ATFA Media Teleconference Transcript: Legal Experts Say Second Circuit Initial Pari Passu Ruling Remains Intact
ATFA Media Teleconference Transcript: Legal Experts Say Second Circuit Initial Pari Passu Ruling Remains Intact
Operator: Ladies and gentlemen thank you for standing by. Welcome to the Argentina and the U.S. Court of Appeals conference call. During the presentation, all participants will be in a listen-only mode.
Afterwards we will conduct a question and answer session. At that time if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press the star followed by the 0.
As a reminder, the call is being recorded, Tuesday, January 8, 2013. I would now like to turn the conference over to Robert Raben. Please proceed.
Robert Raben: Good morning, thank you all. Very - very much appreciate you plugging in. I know that everyone is busy and we will hop right to it.
I am Robert Raben the Executive Director of the American Task Force Argentina. And we are both deeply appreciative of your continued attention to this incredible matter and also sorry that the matter is still pending.
Argentina's persistent unwillingness to meet its obligations in this matter continues to be deeply troubling. We are - I am joined this morning by Paul Keenan who is a noted attorney at Greenberg Traurig and Richard Samp also Counsel - Chief Counsel at the Washington Legal Foundation.
And I will quickly turn it over to them for some explanation of where we are with the court cases, what it all means, and then we will open it up to questions to you.
The - we're going to focus today on Argentina's "settlement offer." And I use that in quotes because of the absurdity of pretending that there's a settlement offer when it's a sentence in a court filing.
We will discuss Argentina's "settlement offering" and (latest) (intervener) and (Amekie) filings in the Second Circuit pari passu clause. As a quick reminder the timeline for the court proceedings - I know it gets complicated - and this may be a reminder for some of you and others it may be new.
On December 28, Argentina's papers were filed in the Second Circuit Court of Appeals. On January 4, the (Amekie) - the friends of the court and the (intervening - intervener) status - briefs were filed. On (Jan) - coming up - on January 25, that's the date that the opposition papers must be filed in the Second Circuit.
Reply papers will be filed on February 1. And on February 27 that is the date that oral arguments are scheduled in the Second Circuit. So January 25, February 1, and February 27 are important dates on the calendar for this litigation.
There is a - I'll give you a quick recap of where we've been in the past week. I'll point out to you that a transcript of a press call that we had more than a week ago is available on our Web site at the American Task Force Argentina www.atfa - A-T-F-A.org.
Argentina has given United States courts and plaintiffs the runaround for years since defaulting on $81 (billion) in 2001. It is (Latin) - Argentina's Latin America's third-largest economy with very significant cash reserves.
The nation certainly has the means to repay its (creditor) - full. Refusal to do so - incredibly regrettable. It has staunchly refused since 2001. Federal courts in the United States and other countries have numerous times noted Argentina's appalling record of keeping its promises to its creditors.
While Argentina has been making regular interest payments to exchange bondholders (unintelligible) to the 70% haircut - in 2005, it had paid nothing to the holdouts and gloated around the world about its refusal to do so.
Argentina even passed the infamous Lock Law to slam the door on future negotiations. We discussed in the last call why Argentina's claim that the pari passu clause will cause chaos in world markets as totally inaccurate.
It's a disingenuous and inaccurate argument that Argentina continues to pursue. The Second Circuit specifically recognize that Argentina is a unique case - what we say in the law sui generis in that sovereign debtors can avoid Argentina's predicament by including non-voluntary collective action clauses in their bondholder agreements like Greece has done in the past.
Last week the United States government weighed in and Argentina's brief to the court purported to reopen the (swap). I'm going to turn it over to Paul Keenan who I mentioned is an attorney with Greenberg Traurig - a prestigious law firm here in the United States to discuss the pari passu decision by the Second Circuit and then we will hear from Attorney Samp from the Washington Legal Foundation.
And his remarks will focus what the briefs that have been recently filed (discussed) - explain the arguments and explain why Argentina's brief is neither a serious argument nor regrettably even a legal argument.
