Opinion

Alison Frankel

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.

It has become rare in recent years for the Justice Department, via the solicitor general, to file an amicus brief on a cert petition without the justices asking to hear the government’s position, said Thomas Goldstein of Goldstein & Russell (and Scotusblog). Unless a government employee is a party in the case, Goldstein told me in an email, the SG “almost never” opines on cert petitions without a specific invitation from the Supreme Court.

Goldstein’s interpretation suggests that we shouldn’t infer anything from the Justice Department’s absence from this week’s amicus briefing for Argentina. The solicitor general may simply be waiting for the justices to invite a brief expressing the views of the Justice Department, which is the typical procedure. In a different Supreme Court case between Argentina and the hedge funds that hold billions of dollars in judgments against it – this one involving the extent of discovery the hedge funds can conduct on Argentine assets they hope to seize to satisfy those judgments – the solicitor general didn’t opine on Argentina’s cert petition until the Supreme Court asked for a brief. The Justice Department ended up agreeing with Argentina that the justices should take the case, then filed a brief supporting Argentina on the merits when the court granted cert. (That case is scheduled for argument next month.)

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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