funded by various public trusts controlled by the federal Ministry of Planning.

The Argentine government provides billions of pesos in subsidies to ENARSA, and the energy sector in general. For example, the government-mandated program to provide Bolivian gas to Argentineconsumers, a program which NML claims results in severe losses for ENARSA, is heavily subsidized by the government. In 2007, the government paid ENARSA over 8 billion pesos for this program. In 2008, energy subsidies in general grew to 16 billion pesos. NML claims that the government has allocated an additional 15.224 billion pesos to the subsidy for the energy sector, to compensate for the difference between the purchase price of Bolivian gas, LNG and Fuel Oil and the domestic sale price in 2009.

The Argentine government also operates major public works contracts through ENARSA for which government funds are used. NML offers several examples. First, there is the Argentine-Bolivian project referred to earlier. Second, ENARSA's portion of a joint pipeline expansion in one Argentine province will be funded by the Ministry of Planning's public trusts. Third, ENARSA is currently receiving offers to build five electric plants and eleven small thermal plants, all of which will be built using the Republic's funds. Fourth, almost half of the funds required for ENARSA's hydrogen fuel cell project are supplied by the Republic.

NML alleges that the government also provides several concessions to ENARSA for no compensation. For example, ENARSA was granted concessions for oil exploration in national maritime areas. Several of these concessions have been subject to exploration agreements with other state-owned and private oil companies, for which ENARSA has notbeen required to contribute any funding, but other companies have. ENARSA was also given the right to establish a database comprised of valuable information relating to all Argentine oil fields. In order to establish this database, private oil...