And as I say we will open it up to questions for the three of us at the conclusion of their brief remarks. Attorney Keenan?
Paul Keenan: Hi, thank you. This is Paul Keenan. Thanks for having me on the call. And I think what I'll just do this morning is to spend about 5 to 10 minutes just briefly explaining or (I) (unintelligible) reminding folks, you know, what the gist of the underlying decision was by the District Court and then the Second Circuit.
I think it's important to point it out because, you know, as we just heard in our introduction, there's been a - not a flurry but a flood of papers filed in this case just in the last ten days.
I think somebody calculated that, you know, it was a - thousands of pages and millions of words filed in the last ten days alone. And most of those documents have to do with procedural issues, the scope of the injunction that was remanded by the District Court.
Issues about whether or not there should be a rehearing in en banc, et cetera - et cetera. And, you know, what may be lost in all of that, is, you know, what exactly is it, you know, that the Second Circuit decided?
And so I'll just talk about that for a few minutes and then just try and put that in context of cross-border (restructurings) in general not just with sovereigns but also with corporates and how, you know, this case is probably not really that much of an (outliers) as people think it is, and really more of an indication of how courts view cross-border restructurings in general.
You know, the Second Circuit's decision was largely - both - almost entirely about what they called the pari passu clause. And the pari passu clause in the bonds really comes down to two sentences.
The first sentence is that the bonds will constitute direct, unconditional, unsecured, (unsubordinated) obligations of the Republic - (should all times) rank pari passu without any preference among themselves.
And the second sentence is that the payment obligations of the Republic under the securities of the bonds shall - at all times - rank at least equally with all other present and future unsecured and (unsubordinated) indebtedness.
That entire clause - both those sentences is what's known as the pari passu clause. And it's the second sentence that's called - that at least the court calls the Equal Treatment Provision. And that's what - that second sentence is really what the court focused on in this decision.
And just as an aside - we - our firm did a - an alert or a short report on this opinion. And much of the information, you know, that I'm discussing right now can be found in that alert.
So if you just want to see it in writing later on (Jan) can provide it to you. So the issue that was decided by the Second Circuit was whether Argentina had violated that Equal Treatment Provision when the country issued and then honored new bonds in exchange for the old.
Add in the words of the Second Circuit, this presented - and I quote, "a simple question of contract interpretation as a bond as a contract." And, you know, that's probably one of the more glaring sentences that really came out of that long opinion.
Argentina argued that the clause was meaningless because it had a (pari) - because a pari passu clause can only be effective where there is a hierarchy of payments that could be enforced in a bankruptcy regime.
So in other words, you know, when you think of a corporate entity, if it goes into bankruptcy and you look at the country's bankruptcy laws, there's a hierarchy of payments.
And the pari passu clause is essentially meant to fit - you know, Argentina's arguing that it's meant to fit into that (part) - hierarchy of payments. Obviously, a sovereign can't file for bankruptcy, you know, kind of like a state in the United States - a country abroad can't really file bankruptcy.
And so (they) were - Argentina was essentially arguing that the pari passu clause was meaningless because a country itself couldn't go through any kind of bankruptcy case.
The Second Circuit rejected that argument because - as they put it - under one of their time-honored principles of contract law - and this is another quote, "a contract should not be interpreted in such a way that would leave one of its provisions substantially without (force or effect)."
And so this is what we lawyers call a - one of the canons of construction in terms of contract, you know, lawyers - all lawyers learn in law school - in their contracts class that - there are these certain canons of construction - as they call them - in interpreting contracts.
And one of those, you know, sort of time honored ways to interpret a contract is that if somebody's arguing to you that a certain provision in a contract has no meaning - like it just doesn't make sense - it has no bearing in any situation at all then it can't possibly mean that. It has to be there for a reason.
And that's really what the court kind of fell back on. In trying to determine whether Argentina violated this Equal Treatment Provision, the court basically looked at the acts of Argentina out of court - in court with their securities filings and everything else.
