The ability of the private banking community to deal with defaulting foreign sovereign borrowers has come under close scrutiny in recent years with the increase in the magnitude of foreign sovereign debt and in the commonplace instances of default and requests (or, perhaps, more accurately, demands) for debt restructuring by sovereign borrowers. Private lenders have believed that, notwithstanding their large commitments to sovereign borrowers, they remain in a strong position to deal with defaulting borrowers and rescheduling requests for at least two reasons: (1) in today’s international world, even a sovereign borrower cannot afford to isolate itself from the international financial community and, accordingly, it is in its self-interest to meet its commitments to its lenders; and (2) the lenders have available significant legal remedies to enforce their rights against sovereign borrowers.

In April, 1984, however, the Second Circuit rendered a decision in Allied Bank International v. Banco Credito de Cartago (hereinafter referred to as Allied I), that took the international banking community by surprise and cast doubt on lenders’ ability to obtain judgments against delinquent foreign United States participated as amicus curiae, the Second Circuit panel reversed its prior decision (hereinafter referred to as Allied II) The Second Circuit’s opinion raises issues that are certain to be of concern in future debt structuring and litigation in U.S. courts.

The Facts

Allied Bank International (“Allied”) was the agent for a syndicate of thirty-nine banks (the “Syndicate”) which lent money, evidenced by promissory notes, to three Costa Rican banks owned by the Central Bank of the Republic of Costa Rica. The promissory notes, together with side letter agreements (the “Agreements”), were executed in June 1976. Most of the negotiations leading to the Agreements occurred outside the United States, although some negotiations did take place in the United States. Actual execution of the promissory notes and the Agreements occurred outside the United States.

Under the Agreements, the Costa Rican Banks were “unconditionally” to make eleven semi-annual payments in New York City in United States dollars. The Agreements acknowledged that the obligations were registered with the Central Bank, which would provide the necessary United States currency. The Agreements provided for concurrent jurisdiction over disputes in New York and in Costa Rica. No specific governing law clause was included in the Agreements.

Under the Agreements, the Costa Rican Banks' failure to pay the required interest or principal within thirty days of the scheduled payment date constituted a default. Upon default, the Syndicate could demand full payment of the promissory notes. If failure to pay was due to the omission or refusal of the Central Bank to release United States currency, the default would be excused for only an additional ten-day period.