On February 18, 2014, Argentina filed a petition asking the United States Supreme Court to review the Second Circuit’s decision affirming the District Court’s decision requiring Argentina to pay a group of holdout bondholders (called “vulture funds” by Argentina’s counsel) 100% of the monies owed to them.  As we discussed here, here, and here, the lower courts’ decisions are part of the fallout of Argentina’s 2001 default on nearly $100 billion of sovereign debt and subsequent attempt at restructuring that debt.

In its petition, Argentina challenges two aspects of the lower courts’ decisions: (1) the courts’ treatment of Argentina under the Foreign Sovereign Immunities Act, and (2) the courts’ interpretation of the pari passu clause in the bonds.

Argentina characterizes the lower courts’ decisions as “deeply offensive to Argentina’s sovereignty” and argues that the decisions “flout the Foreign Sovereign Immunities Act…and have upended expectations in the sovereign debt markets.” Argentina argues that the decisions violate sovereign immunity because they “effectively reach into Argentina’s borders, coercing it into violating its sovereign debt policies and commandeering billions of dollars of core sovereign assets.”  Argentina contends that these rulings “spark international tension.”

Argentina also argued that the interpretation of the pari passu clause in the bonds should be certified to the New York Court of Appeals because the bonds were issued under New York law.  Pointing to purported flaws in the lower courts’ interpretation of the clause, Argentina asserted that “[i]f 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.”

As discussed here, the Supreme Court previously agreed to hear an appeal of a related Second Circuit decision allowing holdout bondholders to subpoena banks for information about Argentina’s assets.  That argument will take place on April 21, 2014.  If the Supreme Court agrees to hear this latest appeal, argument would be scheduled during the next term, which begins in October.

On January 10, 2014, the Supreme Court agreed to hear Argentina’s appeal of the Second Circuit’s decision allowing “holdout” bondholders to subpoena banks for information about Argentina’s assets.  EM Ltd. v. Republic of Argentina, 695 F.3d 201 (2d Cir. 2012), cert. granted, Case No. 12-842, 2014 LEXIS 15 (Jan. 10, 2014).  In the lower courts and in its petition for review, Argentina argued that allowing the subpoenas to apply to non-U.S. assets would violate Argentina’s sovereign immunity.  The U.S. Solicitor General filed an amicus curiae brief arguing that the Supreme Court should grant certiorari because the Second Circuit’s decision “raises significant foreign-policy concerns for the United States.”

As discussed here, Argentina is also expected to seek Supreme Court review of the Second Circuit’s decision upholding an injunction barring Argentina from paying holders of restructured debts while “holdout” creditors remain unpaid.  The petition for certiorari in that case is due in February 2014.

Check back with the Hughes Hubbard Bankruptcy Blog for further developments in these cases.

On November 18, 2013, the Second Circuit issued an order denying Argentina’s petition for rehearing of the court’s decision upholding an injunction that barred Argentina from paying holders of restructured debts while “holdout” creditors remain unpaid.  NML Capital, Ltd. v. Republic of Arg., Case No. 12-105, Docket No. 1035 (2d Cir. Nov. 18, 2013).  As discussed here and here, the “holdout” creditors are primarily hedge funds who declined Argentina’s 2005 and 2010 restructuring offer to trade sovereign bonds for newly issue bonds at a significant haircut and are now trying to collect on the original debt.

The district court injunction remains stayed pending further appeals.  Argentina has 90 days to petition the Supreme Court to review the case.  As discussed here, the Supreme Court rejected Argentina’s earlier petition to hear the interim decision of the Second Circuit that all bondholders must be treated equally.

On October 7, 2013, the Supreme Court issued an order denying Argentina’s petition for a writ of certiorari on the interim decision of the Second Circuit that Argentina violated the contractual provision that all bondholders must be treated equally (discussed here and here).

The Supreme Court’s decision comes on the heels of an October 3, 2013 order by U.S. District Court Judge Thomas Griesa confirming that the Anti-Evasion Injunction barring Argentina from altering mechanisms for payments on Exchange Bonds “has been and remains continuously in full force and effect.”  NML Capital, Ltd., v. Republic of Arg., 08-cv-06978 (TPG), Docket No. 487 (S.D.N.Y. Oct. 3, 2013).

Judge Griesa’s order was prompted by the president of Argentina’s August 26, 2013 televised speech announcing a plan to circumvent previous U.S. court decisions by allowing bondholders who opted in to Argentina’s 2005 and 2010 restructurings to replace their bonds (the “Exchange Bonds”) with nearly identical instruments that would be payable in Argentina.  The proposal is an attempt to circumvent the district court’s decision, affirmed by the Second Circuit, which enjoins Argentina and U.S. agent-banks from making payments on the Exchange Bonds unless holdout creditors receive ratable treatment.  The proposed plan would bypass the U.S. court’s injunctions by making the bonds payable in Argentina.  In the interim, on September 5, 2013, Argentina’s Senate approved a plan offering holdout creditors an opportunity to exchange their bonds under similar terms to previous restructurings.

On August 23, 2013, the Second Circuit affirmed  the District Court’s decision, which held that Argentina must pay a group of holdout bondholders 100% of monies owed to them.  As we outlined in June, the long-running litigation dates to Argentina’s 2001 default on $100 billion of sovereign debt.