And they pointed to five items in particular that show that the Equal Treatment Provision had been violated. The first was that Argentina didn't make any pay amount - payments to the holdouts in the six years since the 2005 restructuring even though they made payments on the new exchange bonds.
The second was that Argentina renewed its moratorium on payment of the old bonds each year since the default. The third is that Argentina declared in their restructuring prospectus for 2005 and 2010 for the new exchange bonds - that it had no intention of resuming payment on the (FAA) bonds which are the old bonds.
The fourth is that Argentina stated in its SEC filings in the United States - that it's not in the legal position to pay on the old bonds and reclassified them as a separate category distinct from its regular debt.
And the fifth was that Argentina enacted the famous Lock Law which prohibited Argentina's local courts from giving full effect. The judgments obtained by holdouts while allowing if a default order occur (in) the new bonds - (its course) to recognize judgments on the new bonds.
So essentially what happened was that it was really the - I guess the actions and the statements by Argentina both in the executive branch and the legislature that kind of gave fuel to the Second Circuit's decision.
You know, I think if you were to explain it in general terms, the Second Circuit's decision had basically - had two parts. One was that they were going to call a contract a contract. Interpret it using - the typical time honored canons of construction including the pari passu clause and Equal Treatment Provision.
And then second, they just looked at the statements - the public statements and the public filings made by Argentina to determine whether or not it had violated the Equal Treatment Provision.
So in some sense- it's actually - I think if this involved a corporation rather than a sovereign, it really wouldn't be a remarkable decision and probably not receiving nearly the amount of press that it has.
(But) because it involves a sovereign, you know, not surprisingly - it's generated a lot of interest and there's a lot of press activity about it. You know, one thing that I've done in the last few weeks is I've just started to point people to, you know, the sort of evidence that this is not as remarkable as it may seem.
You know, I advise folks to take a look at the Fifth Circuit's decision in a case called, Vitro. Vitro is a company based in Mexico that was also involved in a restructuring that has in some ways a lot of similarities to what we are seeing here.
Vitro is the largest glassmaker in Mexico. They borrowed $1.2 billion in the United States using U.S. bonds governed by New York law much like the sovereign debt in Argentina.
And what happened there was Vitro file for bankruptcy in Mexico and devised a restructuring that was very heavily slanted against the bondholders in the United States and much how the bondholders feel in this case.
And what happened there was the Fifth Circuit - which is out of the Southwest - out of Texas decided that the Mexican restructuring plan cannot be enforced in the United States much like the Second Circuit is saying that this new restructuring plan from Argentina can't be enforced in the United States.
Because the - essentially - and I won't go into the details of it because it (will) be the subject of another call, but if you read the Fifth Circuit decision, it basically says that we're not going to enforce this Mexican restructuring plan against the U.S. bondholders because it violates the terms of the guarantees that the Mexican companies gave to those bondholders.
And so even though one case comes out of the Fifth Circuit and it deals with corporate debt restructuring and this case comes out of the Second Circuit dealing with sovereign debt restructuring, what you're seeing is a pattern.
And, you know, you could point to other cases as well - that the pattern is that if a foreign sovereign or corporate is going to issue bond debt in the United States, there is a tendency (of) - by the U.S. courts to actually enforce those bonds according to their terms and not according to, you know, what the vagaries of the foreign law may be.
And so I guess, you know, just in summary I just - I feel like sometimes I just need to point out that this case itself may not be as unusual as it might seem just on its (unintelligible) (serve) - (based on a lot of the press that's out there).
Robert Raben: Thank you very much Attorney Keenan. I appreciate it. Mr. Samp - Attorney Samp?
Richard Samp: Thank you, I appreciate the opportunity to be on the call. First, as a matter of full disclosure, I work for the Washington Legal Foundation and we filed a brief in the Second Circuit on Friday.
We have issued a press release about our brief and if anybody wants to get a copy of the press release on the brief itself, we are certainly willing to provide it.
Now, there has been perhaps, I think, some confusion in the press as to precisely what is before the court. And I don't think that the briefs that were filed helped to clear up the confusion particularly.
