A federal appeals court on Wednesday heard impassioned arguments from two of the nation’s most prominent lawyers in a case that pits a group of bond investors in a long-running battle with the country of Argentina.
Legal specialists who observed the proceedings at the United States Court of Appeals for the Second Circuit in Manhattan said they felt that the judges showed little sympathy for Argentina, which is refusing to make payments on the disputed bonds.
“At least two of the three judges seemed to have no patience with Argentina,” said Anna Gelpern, a professor at the Washington College of Law at the American University. “They were rolling their eyes and shaking their heads.”
The dispute started out over a relatively small amount of debt that Argentina defaulted on over 10 years ago. But, as the case progressed in the United States courts, its significance has grown. Its outcome will test the extent to which an American court can pressure a foreign government to take actions to comply with American laws. Some debt market specialists believe a defeat for Argentina could make it harder for countries overwhelmed by debt to ease their obligations through a managed default.
The appeals court case is being watched closely by legal experts, and on Wednesday, the overflow from the courtroom filled two other rooms in the court building.
Theodore B. Olson, of Gibson, Dunn & Crutcher, spoke on behalf of the hedge fund that is leading the litigation against Argentina. The fund is an affiliate of Elliott Management, an investment firm founded by Paul E. Singer. The fund’s argument is that it should be paid on its defaulted bonds when investors holding another type of Argentine bond get paid.
Those investors, represented on Wednesday by David Boies of Boies, Schiller and Flexner, hold bonds that emerged from two debt restructurings that forced creditors to agree to large losses on their bonds. Argentina has made payments on those so-called exchange bonds since they were issued after the restructurings. Elliott Management and others never included their bonds in the exchange, and for that reason they are called holdouts. Argentina refuses to pay the holdouts, and there is almost no support there for paying these investors.
A federal district court, under Judge Thomas P. Griesa, has already ruled largely in favor of the litigating investors. The appeals court has already issued an opinion agreeing with Judge Griesa’s main points.
The judge has become gradually more frustrated with Argentina and last year issued a ruling that included a sanction that upped the ante on the country. It effectively said that a bank would be in contempt if it processed the payments from Argentina to exchange bondholders while knowing that the holdouts were not also being paid.
The appeals court asked Judge Griesa to clarify which financial entities would be affected by this order and how much the holdouts might get paid.
Of the three appellate court judges, Judge Reena Raggi was the most pointed questioner and was concerned that Argentina was effectively holding out the threat of not paying the exchange bondholders to get a favorable decision in the United States. “It hardly seems appropriate for a court not to enforce one of its orders because a party will breach another of its obligations,” she said.
Mr. Olson echoed that, saying, “The hostage holding is being done by Argentina.”
The Bank of New York Mellon, which processes Argentina’s bond payments, would almost certainly stop channeling money to the exchange bondholders if Judge Griesa’s injunction is upheld. Default would then be likely.
Mr. Boies, representing the exchange bondholders, argued that the district court injunction goes against parts of commercial law and the Constitution that safeguard property rights. “It is designed to prevent us from accepting money we are contractually owed, he said. “We are the innocent parties.”
Argentina’s lawyer, Jonathan I. Blackman of Cleary Gottlieb Steen & Hamilton, understood that the appeals court judges had little sympathy for Argentina. He stated at one point that Argentina was not intending to pay the holdouts if Judge Griesa’s injunction took effect.
He argued that this did not warrant setting off a chain of events that could result in no one being paid. Countries can’t be thrown into bankruptcy so that creditors can make claims, he noted. The current system of dealing with sovereign defaults, such as the sort of debt restructuring Argentina did with exchange bondholders, “is the best system that exists absent bankruptcy,” Mr. Blackman said.
“I beg you, judges of equity, do no harm,” Mr. Blackman said to the bench. “I know it is not easy. I know my client doesn’t appeal to you.”
While the appeals court judges gave Argentina’s supporters few reasons to hope, there were some developments they might cling to. First, the judges asked many questions about how much Elliott Management should receive under a payment formula. Judge Griesa has said Elliott should be paid all that it was owed.
But another solution might be to get a sum proportionate to what the exchange bondholders received. It’s not clear if Argentina would ever agree to paying the holdouts anything. But the questions raised the slight possibility that the appeals judges might arrive at a payment formula that doesn’t give the holdouts all they are owed under the bonds’ original contracts.
Judge Rosemary S. Pooler, asked Mr. Olson if the investors suing Argentina have done trades that would profit if the country defaulted on its exchange bonds. This could create a conflict of interest, the judge said. When asked if his clients had done such a trade, Mr. Olson said, “I have been informed it isn’t true.”
The appeals court may take several weeks to issue its opinion in the case.