Foreign Sovereign Immunities Act

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 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.