And the reason I say that is that the Second Circuit has already ruled. And unless it ends up being reversed either by and en banc court or the Supreme Court that is the law of the case.
And we've gotten beyond many of the basic issues that continue to be argued in these briefs and in the press. And as Paul has indicated, that decision is really a relatively straight forward interpretation of contractual agreements and New York law has been applied to those agreements.
The two very limited issues that are now before the court are first of all, how do you go about figuring out the formula for how much is to be paid to holdouts assuming that payments continue to other bondholders. And there actually any number of formulas that somebody could come up with.
The District Court came up with one formula and there are other bases for arguing that perhaps a lesser amount ought to be due to the plaintiffs. But under the underlying decision there still is a substantial payment under any formula that would be required to be made to the plaintiffs.
The other issue before the court has to do with the question of to whom does the injunction issued by the District Court extend? And Argentina actually spent a good portion of its brief addressing that issue.
And I find that whole discussion quite disingenuous because Argentina could make all of those issues mute if it were to comply with the injunction. But instead it has been making noises that perhaps it's going to find ways to evade the injunction.
To - for example, make payments outside of the United States to trustees for the bondholders and that would therefore (the) actions - that would be outside of the control of the U.S. court.
And it's for that very reason that Argentina is potentially going to try to evade U.S. court orders that the injunction has to extend to some other participants in the payment transactions.
And so for example, I think the most likely candidate for inclusion in the injunction is the trustee for the bondholders - the Bank of New York Mellon. And in fact, the Bank of New York Mellon filed its own brief in the case.
But if you read their brief carefully, they are not really objecting to the - being covered by the injunction. Their real objection is that they don't want to get hammered from two different sides.
So what they are saying to the court is if you make us bound by the injunction, the way we would like to operate is we would like to be able to refuse any payments that Argentina tries to make to us.
But at that point, they are fearful that some of the bondholders might sue them for violating their duties as the trustee.
So at that point I think what the Bank of New York Mellon would like is an order from the Second Circuit holding them harmless so that if they comply fully with the injunction that they would not then be liable to suit from the bondholders.
Now, as I've said, those are really the only issues before the Second Circuit at this point. Perhaps the (biggest) story in all of this is the United States has not participated.
They filed a brief in support of rehearing en banc. But they did not file a brief in support of this appeal on these two issues suggesting that they see nothing unremarkable about the form of the injunction entered by the district judge in November which is the subject of this appeal.
And in fact, the brief that the government did file a week ago in support of rehearing en banc, really isn't in support of Argentina at all. What the brief said was that, "We support rehearing en banc because we are little bit troubled by some of the broader language in the Second Circuit's opinion.
However, at the end of the day, we are not so sure that the result reached by the Second Circuit is wrong at all."
In particular, the United States government has serious problems with the Lock Law that this is not just a matter of a country saying, "We need a little bit of flexibility to allow us to arrange who gets priority in our payments so that we can work out restructuring."
Rather this is an absolute law that says that there shall be no payments whatsoever. And given that the bonds require equal treatment of all bondholders, the United States government essentially said, "We don't see any way you can call a law that prohibits payments to one class of bondholders to constitute equal treatment."
Now one thing that Argentina did say in its brief, was that well perhaps we'll perhaps we are willing to compromise. Maybe we would allow the holdouts to get payment under the same terms that everybody else who received exchange bonds in 2005 and 2010 were given.
Now, these really aren't quite the same terms because of course, given the time value of money to get the same terms now means that you're not getting as good terms as other people who have already been receiving payments.
But the more important point to be made is this is not really an argument to the court in terms of asking the court to enforce those kinds of terms. And perhaps, I think, the press may have misinterpreted what Argentina said because some of the press has been reporting that Argentina has asked the court to enforce its compromise.
Rather, as I interpret what Argentina is saying is, "Your honors, we are reasonable people. We are not the intransigent ones here. And to prove how reasonable we are being, we are showing that we might be willing to compromise if only the District Court's terrible order is not (finely) enforced."
