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Latin America litigation

On December 26 1996, the Constitutional Chamber of the Supreme Court of Justice of Paraguay upheld the constitutionality of Law No. 814/96, the so-called Pangrazio Law, which proposed to indemnify all account holders incurring losses with the commercial banks that collapsed following the May 1995 banking crisis in Paraguay. The scope of the indemnification authorized by the law included the holders of unregistered accounts — that is, accounts represented by bearer deposit receipts, as opposed to accounts registered in the names of the holders.

The 1995 banking crisis

The 1995 banking crisis was triggered in May 1995 by the collapse of a group of commercial banks and finance houses with combined estimated deposits worth nearly 10% of the entire financial system of the country. By the end of the year the crisis extended to 18 financial institutions with hundreds of associated companies. In November 1995, the Senate introduced an emergency bill which proposed to write off the debts of the collapsed financial institutions and extend state compensation to depositors holding up to US$15,000 in undeclared accounts in the failed banks.

However, in late December, the Executive Branch vetoed the proposed law, citing its opposition to the provisions offering compensation to unregistered depositors. Although not mentioned by the Executive Branch as a reason for the veto, political controversy had arisen because of speculation that the primary beneficiaries of the Pangrazio Law would be influential financial interests which had purchased the interests of unregistered account holders at a discount to their face value. In June 1996, Congress overturned the presidential veto and approved the Pangrazio Law.

The Law

The Pangrazio Law was enacted on June 5 1996 to minimize the impact of the financial crisis on small depositors and creditors of banks and other financial institutions under intervention. The law provided that:

  • the Central Bank pay off the instruments issued by the banks and financial institutions under intervention, as well as other documents endorsed by their respective directors and administrators, up to the amount of G30 million (US$15,000) per person;
  • the Executive Branch issue and deliver Treasury Bonds to the Central Bank up to the amount needed to cover the total amount paid off; and
  • the Ministry of Finance (Ministerio de Hacienda) subrogate itself in all rights and legal actions arising from the paid off instruments.

The constitutional challenge

The Executive Branch alleged the unconstitutionality of the Pangrazio Law. The Ministry of Finance and the Central Bank sued jointly under the sponsorship of the attorney general (Procurador General de la República), asserting the following grounds in opposition to the law:

  • The transaction set forth in the Pangrazio Law is incongruent with the duties constitutionally assigned to the Central Bank. Under Article 285 of the Constitution, the Central Bank is only responsible for monetary issuance and for participating in the formulation of monetary, credit and exchange rate policies.
  • Under Article 286 of the Constitution, the Central Bank is forbidden from granting any type of loan, except for short term advances to the government.
  • No one can force the State to assume obligations for unspecified amounts and beneficiaries.

The Court's decision

In the Court's opinion, the central premise of the claim involved a conflict between two branches of the government, namely the Legislative and the Executive Branches, where the latter dissatisfied with the overturn of its veto sought to further pursue the struggle of power by involving a third branch, the Judicial Branch.

However, the Court believed that because the presidential veto was legally overturned by Congress and the Pangrazio Law was passed, the Executive Branch was thereby bound regardless of its prior veto. By the same token, the Court noted that it could not revoke nor improve a law that had been duly approved by due compliance with all the constitutional requirements.

The Court upheld the constitutionality of the Pangrazio Law by a vote of 2 to 1, citing the following reasons:

  • The transaction set forth in the Pangrazio Law is not incongruent with the duties constitutionally assigned to the Central Bank. While Article 285 of the Constitution states that the Central Bank is solely responsible for monetary issuance, this article does not limit the role of the Central Bank to monetary issuance only; on the contrary, it also states that the Central Bank is an executor of the credit policy, and as such, under Article 4 of the Organic Law of the Central Bank (Ley Orgánica del Banco Central), the Central Bank's duties include that of acting as banker and financial agent to the State. Therefore, the Court noted that nothing in these articles prevented a law such as the Pangrazio Law from authorizing the Central Bank to pay depositors and creditors of banks and financial institutions which have been the subject of official intervention.
  • The Pangrazio Law does not violate Article 286 because the Central Bank merely acted as a financial agent and did not grant any type of loans. The State held itself out as the party responsible for the debt, assumed the full amount paid in accordance with the mechanism set forth in the Pangrazio Law and ordered its financial agent and banker, the Central Bank, to pay off the debt with bonds to be issued by the Executive Branch.
  • The State's civil responsibility is unlimited, as is the civil responsibility of any other entity with legal personality. No constitutional interpretation can prohibit the State from voluntarily assuming an obligation to protect hundreds of persons who were harmed while the authorities were supposed to be looking after their interests.
  • Finally, the Court noted that the Pangrazio Law was not intended to release the persons responsible for the financial crisis from any responsibility inasmuch as the Ministry of Finance was subrogated to all of the depositors' rights and claims against those parties.

Ya-Ting Yang
Curtis, Mallet-Prevost, Colt & Mosle
New York

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