Executive Summary
In again upholding the injunctions ordered by Judge Griesa of the Southern District of New York, the Second Circuit Court of Appeals sent a strong message that NY courts will enforce valid contracts according to their terms, even where the parties are holdout creditors and sovereign borrowers. The Court also affirmed that sovereigns cannot rely upon sovereign immunity to avoid consequences of extreme behavior such as disregard of contractual obligations or defiance of court orders.
At the same time, the Court went to great lengths to caution those who would place too much importance on this decision or predict substantial impact on future sovereign debt restructuring. The Court did not rule on the meaning of all pari passu clauses, but only that the extraordinary conduct of Argentina in this case violated the particular clause in the holdout bond documentation.
Enforcement of the injunctions was stayed pending the Supreme Court's ruling on Argentina's petition for certiorari.
The Decision
On Friday August 23rd the Second Circuit issued its long-awaited decision in NML v. Argentina. Prior client alerts detailing the history of this litigation can be found by clicking on the below links.
http://www.bingham.com/Alerts/2013/04/Argentina-Stands-Pat-Repeats-Exchange-Offer
http://www.bingham.com/Alerts/2013/04/NML-Pulls-No-Punches-in-its-Response-to-Argentinas-Ratable-Payment-Proposal
http://www.bingham.com/Alerts/2013/06/Argentina-Seeks-Supreme-Court-Review-in-NML-v-Argentina
The Second Circuit affirmed in full the amended injunctions issued by the District Court for the Southern District of New York on November 21, 2012, finding no abuse of discretion by the Judge Griesa in either:
(1) the ratable payment formula calling for payment to the holdouts and exchange bondholders of the same percentage of the amounts then due notwithstanding that the holdout bonds have been accelerated (meaning that all principal, interest and penalty interest are now due), whereas only periodic interest payments are now due on the exchange bonds, or
(2) the ruling that under Federal Rule of Civil Procedure 65(d) the injunctions bind “Argentina’s ‘agents’ and ‘other persons who are in active concert or participation’ with Argentina”, which includes Bank of New York, as indenture trustee for the exchange bondholders, Cede & Company and Bank of New York Depositary, as registered owners of the exchange bonds, clearing systems such as Depositary Trust Company, Euroclear and Clearstream, but excludes intermediate banks merely processing electronic funds transfers (page 8).
In a 25-page opinion, the Court did not limit itself to the above, which were the only issues remanded to the District Court in the Second Circuit’s October 26, 2012 order. Instead, it addressed each argument advanced by Argentina, the exchange bondholders, Bank of New York and the other parties appearing at the February 27th oral argument or submitting briefs.
(1) The Court rejected arguments based on alleged prejudicial impact of this ruing on future sovereign debt restructurings. Instead, it carefully circumscribed the precedential impact of its holding, stating on page 23:
"… this case is an exceptional one with little apparent bearing on transactions that can be expected in the future. Our decision here does not control the interpretation of all pari passu clauses or the obligations of other sovereign debtors under pari passu clauses in other debt instruments. As we explicitly stated in our last opinion, we have not held that a sovereign debtor breaches its pari passu clause every time it pays one creditor and not another, or even every time it enacts a law disparately affecting a creditor’s rights. … We simply affirm the district court’s conclusion that Argentina’s extraordinary behavior was a violation of the particular pari passu clause found in the [Fiscal Agency Agreement]."
(2) Similarly, the Court rejected alleged public policy concerns and prejudice to third parties including the exchange bondholders, finding that they were largely of Argentina’s own making, citing Argentina’s failure to provide its own credible payment formula as requested by the Court and unilateral threat to withhold payment from exchange bondholders if ordered to pay the holdouts.
(3) The Court concluded that it is in New York's interest as a financial center that New York law contracts be enforced and that debtors pay their debts, stating on pages 24 – 25:
“… our decision affirms a proposition essential to the integrity of the capital markets: borrowers and lenders may, under New York law, negotiate mutually agreeable terms for their transactions, but they will be held to those terms. We believe that the interest—one widely shared in the financial community—in maintaining New York’s status as one of the foremost commercial centers is advanced by requiring debtors, including foreign debtors, to pay their debts.”
(4) The Court deferred to later litigation arguments that the Court may lack jurisdiction over some parties bound by the injunction under Rule 65(d) as interpreted in Judge Griesa’sNovember 21st order, noting on page 22, footnote 12:
"We have never been presented with the question whether U.S. sanctions legally apply to non-U.S. persons or institutions, and we do not answer that question today. We merely note that both foreign and domestic financial institutions are already required to police their own transactions in order to avoid violations of potentially applicable United States laws and regulations."
In so doing, the Court reminded the parties that the District Court is available to provide guidance to parties concerned that contemplated actions may give rise to Rule 65 liability.
(5) Finally, the Court addressed the two issues raised in Argentina’s pending petition for certiorari “apparently …filed … on June 24, 2013, notwithstanding that, as of that date, no final order had yet been issued in this case" (page 7, footnote 6):
• With respect to Argentina’s claim that the injunctions issued by Judge Griesa violate the Foreign Sovereign Immunities Act, the Court reiterated its argument that the injunctions “do not attach, arrest or execute on any property” of Argentina and therefore “[a]bsent further guidance from the Supreme Court, we remain convinced that the amended Injunctions are consistent with the FSIA” (page 11)
• With respect to Argentina’s claim that an injunction is an improper remedy in a debt collection action, the Court held that an injunction is proper where a creditor has no other adequate remedy. The Court noted that Argentina “has made clear its intention to defy any money judgment” and “has gone considerably farther by passing legislation … specifically barring payments to [the holdouts]" (page 12).
As expected, the Court stayed enforcement of the injunctions pending resolution of any petitions for certiorari to the Supreme Court. As noted, a petition was filed by Argentina on June 24th. It is uncertain whether that petition will be amended or a new petition filed. We do not expect a ruling on the petition(s) before upcoming Argentine legislative elections on October 27th.
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Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Wolfson-BruceThis article was originally published by Bingham McCutchen LLP.