And perhaps that is a good strategy to demonstrate Argentina's willingness to be flexible. However, what I think it mostly demonstrates is that the Lock Law is not inviolate.
The Argentina executive branch has been coming into court and saying, "Well, our hands are tied. The legislature in Argentina has told us that we can never make payments.
So by ordering payments you are essentially requiring a default of all bond payments because that's the only option that we would have."
But the offer of compromise that Argentina has made really puts the lie to that assertion because Argentina essentially said in its brief, "We are willing to go to the legislature and get a change in the law."
Richard Samp: Excuse me?
Richard Samp: Hello, this is Richard Samp.
Robert Raben: I think you may be on the wrong call - whoever is interposing. Go ahead Richard.
Richard Samp: Okay.
Robert Raben: Let's open it up to questions.
Richard Samp: All right, so the final point is to make is that Argentina is essentially admitting that it has the power to change the Lock Law any time it wants to so that it is not in any way prohibited from making the sorts of payments that would allow it to avoid a default.
I'm happy during the course of question and answer to discuss other issues that are raised in the various briefs. In particular, many of the exchange bondholders have filed briefs expressing the view that the injunction is unfair to them.
I don't think there is much merit to those arguments and I would be happy to go into the details of that during the question and answer session.
Robert Raben: Thank you so much. We appreciate both of you recapping this important and slightly complicated set of issues. Let's open it up to questions operator.
Operator: Thank you ladies...
Robert Raben: Go ahead.
Operator: Ladies and gentlemen if you would like to register a question, please press the 1 followed by the 4 on your telephone. You'll hear a three tone prompt to acknowledge your request.
If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your headset before entering (a) request.
Again press 1 - 4 to register any questions by telephone.
Robert Raben: I'll just start with a very - very quick one. One of the procedural questions that you - one of the procedural issues in play is this petition for a rehearing so that the entire Second Circuit would hear it which would slow down this process in - significant way.
What are the - to the extent you can guess, what are the odds that that will occur - that the Second Circuit will agree to rehear the entire matter in front of the larger panel of judges?
Richard Samp: Well I will jump in. This is Richard Samp - just to say that while it is always possible, very - very few cases have rehearing en banc (granted). I've heard that it is well less than 1/10 of 1%.
The more likely possibility is that if the United States supports a petition for (certiorari) on the U.S. Supreme Court that that would at least be plausible that that would happen.
The Second Circuit never grants rehearing en banc unless it first asks the opposing party to file a brief responding to the petition. That has not happened yet.
So the failure of the Second Circuit to ask for a response suggests that perhaps it is not at this point seriously considering granting rehearing en banc.
Paul Keenan: This is Paul Keenan. I definitely agree with that in terms of (cert) to the Supreme Court, you know, I think it's important to note that under the fairly famous Supreme Court case (Eerie) - the Supreme Court is very reluctant to hear questions of - that are purely questions of state law.
And if you go back and look at the Second Circuit decision, putting the injunction and some of the procedural issues aside, in terms of appealing the substance of that decision - I think it's unlikely to be heard - highly unlikely to be heard by the Supreme Court because it's mostly about the interpretation of New York State contract law.
And that's really not the kind of question that a Supreme Court is likely to hear.
Robert Raben: Okay, thank you. We open it to questions.
Operator: Ladies and gentlemen as a reminder, to register a question press 1 - 4. There are no questions from the phone lines at this time.
Richard Samp: Let me add a point to what Paul said. The vast majority of the issues that were decided by the Second Circuit are issues of New York law. And I agree with him that those are unlikely to attract the interest of the Supreme Court.
The one possible issue they would agree to hear is the scope of the FSIA - the Foreign Sovereign Immunities Act which limits the ability of the United States courts to enter judgments against foreign countries.
And Argentina has maintained in this case that the scope of the injunction violates the FSIA. The Second Circuit rejected that argument. But because that is an issue of federal law, that is a plausible issue for Supreme Court review.