Earlier this week, the U.S. Supreme Court announced that it would decide on September 30th whether to review Argentina’s appeal of the Second Circuit’s decision.  Stay tuned to the Hughes Hubbard Bankruptcy Report for further updates and analysis regarding the appeal.

When sovereign states become insolvent or default on their debt, there are no statutory bankruptcy protections in place, such as the automatic stay, to orderly distribute assets and prevent litigation to collect on defaulted debt.  The alternative to statutory bankruptcy protection is frequently debt restructuring proposals that force debt holders to accept deeply discounted exchange bonds or risk receiving nothing.  As Jonathan I. Blackman and Rahul Mukhi wrote in a 2010 article, The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and Other Legal Fauna, in recent years when sovereigns have faced insolvency or default and present debt restructuring proposals to investors, some hedge fund investors have opted out of the proposals and pursued litigation to collect on the defaulted debt.

Background

In 2008, NML Capital, Ltd., a subsidiary of Elliot Associates, led a suit against the Republic of Argentina to collect on sovereign bonds.  Beginning in 2001, Argentina defaulted on nearly $100 billion of its sovereign debt.  After four years of failing to pay on the bonds, Argentina gave investors a choice to either trade existing bonds for newly issued bonds at a significant haircut on the original value, or keep the old bonds and get nothing.  While most investors accepted the haircut, several hedge funds declined the exchange offer, held the existing bonds, and filed a series of lawsuits in the United States to collect on the debt.  The holdout creditors filed lawsuits alleging breach of contract and seeking injunctive relief, and in some cases successfully won judgments against Argentina, as the Second Circuit noted in NML Capital, Ltd. v. Republic of Arg., 699 F.3d 246, 253 n.5 (2d Cir. 2012).  Other examples include: EM Ltd. v. Republic of Arg., 473 F.3d 463, 472 (2d Cir. 2007) (affirming vacatur of attachment of central bank reserves); NML Capital, Ltd. v. Banco Central de la República Arg., 652 F.3d 172, 197 (2d Cir. 2011) (vacating attachment of reserves); Aurelius Capital Partners, LP v. Republic of Arg., 584 F.3d 120, 131 (2d Cir. 2009) (rejecting attempt to restrain assets to be acquired by Argentine social security system); but see NML Capital, Ltd. v. Republic of Arg., 680 F.3d 254, 260 (2d Cir. 2012) (affirming attachment and restraining orders); EM Ltd. v. Republic of Arg., 389 F. App’x 38, 43 (2d Cir. 2010) (affirming post-judgment restraint and pre-judgment attachment orders on certain assets of Argentina held in trust in the United States).  However, Argentinian courts refused to honor the judgments.

Recent Litigation

The holdout creditors responded by filing suit in the U.S. District Court for the Southern District of New York alleging that, pursuant to the pari passu clause in the debt instruments, Argentina could not continue to pay its exchange bondholders without also paying the holdout creditors. The pari passu clause in the Argentinian debt instruments promised to maintain the equal ranking of the country’s “payment obligations.”

After sixteen months of briefing and hearings, Judge Griesa of the U.S. District Court for the Southern District of New York held that Argentina violated the pari passu clause and enjoined Argentina and domestic agent-banks from making payments on the exchange bonds unless the other bondholders were also paid.  Argentina appealed the district court injunctions, and on October 26, 2012, the Second Circuit affirmed the district court’s findings and conclusions, but remanded the matter to Judge Griesa to clarify “how the injunctions’ payment formula is intended to function.”  The district court clarified the payment formula in an opinion dated November 21, 2012.  NML Capital, Ltd. v. Republic of Arg., 2012 U.S. Dist. LEXIS 167272 (S.D.N.Y. Nov. 21, 2012).  The case returned to the Second Circuit, and on March 1, 2013, the Second Circuit gave Argentina a chance to submit in writing “the precise terms of any alternative payment formula and schedule to which it is prepared to commit.”  NML Capital, Ltd. v. Republic of Arg., No. 12-105 (2d Cir. Mar. 1, 2013), ECF No. 903.  Argentina submitted a written proposal that the holdout creditors characterized as “unacceptable and unresponsive” that offered holdout creditors less than fifteen percent of the amount owed under the terms of the bonds.

On May 22, 2013, Citibank, a non-party, filed a motion in the district court requesting confirmation that Citibank’s Argentine branch is not bound by the injunctions, arguing that their Argentine branch is beyond the jurisdictional reach of the district court injunctions.  In an order dated May 24, 2013, however, Judge Griesa declined to rule on the request pending the Second Circuit’s opinion.

The Second Circuit has not yet issued its decision on this matter, but its ruling will likely have ripple effects across the sovereign debt market and be appealed to the Supreme Court.  The United States filed an amicus brief in the Second Circuit on December 28, 2012 arguing that, if affirmed, the injunctive relief “could adversely affect U.S. foreign relations and threaten U.S. government assets.”  The Second Circuit, however, anticipated that this case will not have widespread effects because nearly all New York-law bonds issued over the last eight years include collective action clauses that eliminate the holdout creditor problem.

Check back with the Hughes Hubbard Bankruptcy Blog for further developments in these cases.