Opinion

Alison Frankel

The other loser in Argentina debt saga: U.S. courts

Alison Frankel
Jul 31, 2014 20:49 UTC

There’s been a lot of talk in the Argentine debt crisis about whether U.S. courts have overstepped their bounds. At the end of 2011, you’ll recall, U.S. District Judge Thomas Griesa of Manhattan ruled that the pari passu, or equal treatment, clause of Argentina’s bond contracts entitles hedge fund holdouts that refused to participate in debt restructurings to payments alongside the more obliging exchange debtholders. Since then, Argentina and its allies, including the U.S. Justice Department, have argued that Griesa’s interpretation of the pari passu clause — which was subsequently affirmed by the 2nd U.S. Court of Appeals and left intact by the U.S. Supreme Court last month — gives too much power to creditors and undermines sovereigns.

On Wednesday, Argentine officials chose to default on exchange bonds rather than pay about $1.6 billion to, or otherwise reach a settlement with, the hedge fund holdouts. That decision exposed a stark truth: All the might of the U.S. judicial system cannot force a foreign nation to pay its debtors. U.S. judges can’t order the seizure of a foreign sovereign’s assets and they can’t throw foreign officials in jail for contempt. As Georgetown law professor Adam Levitin wrote in a very smart column in the Wall Street Journal, “There’s no way to bind a sovereign to its promise of complying with court orders any more than there is to its promise of payment.”

Griesa and the 2nd Circuit thought the pari passu injunctions were the club that would finally bludgeon Argentina into submission, after years of Argentine defiance of court-ordered judgments for NML Capital, Aurelius Capital and other holdout debt investors. The holdouts — many of which acquired defaulted Argentine debt on the cheap, gambling that they’d be able to recover from Argentina via litigation — tried all kinds of maneuvers to attach Argentine assets, only to run time and again into the country’s immunity as a foreign sovereign.

The pari passu injunctions, though, implicated not just Argentina but also the global banks that transfer money from Argentina to its exchange bondholders. Technically, the injunctions barred Argentina from making interest payments on its restructured debt without also paying the holdouts. Practically, the injunctions meant that financial institutions such as the bond trustee Bank of New York Mellon could not transfer interest payments from Argentina to exchange bondholders without violating U.S. court orders. Unlike Argentina, global banks that do business in the United States can’t simply ignore U.S. rulings they don’t like.

Those banks, as well as the exchange bondholders, protested to Griesa and to the 2nd Circuit that the pari passu injunctions turned them into hostages in the gunfight between Argentina and the holdouts. That’s a fair point, and they have eloquent sympathizers like Felix Salmon in Foreign Affairs. But it’s also true that Argentina’s exchange bondholders and payment agents subjected themselves to U.S. jurisdiction though their contracts with Argentina. (A caveat: As Floyd Norris pointed out in a New York Times column last week, Judge Griesa and the 2nd Circuit haven’t done a good enough job of distinguishing between Argentine bonds issued under New York law and those issued under the law of other jurisdictions, which has created considerable confusion about precisely which interest payments are covered by the pari passu injunctions.) If you agree to submit to a court’s jurisdiction, you’re stuck with the obligation of following its rulings.

Judge says Cleary Argentina memo is privileged, he won’t ‘make use of it’

Alison Frankel
Jun 10, 2014 21:11 UTC

The hedge fund NML Capital is going to have to execute some fancy footwork to maintain its argument that Argentina is plotting to evade a ruling by the 2nd U.S. Circuit Court of Appeals that prohibits the foreign sovereign from making payments to holders of its restructured debt before paying off hedge funds that refused to exchange defaulted bonds.

As I told you last week, NML presented U.S. District Judge Thomas Griesa with what it considered smoking-gun evidence: published accounts of a May 2 memo from Argentina’s lawyers recommending that the country’s “best option” if the U.S. Supreme Court refuses to hear Argentina’s appeal of the 2nd Circuit decision would be to default “and then immediately restructure all of the external bonds so that the payment mechanism and the other related elements are outside of the reach of American courts.”

But in a June 3 letter to lawyers for NML and for Argentina, Judge Griesa said that the memo, written by Cleary Gottlieb Steen & Hamilton for Argentina’s Minister of Economy and Public Finance, “is clearly privileged,” based on his assumption that Cleary didn’t intend the document to become public. (It was leaked in the Argentine press, then was reported by the Financial Times’s FT Alphaville blog, which links to an English translation of the entire five-page memo, entitled “Possible Outcomes of the Petition for Certiorari and Issues Regarding the Settlement of the Debt.”) The judge said he would “not make use of” the privileged document.

In new SCOTUS brief, Argentina pledges to comply with U.S. courts

Alison Frankel
May 30, 2014 20:44 UTC

The most notorious deadbeat in the U.S. courts made an historic concession this week.

In a May 27 response brief at the U.S. Supreme Court, Argentina said that, contrary to the accusations of its hedge fund foes, it will comply with directives from the 2nd U.S. Circuit Court of Appeals to pay renegade sovereign debtholders if the Supreme Court refuses to hear its appeal. That pledge marks a big departure from the outright defiance Argentina showed last year at the 2nd Circuit, when its lawyers informed the court that the government “would not voluntarily obey” a U.S. court order it disagreed with. Even after the appeals court ruling — which upheld an injunction that bars Argentina from making payments to holders of its restructured debt before it pays more than $1 billion it owes to the hedge fund holdouts — the Argentine government vowed that it would never negotiate with the rapacious hedge funds. Argentina now seems to be reconsidering that vow, both outside of the courts, as Reuters reported Thursday, and within the U.S. litigation, as the May 27 filing indicates.