I agree with the Second Circuit's decision rejecting Argentina's argument but at least they would have some leg to stand on to seek review of that issue.
Robert Raben: Thank you very much. We deeply - deeply appreciate your continued attention to this. We hope for a much faster resolution of this issue than what we are seeing.
Argentina has dragged its heels from 10 years and we know that this gets complicated. We are at your service to answer any follow-up questions. And you can contact us at the ATFA Web site info at Atfa.org or (media at) Atfa.org and I will respond to you ASAP.
Thank you so much attorneys for explaining this to us and we'll stop here.
Operator: Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.
http://www.atfa.org/atfa-media-teleconference-transcript-legal-experts-say-second-circuit-initial-pari-passu-ruling-remains-intact/
Moderator: Robert Raben
January 8, 2013
11:01 am CT
Operator: Ladies and gentlemen thank you for standing by. Welcome to the Argentina and the U.S. Court of Appeals conference call. During the presentation, all participants will be in a listen-only mode.
Afterwards we will conduct a question and answer session. At that time if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press the star followed by the 0.
As a reminder, the call is being recorded, Tuesday, January 8, 2013. I would now like to turn the conference over to Robert Raben. Please proceed.
Robert Raben: Good morning, thank you all. Very - very much appreciate you plugging in. I know that everyone is busy and we will hop right to it.
I am Robert Raben the Executive Director of the American Task Force Argentina. And we are both deeply appreciative of your continued attention to this incredible matter and also sorry that the matter is still pending.
Argentina's persistent unwillingness to meet its obligations in this matter continues to be deeply troubling. We are - I am joined this morning by Paul Keenan who is a noted attorney at Greenberg Traurig and Richard Samp also Counsel - Chief Counsel at the Washington Legal Foundation.
And I will quickly turn it over to them for some explanation of where we are with the court cases, what it all means, and then we will open it up to questions to you.
The - we're going to focus today on Argentina's "settlement offer." And I use that in quotes because of the absurdity of pretending that there's a settlement offer when it's a sentence in a court filing.
We will discuss Argentina's "settlement offering" and (latest) (intervener) and (Amekie) filings in the Second Circuit pari passu clause. As a quick reminder the timeline for the court proceedings - I know it gets complicated - and this may be a reminder for some of you and others it may be new.
On December 28, Argentina's papers were filed in the Second Circuit Court of Appeals. On January 4, the (Amekie) - the friends of the court and the (intervening - intervener) status - briefs were filed. On (Jan) - coming up - on January 25, that's the date that the opposition papers must be filed in the Second Circuit.
Reply papers will be filed on February 1. And on February 27 that is the date that oral arguments are scheduled in the Second Circuit. So January 25, February 1, and February 27 are important dates on the calendar for this litigation.
There is a - I'll give you a quick recap of where we've been in the past week. I'll point out to you that a transcript of a press call that we had more than a week ago is available on our Web site at the American Task Force Argentina www.atfa - A-T-F-A.org.
Argentina has given United States courts and plaintiffs the runaround for years since defaulting on $81 (billion) in 2001. It is (Latin) - Argentina's Latin America's third-largest economy with very significant cash reserves.
The nation certainly has the means to repay its (creditor) - full. Refusal to do so - incredibly regrettable. It has staunchly refused since 2001. Federal courts in the United States and other countries have numerous times noted Argentina's appalling record of keeping its promises to its creditors.
While Argentina has been making regular interest payments to exchange bondholders (unintelligible) to the 70% haircut - in 2005, it had paid nothing to the holdouts and gloated around the world about its refusal to do so.
Argentina even passed the infamous Lock Law to slam the door on future negotiations. We discussed in the last call why Argentina's claim that the pari passu clause will cause chaos in world markets as totally inaccurate.
It's a disingenuous and inaccurate argument that Argentina continues to pursue. The Second Circuit specifically recognize that Argentina is a unique case - what we say in the law sui generis in that sovereign debtors can avoid Argentina's predicament by including non-voluntary collective action clauses in their bondholder agreements like Greece has done in the past.
