Government Investors and Sovereign Immunity - What You Should Know

author by Stephanie Padly-Julien on Dec. 13, 2012

Bankruptcy & Debt Business Government 

Summary: Enforcing a judgment as a government investor when the government has waived its immunity should be discussed with a lender and take a strategic legal approach. We can help you see how it can be done in your case.

Sovereign Immunity Analysis In Subscription Credit Facilities:

 

            A form of financing that has become popular among the private equity and real estate funds is subscription credit facilities. The lenders of these facilities are allowed to receive some interest in the capital commitments from the limited partners of the funds. Frequent investors of these funds are government pension plans, state endowment funds, and other investment funds of both domestic and foreign governments. These funds may have certain sovereign immunity rights. Sovereign immunity has the ability to protect the government entity from all kinds of liability.

            Government investors are evaluated on a case-by-case basis in order to see if any sovereign rights apply to that particular investor. Due to the financial troubles that many of the government investors are facing because of the economic crisis and other debt concerns, the lenders are investigating the credit of the government investors even more. The lenders are also looking at whether the government investors have the ability to bring up any kind of sovereign immunity as a defense if they were to go into litigation with each other.

            Under the doctrine of sovereign immunity, a government entity cannot be sued in their own court system unless it has agreed to waive its immunity. For those government investors who are organized under United States laws or one of its political subdivisions, there are two forms that the doctrine of sovereign immunity comes in. These immunities are the sovereign immunities of the state governments as protected by the Eleventh Amendment of the US Constitution and that of the federal government.

            Government Investors from the United States can waive their immunity in one of three different ways. The first way that an investor can waive their immunity is in writing. The best written waiver for a lender is an explicit waiver from the investor. In these letters, the investor usually acknowledges that it is entitled to immunity now or at some point in the future and that it waives its immunity to the full capacity allowed under the law. A second form of waiver is the implicit waiver. With this waiver, the lender is provided an affirmative representation that is subject to commercial law which will establish private and commercial acts instead of governmental acts. A third form of waiver that involves a statement from the government investor that despite their immunity, it does not limit the investor’s obligations to make investments as both parties agreed upon.

            The second way that a government investor can waive their immunity is a statute that has been enacted by the appropriate governing legislature which will waive their immunity from contract claims in commercial transactions. Government investors with the United States usually reserve their Eleventh Amendment rights in a side letter. It is important that the governmental immunity provisions in these side letters are reviewed against the applicable law. Many states have decided to waive their immunity for commercial contract claims through their constitution, statute, or case law. Due to the variations in statutes of the states for waiving their immunity, the lenders should examine each state’s statute on a case-by-case basis.

            The third way that a government investor can waive their immunity is through controlling case law usually through a federal court or the highest court in the given state. Some state courts have made decisions that have eliminated a state’s immunity when it comes to contractual claims. Like state legislatures, state courts have taken different approaches when it comes to the timelines and the procedures that have to be followed when someone decides to take action against the state due to a contractual claim. However, a minority of states have resisted the trend of waiving their immunity for contracts. This tends to leave the lenders at risk of not knowing how to enforce the contract if the state defaults.

            Foreign governments and their departments and agency are also frequent investors. They usually have large capital commitments to give to these funds. Lenders should carefully look over the procedural requirements to enforce these foreign countries' capital commitments. The general basis of the Foreign Sovereign Immunities Act is that a foreign government has immunity. It also claims that these foreign governments cannot be sued in the United States. There are three exceptions to this rule. The first exception is where the investor clearly waives their immunity by contract. The second exception is an implied waiver. The third exception is a “commercial activity” exception.

            Even though a governmental investor may have waived their immunity, enforcing a judgment against these governmental investors is something that should be discussed by the lender. The provisions in the side letter could possibly recommend a jurisdiction or a choice of alternative dispute resolutions that the governmental investor would like to help resolve situations. Once the proper tribunal passes judgment on the case, fulfilling the judgment against a governmental investor will differ than that of a private person. Some governmental entities who do not have immunity from a lawsuit could argue that they are excused from paying monetary judgements.

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* This information is intended as general information and does not constitute legal advice. It further does not create any attorney-client relationship or privilege. Every situation is different and requires an individual analysis and approach; please call us so we can help. 

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