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In 2006, BDL had $163mn of its reserves temporarily restrained in NY. What does this story tell us about some of the challenges Lebanon will face as it enters Eurobond restructuring talks?

In 2005, Libancell won an arbitration award against the Republic of Lebanon in the amount of $265mn + interest. The arbitration arose from a dispute over a contract to provide telecom services.

In 2006, Libancell filed a petition in NY court to confirm the award & allow enforcement of it in the US. Simultaneously, Libancell filed a temporary restraining order (TRO) to prevent Deutsche Bank from transferring/disposing any assets in which the Republic had an interest

The purpose of the TRO was to prevent the Republic from engaging in a transaction that could impair/impede Libancell’s ability to collect its money in the future, if the NY court confirmed the award. It’s called "pre-trial attachment”.

Libancell’s motion for pre-trial attachment was originally in respect of proceeds from a sovereign bond issuance by the Republic. It was the Republic’s money that BDL was going to transfer back to it. Lebanon cancelled the bond offering upon hearing of the impending attachment.

Since the offering was canceled, Deutsche Bank (acting on the TRO) restrained $163mn in other BDL funds comprising two wire transfers from BDL to a private company called IXIS, for which Deutsche Bank acted as intermediary.

The TRO was granted pending BDL intervening "for the limited purpose of asserting [its] immunity from pre or post judgment attachment or execution (and any related injunctive relief) with respect to the Central Bank's property held for its own use..."

Definitions:

Pre-judgement attachment is when an asset is restrained pending trial/judgement by a court to protect a plaintiff's ability to collect if it wins.

Post-judgement attachment is when the asset is seized to make good on an award/judgement already made by a court.

Remember, the TRO was not for a post-judgement attachment (in execution of a court judgement). It was a pre-judgement attachment b/c Libancell’s award had not yet been confirmed by a NY court. It was to protect Libancell's ability to collect in the future in case it won at trial

The court went on to say that property of a central bank "is absolutely immune from prejudgment attachment, and that immunity cannot be waived" under the FSIA. Pretty straight forward.

According to the court, the relevant law (FSIA) provides that property of a central bank held for its own account/used for central bank purposes is also immune from post-judgement attachment unless the bank or its parent gov't has explicitly waived such immunity.

Neither Lebanon nor BDL have waived such immunity in respect of the Eurobonds. But back to Libancell, the court noted that: “Should Libancell ultimately succeed [in obtaining a judgement], … Libancell may seek to attach Lebanon's commercial assets under section FSIA 1610(a)(6)”

Funds held by BDL for central banking purposes would, in any case, be immune. The risk is only in respect of commercial assets of the Republic. This is the same risk in connection with the Eurobonds. Lebanon does not appear to have many commercial assets abroad as far as I know.

Libancell's motion was denied & the funds were released in few weeks. The court found that the Republic had not explicitly waived its right to immunity frm prejudgment attachment & Libancell didn't provide sufficient evidence that the funds were commercial assets of the Republic

What does this teach us about what challenges Lebanon may face? Well there may be similar TROs issued in the future in which BDL will have to make the same arguments it made in the Libancell case.

If the funds are “held in [BDL’s] own account” / used for central banking purposes (eg gold, fx reserves), rather than “commercial assets of the Republic”, they should be released quickly & immune from both pre-trial attachment and attachment in aid of execution (post-judgement).

If the funds are found to be “commercial assets of the Republic”, the court will have to determine whether the Republic waived its right to pre-trial attachment of the assets. If such right has been waived, the assets could be restrained until a judgement is made by the court.

If the bondholders do get a judgement (which they likely will), those assets could potentially be used to execute the judgement (i.e., to fulfill a monetary award to the bondholders). All of these determinations will take upwards of a year or longer. It’s a very long process.

Read the court decision yourself. Lots of interesting information in there that I didn’t cover in this thread.

casetext.com/case/sal-v-rep…