Last week the United States government weighed in and Argentina's brief to the court purported to reopen the (swap). I'm going to turn it over to Paul Keenan who I mentioned is an attorney with Greenberg Traurig - a prestigious law firm here in the United States to discuss the pari passu decision by the Second Circuit and then we will hear from Attorney Samp from the Washington Legal Foundation.
And his remarks will focus what the briefs that have been recently filed (discussed) - explain the arguments and explain why Argentina's brief is neither a serious argument nor regrettably even a legal argument.
And as I say we will open it up to questions for the three of us at the conclusion of their brief remarks. Attorney Keenan?
Paul Keenan: Hi, thank you. This is Paul Keenan. Thanks for having me on the call. And I think what I'll just do this morning is to spend about 5 to 10 minutes just briefly explaining or (I) (unintelligible) reminding folks, you know, what the gist of the underlying decision was by the District Court and then the Second Circuit.
I think it's important to point it out because, you know, as we just heard in our introduction, there's been a - not a flurry but a flood of papers filed in this case just in the last ten days.
I think somebody calculated that, you know, it was a - thousands of pages and millions of words filed in the last ten days alone. And most of those documents have to do with procedural issues, the scope of the injunction that was remanded by the District Court.
Issues about whether or not there should be a rehearing in en banc, et cetera - et cetera. And, you know, what may be lost in all of that, is, you know, what exactly is it, you know, that the Second Circuit decided?
And so I'll just talk about that for a few minutes and then just try and put that in context of cross-border (restructurings) in general not just with sovereigns but also with corporates and how, you know, this case is probably not really that much of an (outliers) as people think it is, and really more of an indication of how courts view cross-border restructurings in general.
You know, the Second Circuit's decision was largely - both - almost entirely about what they called the pari passu clause. And the pari passu clause in the bonds really comes down to two sentences.
The first sentence is that the bonds will constitute direct, unconditional, unsecured, (unsubordinated) obligations of the Republic - (should all times) rank pari passu without any preference among themselves.
And the second sentence is that the payment obligations of the Republic under the securities of the bonds shall - at all times - rank at least equally with all other present and future unsecured and (unsubordinated) indebtedness.
That entire clause - both those sentences is what's known as the pari passu clause. And it's the second sentence that's called - that at least the court calls the Equal Treatment Provision. And that's what - that second sentence is really what the court focused on in this decision.
And just as an aside - we - our firm did a - an alert or a short report on this opinion. And much of the information, you know, that I'm discussing right now can be found in that alert.
So if you just want to see it in writing later on (Jan) can provide it to you. So the issue that was decided by the Second Circuit was whether Argentina had violated that Equal Treatment Provision when the country issued and then honored new bonds in exchange for the old.
Add in the words of the Second Circuit, this presented - and I quote, "a simple question of contract interpretation as a bond as a contract." And, you know, that's probably one of the more glaring sentences that really came out of that long opinion.
Argentina argued that the clause was meaningless because it had a (pari) - because a pari passu clause can only be effective where there is a hierarchy of payments that could be enforced in a bankruptcy regime.
So in other words, you know, when you think of a corporate entity, if it goes into bankruptcy and you look at the country's bankruptcy laws, there's a hierarchy of payments.
And the pari passu clause is essentially meant to fit - you know, Argentina's arguing that it's meant to fit into that (part) - hierarchy of payments. Obviously, a sovereign can't file for bankruptcy, you know, kind of like a state in the United States - a country abroad can't really file bankruptcy.
And so (they) were - Argentina was essentially arguing that the pari passu clause was meaningless because a country itself couldn't go through any kind of bankruptcy case.
The Second Circuit rejected that argument because - as they put it - under one of their time-honored principles of contract law - and this is another quote, "a contract should not be interpreted in such a way that would leave one of its provisions substantially without (force or effect)."
And so this is what we lawyers call a - one of the canons of construction in terms of contract, you know, lawyers - all lawyers learn in law school - in their contracts class that - there are these certain canons of construction - as they call them - in interpreting contracts.
