143-Year-Old Peruvian Guano Bonds – Only Pretty Paper

October 1, 2018 was arguably an important day for not one, but two, of Chile’s northern neighbors; and, if it was hard to avoid the news that the U.N. had rejected Bolivia’s request that Chile be ordered to negotiate on ocean access, it was just as easy to miss a one-line U.S. Supreme Court decision favoring Peru.

In 2015, MMA Consultants 1, Inc. (“MMA”) filed a civil action against Peru in the United States District Court for the Southern District of New York. MMA sued for breach of contract, alleging that Peru had failed to remit payment on certain bearer bonds that MMA held. Supposedly, with 140 years of compounding interest, the bonds were worth more than 182 million USD.

Peru moved to dismiss the case, and the district court granted the motion. The court found that it had no jurisdiction over the case because the Foreign Sovereign Immunities Act provides the sole basis for obtaining jurisdiction over a foreign state in federal court, and a foreign state is presumptively immune from U.S. court jurisdiction unless one of a number of statutory exceptions applies, and none did.

The district court also found that MMA’s claim was time-barred by the applicable statute of limitations and that MMA had failed to state a claim upon which relief could be granted.

MMA appealed, and the United States Court of Appeals for the Second Circuit affirmed the district court’s decision that it had no jurisdiction over the case.

MMA then petitioned for review by the United States Supreme Court, and, on October 1, 2018, the Court issued a one-line opinion denying the petition. As a result, the decision of the Court of Appeals stands.

If a summary of the case is metaphorically dry as dust, the origin of the bonds is literally so: desiccated seabird guano.

The story of Peru’s prized guano deposits begins with water and ends with its absence

The story of this guano begins with water and ends with its absence. The Humboldt Current, also known as the Peru Current, flows north along the western coast of South America. It carries cold, upwelled, nutrient-rich Antarctic water. This water supports teaming schools of fish. The fish, in turn, feed millions of seabirds.

For thousands of years, these seabirds blanketed the small islands off the coast of Peru with their droppings, where the extremely dry climate preserved it. A lot of it. Millions of tons of it. Even reaching heights of 60 m on the Chincha Islands off the southern coast of Peru.

Urban Invaders: Monk Parakeets

Indigenous peoples exploited the guano for centuries

This was no secret. For centuries, Peru’s indigenous populations had valued and exploited these deposits as fertilizer.

The Incas did likewise when they ruled the coast. In fact, the word guano is derived from their language, Quechua. They carefully managed it, by, among other things, limiting access to it and punishing those who disturbed the birds (execution being the ultimate punishment).

When the Spanish arrived in the mid-1500s, however, they were more focused on other commodities like gold and silver. As a result, the guano deposits remained largely intact for the next 300 years.

The nest of the Peruvian booby is made of almost pure guano. (Wikimedia Commons)

Europe and North America’s sudden appetite for guano caused a boom

That all changed in the mid-1800s.

Peru was struggling to find its way after having obtained independence from Spain. It was desperately searching for a profitable natural resource to pull its economy out of a post-revolutionary funk.

At the very same time, on the other side of the planet, in Europe, there was increasing recognition that minerals played an important role in plant growth and that standard farming practices there (rotating crops and using local animal manure) were insufficient to support ever-growing populations.

European scientists began trumpeting the use of guano as a fertilizer, and their tests showed that Peruvian island guano was especially rich. As a result, Europe and North America were suddenly hungry for it, and a boom was born, often referred to as the “Guano Age.”

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The bonds at issue arose from the tail end of the Guano Age

MMA’s bonds arose during the boom. As the district court explained in its decision, Peru passed a law in 1875 allowing the free sale of guano in the United States in contravention of a consignment contract it had with a certain company (“CCG”), and the bonds were part of the consideration for terminating CCG’s exclusive rights under the consignment contract. (MMA Consultants 1, Inc. v. Republic of Peru, 245 F.Supp.3d 486, 493-494 (S.D.N.Y. 2017).)

It’s unknown whether the bonds were begrudgingly accepted as a “consolation prize,” but it may well be that they were more valuable than the exclusive rights they replaced, because by 1875 the boom was busting: the quantity, quality, and markets for guano were in steep decline, and saltpeter from the Atacama desert to the south was replacing guano as a fertilizer component.

In fact, this transition in fertilizers was one of the motivators in the War of the Pacific, also known as the Saltpeter War, between a Peruvian-Bolivian alliance and Chile, in which Bolivia lost its coastline. That loss remains a sensitive topic, as evidenced by the United Nations proceedings that concluded the very same day the U.S. Supreme Court refused to review MMA’s case.

BREAKING – ICJ verdict: No obligation to negotiate sea access with Bolivia

More than just a footnote to the Guano Age

It’s unknown how MMA came into possession of its “guano bonds,” but it hardly matter because the case is over.

What does matter, is the case itself. It’s more than just a footnote to the Guano Age. As Peru’s Ministry of Economy and Finance reported, the rulings in the case establish important precedents for Peru that will serve similar cases.

The rulings will be useful, in general, in any case in which a plaintiff attempts to drag a foreign government into U.S. state or federal court; and, in particular, in any case in which a plaintiff comes forward with another “guano bond” in the series.

Indeed, MMA had only 14 of the 3,600 “guano bonds” that Peru was to issue and deliver under the deal with CCG, and, as of the date of this article, at least one of those bonds was available for sale on eBay at a “Buy It Now” price of 100,000 USD. Be forewarned: it’s said to have “some worm holes.” The good news is that it comes with free shipping.



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