In new SCOTUS bid, Argentina hedges bet on sovereign immunity
On Tuesday, the Republic of Argentina asked the justices of the U.S. Supreme Court to grant review of a pair of rulings by the 2nd Circuit Court of Appeals that, according to Argentina’s brief, have put millions of Argentineans on the brink of economic catastrophe. The 2nd Circuit decisions, as you may recall, held that under the pari passu, or equal footing, clauses of defaulted Argentine bonds, Argentina may not make payments to bondholders who participated in two rounds of restructuring before it pays more than $1 billion to holdout distressed debt investors that refused to exchange their defaulted bonds. In the cert petition, Argentina’s new Supreme Court counsel, Paul Clement of Bancroft, reprises arguments that failed to sway U.S. District Judge Thomas Griesa and the 2nd Circuit when Cleary Gottlieb Steen & Hamilton previously asserted them. But Argentina is counting on the Supreme Court’s proven interest in the boundaries of sovereign immunity, and, if that doesn’t do the trick, in the court’s federalism concerns.
In fact, the cert petition presents federalism as the first issue for the justices, asserting an extremely unusual request for the U.S. Supreme Court to refer a question to a state high court. The 2nd Circuit, you’ll recall, agreed to block Argentina’s payments to exchange bondholders based on the appellate court’s interpretation of the pari passu provisions in the country’s sovereign debt offerings. Argentina contends not only that the federal appeals court reached the wrong conclusions, but that it exceeded its authority when it did. The interpretation of the pari passu provision is of surpassing interest to New York because it will impact the state’s status as a financial center, the brief said. And no New York state court has issued a decision on the meaning of an equal footing clause in a sovereign debt contract.
So according to Argentina, the justices should certify to the New York Court of Appeals the question of whether a foreign sovereign breaches pari passu provisions when it pays interest to holders of performing debt before paying holders of defaulted bonds. As precedent for this unusual maneuver, the brief cites the justices’ 2013 referral in the abortion pill case Cline v. Oklahoma Coalition for Reproductive Justice, but in that case, the U.S. court was asking Oklahoma justices to clarify a recently passed state law, not to interpret a contract provision.
But according to Argentina, the 2nd Circuit has improperly exercised the state court’s prerogative. “The New York Court of Appeals should have the final word,” Argentina argues. “If New York courts want New York law to upset settled expectations, impede restructurings, and endanger New York’s status as the law of choice for sovereign debt, that is their prerogative. But they should not have those consequences thrust upon them.”
Argentina didn’t assert federalism when it previously asked the Supreme Court to look at the pari passu issue on an interlocutory appeal the justices declined to hear. According to its new counsel, Clement, if the Supreme Court certifies equal footing contract interpretation to the New York Court of Appeals, the justices needn’t even consider Argentina’s argument that the 2nd Circuit improperly sidestepped the Foreign Sovereign Immunities Act when it enjoined Argentina from paying exchange bondholders before distressed debt holdouts. But Clement nevertheless urged the high court to grant review on FSIA grounds, and in quite florid terms. “The Second Circuit affirmed injunctions that effectively reach into Argentina’s borders, coercing it into violating its sovereign debt policies and commandeering billions of dollars of core sovereign assets – Argentina’s reserves – to pay the vulture fund NML Capital and other holdout creditors,” the brief said. “The injunctions circumvent (FSIA’s) express limitation on judicial authority by coercing Argentina into paying respondents with immune assets located outside the United States.”
The 2nd Circuit did so, according to Argentina, by distinguishing between the injunctive relief it issued in this case and enforcement of a money judgment. As I’ve previously explained, the appeals court has reluctantly cited FSIA to squelch all kinds of creative attempts by distressed debt investors to execute billions of dollars in judgments they’ve won against Argentina. Time and time again, the appeals panel has said that under FSIA, holders of defaulted Argentine debt can’t touch sovereign assets unless those assets are used for commercial activity in the United States. But when the distressed debt hedge funds sued Argentina on pari passu grounds, they weren’t asking to enforce a money judgment but for specific performance under their contracts. The 2nd Circuit held that the injunctions did not implicate Argentina’s sovereign immunity because they didn’t require Argentina to use sovereign assets to pay distressed-debt holders. Argentina claims that’s a meaningless distinction, since the country will certainly have to use immune assets to pay off the hedge funds.
The appeal court’s ruling, according to Argentina, upends the “carefully-crafted regime” of foreign sovereign immunity, knocking askew the compromise that Congress and the Executive Branch struck between the interests of foreign sovereigns and of their creditors. The law acknowledges that in some cases, judgments simply can’t be executed against foreign sovereigns, Argentina said, and the 2nd Circuit was wrong to attempt to “circumvent Congress’ remedial scheme and to provide relief where Congress fully intended U.S. courts would provide none.”
Argentina already knows that the justices are interested in FSIA: Last month, the Supreme Court granted Argentina’s petition for review of a different 2nd Circuit ruling in its endless litigation with holdout investors, this one presenting the question of whether FSAI prohibits discovery in post-judgment enforcement proceedings on sovereign assets that creditors can’t touch. That case, in which Argentina is represented by Cleary, is set to be argued in April.
Argentina can probably count on the Justice Department to support its bid for Supreme Court review in the pari passu case. The solicitor general has already highlighted the Executive Branch’s deference to foreign sovereign immunity in an amicus brief urging the Supreme Court to grant cert in the discovery case and in a separate brief backing Argentina’s interpretation of pari passu clauses when that case was before the 2nd Circuit.
But the new cert petition doesn’t claim a split in the federal circuits on the interpretation of pari passu clauses in sovereign debt contracts; by contrast, there is at least an arguable split on the limits that sovereign immunity should impose on discovery of foreign assets. The Supreme Court, as you know, is likeliest to take up issues that are unresolved in the lower courts. In the new petition, Argentina tries to make up for the lack of a circuit split by emphasizing the supposed calamity that will ensue if the country is forced to pay what it owes to renegade bondholders – not just for Argentina but for the entire sovereign debt market. The 2nd Circuit tried to portray Argentina as uniquely obstinate, but according to the brief, the disastrous consequences of the appellate ruling don’t apply only to Argentina. “The panel’s interpretation of the pari passu clause and its holding that reserves can be reached by injunction will embolden vultures worldwide and create powerful incentives for others to hold out,” it said.
I reached out to NML Capital counsel Theodore Olson of Gibson, Dunn & Crutcher. My email was referred to an NML representative, who emailed a statement from Olson: “For almost a decade, Argentina has openly defied dozens of orders and judgments of the courts of the United States,” it said. “Most recently, Argentina’s lawyer stood before the court of appeals and said that Argentina would not obey the orders in this case even if they were upheld by the Supreme Court. Not only does this case not remotely warrant Supreme Court review, but the Supreme Court should not hear the appeal of Argentina, or any litigant, that refuses to abide by the Supreme Court’s judgment.”
(Reporting by Alison Frankel)