Second Circuit Decision Addresses the Ability of Hedge Funds to Attach Sovereign Property

A recent Second Circuit decision addressed the circumstances in which a hedge fund may attach property of a sovereign in satisfaction of defaulted sovereign debt.  See also “United Kingdom’s High Court Finds Argentina’s Sovereign Immunity Doctrine Cannot Prevent a Hedge Fund from Seeking to Enforce an American Judgment against Argentina in English Courts,” Hedge Fund Law Report, Vol. 4, No. 25 (Jul. 27, 2011).  The opinion is particularly relevant to the hedge fund community today, when many distressed debt managers are actively raising funds to invest in what they anticipate will be a wave of sovereign debt defaults or near-defaults in Europe.  See generally (on the market for trading in European secondary corporate loans) “Regulatory, Tax and Credit Documentation Factors Impacting Hedge Funds’ Trade Risk in European Secondary Loans (Part One of Two),” Hedge Fund Law Report, Vol. 4, No. 37 (Oct. 21, 2011).  In the event of an actual sovereign default, this opinion will help clarify the ability of hedge funds to, in effect, foreclose on sovereign collateral – a process that is typically more involved, more time-consuming and more risky than foreclosing on private collateral in a U.S. bankruptcy or a UK administration.  See “Liquidity for Post-Reorganization Securities Under Section 1145 of the Bankruptcy Code,” Hedge Fund Law Report, Vol. 3, No. 26 (Jul. 1, 2010).

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