In the new brief, Argentina’s lawyers — Paul Clement of Bancroft, who is counsel of record and a recent addition to Argentina’s team, and the country’s longtime advisers Jonathan Blackman and Carmine Boccuzzi from Cleary Gottlieb Steen & Hamilton — repeated their arguments that the Supreme Court should grant certiorari and ask New York’s highest state court to interpret the pari passu, or “equal footing,” provision in Argentina’s sovereign debt contracts. Argentina also suggested that this case is of such overwhelming importance to foreign sovereigns and to foreign debt markets that the Supreme Court might want to invite the views of the U.S. government, which (as I noted in March) didn’t file an amicus brief supporting Argentina’s cert petition.

U.S. stays out of Argentina pari passu case at SCOTUS – for now

Alison Frankel
Mar 26, 2014 19:18 UTC

France, Brazil and Mexico told the U.S. Supreme Court this week that the 2nd Circuit Court of Appeals has endangered sovereign debt markets with its ruling last year against the Republic of Argentina. In amicus briefs supporting Argentina’s petition for Supreme Court review, the foreign sovereigns argue that the 2nd Circuit gravely misinterpreted the so-called “pari passu” (or equal footing) clause of Argentina’s sovereign debt contracts. By ruling that Argentina may not pay bondholders who exchanged defaulted bonds for restructured debt before it pays hedge fund creditors that refused to exchange their defaulted bonds, the amicus briefs argue, the 2nd Circuit has undermined international debt restructurings, permitting vulture investors to hold entire foreign economies hostage.

The United States made quite similar arguments, as you may recall, when Argentina’s pari passu case was before the 2nd Circuit. But there’s no filing from the Justice Department among the 10 new amicus briefs urging the Supreme Court to take Argentina’s appeal. Does that mean Argentina has lost its most influential friend in the U.S. court system?

It does not, but it does mean that the administration is waiting for an invitation from the Supreme Court justices before it takes a position in the Argentina pari passu case. And there’s at least some chance the invitation will never come.

U.S. walks dangerous line to support Argentina in bond cases

Alison Frankel
Apr 9, 2012 21:29 UTC

Distressed debt investors don’t have much credence as victims. These are, after all, hedge funds that buy up bonds in or near default, typically at a steep discount, in the hope they’ll be able to boost the value of the debt through the bankruptcy process or litigation in U.S. courts. Right now, for instance, distressed bond funds are preparing for battle over billions of dollars worth of Greek sovereign debt that they snatched up in anticipation of that country’s default in March. Distressed debt funds quite literally feed off the flesh of moribund companies and foreign economies, which is why they’re frequently called vulture funds. Vultures flanked by crafty lawyers aren’t entitled to a whole lot of sympathy.

But they earned some from me when I read the Justice Department’s new amicus brief, filed last week at the 2nd Circuit Court of Appeals in the long-running battle between The Republic of Argentina and NML Capital, Aurelius, and other holders of defaulted Argentine bonds. The brief suggests that the Justice Department believes the foreign policy objectives of the executive branch trump the obligations of a foreign sovereign to comply with U.S. court directives. That’s an argument the government clearly feels conflicted about, based on the brief. And its support of Argentina, at the expense of the power of the U.S. court system, could roil the vulture-dominated secondary market for distressed sovereign debt in the midst of the Eurozone crisis.

Usually, the United States wouldn’t get involved in a dispute over contract interpretation, which is at the heart of the cases at the 2nd Circuit. But the Justice Department believes Argentina’s appeal implicates a “cornerstone” foreign economic policy. Last December, U.S. District Judge Thomas Griesa of federal court in Manhattan issued a series of orders in various bondholder cases against Argentina concluding that under the standard contract provision known as pari passu (or “equal footing”), Argentina must pay the vulture funds in full before making payments to investors who agreed to participate in two rounds of restructurings that followed Argentina’s 2002 bond default. In February, Griesa issued injunctions based on those orders, which meant that Argentina could not make any payment to investors who were issued new debt in the 2005 and 2010 restructurings until it paid the holdouts everything it owes them.

Bondholder beats Argentina on appeal but still may not recover

Alison Frankel
Jul 21, 2011 21:59 UTC

For vulture funds holding defaulted Argentinean bonds, the U.S. Court of Appeals for the Second Circuit has been a brick wall with only the tiniest of chinks. In recent years, the appellate court has rejected all sorts of clever stratagems the bondholders and their lawyers have dreamed up in an effort to get their hands on Argentine assets, including an attempt to attach assets belonging to Argentina’s central bank and pension system.

One notable exception to the rule of bondholder frustration at the Second Circuit was the appellate court’s 2006 ruling that a holder called Capital Ventures International had the right to attach Argentine collateral (in the form of U.S. and German government securities) held by the Federal Reserve Bank in New York. Argentina put up the securities to back its 1992 issuance of so-called “Brady bonds,” which, under a plan pushed by then-Treasury Secretary Nicholas Brady, exchanged $28.5 billion in defaulted bonds for collateralized Brady bonds due in 2023. The Second Circuit’s 2006 ruling meant that if Argentina attempted to restructure or exchange the Brady bonds before their 2023 maturity, CVI was first in line to get its hand on the securities held at the Fed.

There was just one big problem with the 2006 appellate ruling for CVI and its lawyers at Ballard Spahr and Cozen O’Connor: it came too late. By the time the Second Circuit overturned a lower court ruling and granted CVI a right to the Fed-held collateral, Argentina had already completed an exchange of $2.8 billion in Brady bonds. Because CVI only had a right to the collateral at the Fed if Argentina was engaged in a Brady bond exchange, CVI was out of luck, despite its appellate win. CVI was left holding a big-money judgment against Argentina — more than $200 million in CVI’s case — with no foreseeable way to collect on it.

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