Here’s a prediction: When historians look back at the legacy of U.S. Supreme Court Justice Antonin Scalia and his conservative colleagues, they will pay close attention to the justices’ reluctance to extend the dominion of U.S. courts beyond our country’s borders. Scalia made that sentiment clear in his 2010 opinion in Morrison v. National Australia Bank, and the court is right now considering the reach of a U.S. law that provides a cause of action for human rights victims in Kiobel v. Royal Dutch Petroleum (Shell). Scalia, who has spoken about the danger of applying rulings from international courts to cases in the United States, believes that the same holds true in reverse: The laws of the United States govern only the United States.
But in a ruling Friday in Argentina’s long-running dispute with vulture funds that hold defaulted Argentine bonds, the 2nd Circuit Court of Appeals drew a line in the sand. The appeals court held that Argentina cannot submit to the jurisdiction of U.S. courts when it issues sovereign debt, then defy the power of our courts to interpret the governing contracts with bondholders. The 2nd Circuit reached that conclusion despite Argentina’s invocation of the Foreign Sovereign Immunities Act — and despite our own government’s dire warning of a public policy disaster if the court sided against Argentina. The opinion, by Judge Barrington Parker for a panel that also included Judges Rosemary Pooler and Reena Raggi, is notably devoid of fiery pronouncements from a court that has repeatedly (if reluctantly) agreed with Argentina that the FSIA precludes bondholders from snatching the sovereign’s assets in the United States. But make no mistake. The 2nd Circuit is defending the power of U.S. courts in the face of a defendant that has so far refused to submit to their authority.
As Jon Stempel explained in a wonderfully lucid Reuters piece Friday, the 2nd Circuit’s opinion came in a fight over $100 billion in sovereign debt that Argentina issued in the 1990s and restructured in 2005 and 2010. The issue is whether Argentina can continue to make payments to bondholders who participated in the restructurings even as it refuses to pay vulture funds that refused to participate in the restructurings. More than 90 percent of Argentina’s bondholders took the exchange offer (which gave them between 25 and 29 cents on the dollar) after Argentina explicitly warned that those who did not participate would not receive payment on their defaulted notes. Distressed debt funds including NML Capital and Aurelius Capital nevertheless opted to hold onto their bonds. They’ve since obtained billions of dollars in judgments against Argentina.
Argentina and its lawyers at Cleary Gottlieb Steen & Hamilton have been extremely successful in thwarting execution of those judgments, as the 2nd Circuit mentioned in a footnote to Friday’s ruling. So the hedge funds took a different tack in the case that led to that decision. Argentina’s 1994 Fiscal Agency Agreement bonds included a so-called pari passu, or equal footing, clause, which said that the sovereign’s obligation to bondholders “shall at all times rank at least equally with all its other present and future unsecured and unsubordinated external indebtedness.” In 2011 NML, Aurelius and other vulture funds that claim they’re owed $1.4 billion in unpaid principal and interest on those 1994 bonds argued that Argentina was violating the pari passu clause by paying bondholders who participated in the restructuring before it paid them. The Argentine bonds were issued under New York law, so U.S. District Judge Thomas Griesa of Manhattan has presided over the litigation between Argentina and its bondholders. In a series of rulings in early 2012, he agreed to enjoin Argentina from paying the exchange bondholders before paying the hedge funds.
Griesa, who has seen Argentina refuse to pay up despite his previous rulings in the hedge fund bond litigation, expressed his frustration in the injunction rulings, in words the 2nd Circuit quoted in Friday’s decision. “The Republic has made clear — indeed, it has codified (in a 2005 law) — its intention to defy any money judgment issued by this court,” Griesa wrote. “If there was any belief that the Republic would honestly pay its obligations, there wouldn’t be any need for these (injunctions).”