Case of the Day: NML Capital v. Argentina

The case of the day is NML Capital, Ltd. v. Republic of Argentina (2d Cir. 2013). Just by way of background, here is my brief overview from my October 2012 post on the Second Circuit’s first decision in the case:

When Argentina restructured its debt, it enacted law treating the bonds of investors who did not take Argentina’s offer less favorably than the bonds of investors who did. The idea was to give investors an incentive to take the offer; but the original Fiscal Agency Agreement had a pari passu clause. As a result of its new law, Argentina’s courts have refused to recognize or enforce foreign judgments in favor of holders of the original debt.

In February 2012, the district court entered an injunction ordering Argentina to make payments to the original debtholders whenever it makes payments to the holders of the reorganized debt, so as to comply with the pari passu clause. Argentina was unlikely to obey the injunction, so the court directed that notice of the injunction be given to “all parties involved, directly or indirectly, in advising upon, preparing, processing, or facilitating any payment on the Exchange Bonds.” The idea was to put Argentina’s agents in New York at risk of aiding and abetting a violation of the injunction.

The Second Circuit affirmed the injunction, but it remanded to Judge Griesa, the judge who had entered the injunction, for clarification of the injunction’s payment formula and its effects on third parties and intermediary banks. As I noted in a November 2012 post, the Argentine government’s reaction was intemperate:

From the moment of the October 26, 2012 Court of Appeals’ decision, the highest officials in Argentina have declared that Argentina would pay the exchange bondholders but would not pay one dollar to holders of the original FAA bonds. President Cristina Kirchner made such a statement. The Minister of Economy, Lorenzino, declared that despite any ruling to come out of any jurisdiction, Argentina would not pay the FAA bondholders.

On November 9, 2012, the court met with counsel and asked the attorney for Argentina if the press reports of the above statements were correct. In response, the attorney turned to other subjects, meaning that the press reports were not denied. At the November 9, 2012 hearing, the court reminded all concerned that Argentina is subject to the jurisdiction of the federal courts in New York, to which Argentina has consented. For the past ten years Argentina has repeatedly submitted matters to the District Court and the Court of Appeals, and received what was undoubtedly fair treatment, since Argentina prevailed in most matters. The court went on to urge that the Argentine government should back away from these ill-advised threats to defy the current court rulings, and that any defiance of the rulings of the courts would not only be illegal but would represent the worst kind of irresponsibility in dealing with the judiciary.

This did not stop the highest Argentine officials who have continued to the present time their inflammatory declarations that the court rulings will not be obeyed.

In light of these statements, Judge Griesa, who had until then stayed the injunction, lifted the stay. In light of a December 2012 payment due on the bonds, Argentina, which had appealed again, sought an emergency stay from the Second Circuit. The court granted its motion. The Second Circuit did, however, order Argentina to put its offer to its creditors in writing. Here was my response to the offer:

I have to say that I don’t really understand the offer. As I read the document, Argentina is offering to exchange the old debt for its new, restructured debt on pretty much the same terms that plaintiffs such as NML Capital have already rejected. Why would NML surrender now, when it seems to be doing well in the US courts? And isn’t there a risk that the Second Circuit will get its dander up on account Argentina’s new show of intransigence in the face of Judge Griesa’s injunction?

On appeal, the Second Circuit reaffirmed its conclusion that injunction did not violate the FSIA. Argentina’s argument was that the injunction required it to use property protected by the statute to satisfy the requirements of the injunction. The court rejected this argument curtly: the injunction does not violate the statute because it does not “attach, arrest, or execute upon” any property; rather it “allow[s] Argentina to pay its [Fiscal Agency Agreement] debts with whatever resources it likes.”

The court also rejected the argument that the injunction was inequitable because the plaintiffs would receive all principal and accrued interest whenever the bondholders who exchanged their bonds received an installment payment. “[T]he undisputed reason that plaintiffs are entitled immediately to 100% of the principal and interest on their debt is that the [Agreement] guarantees acceleration of principal and interest in the event of default.”

Argentina made a chutzpahdik argument that the injunction would inequitably injure the bondholders who had exchanged the original debt for new bonds. Why? Because Argentina had already vowed not to pay NML and others anything, and if the injunction stood, it would therefore not be able to pay the holders of the exchanged bonds, either. The court rejected this argument. “This type of harm—harm threatened to third parties by a party subject to an injunction who avows not to obey it—does not make an otherwise lawful injunction ‘inequitable.’ We are unwilling to permit Argentina’s threats to punish third parties to dictate the availability or terms of relief under Rule 65.”

The most serious arguments were those raised by participants in the international payment system, who worried about the effects of the injunction on the financial system. They raised several technical arguments, claiming that the court lacked personal jurisdiction, that the injunction could not apply extraterritorially, that they had been denied due process, and that the injunction would violate the UCC, which protects intermediary banks.

The personal jurisdiction and due process arguments failed because the court had not enjoined any of the payment system participants. It had enjoined only Argentina. Before the District Court could find them liable or sanction them, the payment system participants would be entitled to notice and an opportunity to be heard, and jurisdictional questions could be raised at that time. “But at this point, they are premature.”

The comity argument failed because “a federal court sitting as a court of equity having personal jurisdiction over a party has power to enjoin him from committing acts elsewhere.” The court considered that Judge Griesa may have made a mistake in finding that the payment process “takes places in the United States,” but it held that the mistake was “of no moment,” because only Argentina was enjoined. “If others in active concert or participation with Argentina are outside the jurisdiction or reach of the district court, they may assert as much if and when they are summoned to that court for having assisted Argentina in violating United States law.”

The UCC argument is interesting. Section 4A-502, which generally bars “creditor process,” did not apply, because there was no process here (i.e., no “levy, attachment, garnishment, notice of lien, sequestration, or similar process”), but rather only an injunction. Long live equity! Section 4A-503, however, did apply. It requires “proper cause” before a court enjoins a person from carrying out a funds transfer. The court found that Judge Griesa had “proper cause,” but it also went on to question whether the parties objecting to the injunction (Judge Griesa had already excluded “intermediary banks” from its reach) were within the class the statute aimed to protect. In any case, “Whether or not an institution has assisted Argentina in a payment transaction solely in the capacity of an intermediary bank will be a question for future proceedings.”

Last, the court rejected the public interest arguments advanced by Argentina and several amici curiae. In short, the court rejected the doom-and-gloom predictions about the effect of the ruling on future sovereign debt restructurings, the Argentine economy, and the payment system. Time will tell. The court also felt that the decision protected New York’s interest as a financial center:

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.

The court stayed its decision pending resolution of a petition for a writ of certiorari. In fact, Argentina filed a petition in late June: the opposition is due tomorrow.

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