And one of those, you know, sort of time honored ways to interpret a contract is that if somebody's arguing to you that a certain provision in a contract has no meaning - like it just doesn't make sense - it has no bearing in any situation at all then it can't possibly mean that. It has to be there for a reason.
And that's really what the court kind of fell back on. In trying to determine whether Argentina violated this Equal Treatment Provision, the court basically looked at the acts of Argentina out of court - in court with their securities filings and everything else.
And they pointed to five items in particular that show that the Equal Treatment Provision had been violated. The first was that Argentina didn't make any pay amount - payments to the holdouts in the six years since the 2005 restructuring even though they made payments on the new exchange bonds.
The second was that Argentina renewed its moratorium on payment of the old bonds each year since the default. The third is that Argentina declared in their restructuring prospectus for 2005 and 2010 for the new exchange bonds - that it had no intention of resuming payment on the (FAA) bonds which are the old bonds.
The fourth is that Argentina stated in its SEC filings in the United States - that it's not in the legal position to pay on the old bonds and reclassified them as a separate category distinct from its regular debt.
And the fifth was that Argentina enacted the famous Lock Law which prohibited Argentina's local courts from giving full effect. The judgments obtained by holdouts while allowing if a default order occur (in) the new bonds - (its course) to recognize judgments on the new bonds.
So essentially what happened was that it was really the - I guess the actions and the statements by Argentina both in the executive branch and the legislature that kind of gave fuel to the Second Circuit's decision.
You know, I think if you were to explain it in general terms, the Second Circuit's decision had basically - had two parts. One was that they were going to call a contract a contract. Interpret it using - the typical time honored canons of construction including the pari passu clause and Equal Treatment Provision.
And then second, they just looked at the statements - the public statements and the public filings made by Argentina to determine whether or not it had violated the Equal Treatment Provision.
So in some sense- it's actually - I think if this involved a corporation rather than a sovereign, it really wouldn't be a remarkable decision and probably not receiving nearly the amount of press that it has.
(But) because it involves a sovereign, you know, not surprisingly - it's generated a lot of interest and there's a lot of press activity about it. You know, one thing that I've done in the last few weeks is I've just started to point people to, you know, the sort of evidence that this is not as remarkable as it may seem.
You know, I advise folks to take a look at the Fifth Circuit's decision in a case called, Vitro. Vitro is a company based in Mexico that was also involved in a restructuring that has in some ways a lot of similarities to what we are seeing here.
Vitro is the largest glassmaker in Mexico. They borrowed $1.2 billion in the United States using U.S. bonds governed by New York law much like the sovereign debt in Argentina.
And what happened there was Vitro file for bankruptcy in Mexico and devised a restructuring that was very heavily slanted against the bondholders in the United States and much how the bondholders feel in this case.
And what happened there was the Fifth Circuit - which is out of the Southwest - out of Texas decided that the Mexican restructuring plan cannot be enforced in the United States much like the Second Circuit is saying that this new restructuring plan from Argentina can't be enforced in the United States.
Because the - essentially - and I won't go into the details of it because it (will) be the subject of another call, but if you read the Fifth Circuit decision, it basically says that we're not going to enforce this Mexican restructuring plan against the U.S. bondholders because it violates the terms of the guarantees that the Mexican companies gave to those bondholders.
And so even though one case comes out of the Fifth Circuit and it deals with corporate debt restructuring and this case comes out of the Second Circuit dealing with sovereign debt restructuring, what you're seeing is a pattern.
And, you know, you could point to other cases as well - that the pattern is that if a foreign sovereign or corporate is going to issue bond debt in the United States, there is a tendency (of) - by the U.S. courts to actually enforce those bonds according to their terms and not according to, you know, what the vagaries of the foreign law may be.
And so I guess, you know, just in summary I just - I feel like sometimes I just need to point out that this case itself may not be as unusual as it might seem just on its (unintelligible) (serve) - (based on a lot of the press that's out there).
Robert Raben: Thank you very much Attorney Keenan. I appreciate it. