Could Argentina’s Bond Dispute Be Headed to the U.S. Supreme Court?
Argentina’s legal dispute over defaulted sovereign bonds could be headed to this country’s highest court. Although the Second Circuit Court of Appeals has ruled that the country cannot treat bondholders who accepted discounted debt swaps differently than holdouts, Economy Minister Hernan Lorenzino has vowed to take the case all the way to the U.S. Supreme Court.
The dispute can be traced back to $100 billion in sovereign debt issued by the country in the 1990s. After defaulting, Argentina restructured the debt in 2005 and 2010, with bondholders receiving 25 and 29 cents on the dollar. Several hedge funds, including Elliott Management and Aurelius Capital Management, held out and are now challenging Argentina in the U.S. court system. Although the funds, deemed “vultures” by Argentina, have been successful in U.S. courts, they have not yet collected any money.
In the most recent legal challenge, NML Capital Ltd et al v. Argentina, the hedge funds cited a “pari passu” clause in the bond documents. It stated that Argentina’s payment obligations to bondholders “shall at all times rank at least equally with all its other present and future unsecured and unsubordinated external indebtedness." The holdouts argued that Argentina violated the clause by paying bondholders who agreed to the restructure discount before it paid them.
To the surprise of many, the United States Court of Appeals for the Second Circuit agreed. The Court found that Argentina breached the equal treatment provision by improperly discriminated against the holdouts in favor of those who agreed to participate in the debt swaps. It further agreed with the lower court that Argentina should be required to equally honor its payment obligations to both groups of bondholders. Lastly, it also rejected the Argentine government’s reliance on the Foreign Sovereign Immunities Act to avoid the jurisdiction. "The (bond issue) is governed by New York law and further provides for jurisdiction in 'any state or federal court in The City of New York,'" the panel concluded. It remanded the case back to the lower court to work out the payment details for the holdouts.
The decision has received widespread criticism. The U.S. government even objected, arguing that the decision could handicap other foreign governments' efforts to restructure debt. "The district court's interpretation of the pari passu provision could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises," the amicus brief stated.
Further adding to the controversy, Judge Thomas P. Griesa of Federal District Court recently issued a ruling that effectively prevents Argentina from proceeding with a scheduled $3 billion payment on its restructured bonds due on Dec. 15 unless it also pays the holdouts. He ordered the Argentine government to deposit $1.3 billion in an escrow account by Dec. 15, pending the Second Circuit’s ruling on the calculation of payments.
To date, Argentina has made it clear that it will explore every legal avenue before paying the holdouts. Therefore, it is likely the country will likely carry through with its promise to appeal all the way to the Supreme Court. Although that Court only agrees to hear a miniscule number of the petitions it receives, the significant legal issues involved in this case and the broad implications of sovereign debt restructurings on the global economy make it an attractive case to consider.
If you have any questions this case or would like to discuss other international laws issues, please contact me, Donald Scarinci, or the Scarinci Hollenbeck attorney with whom you work
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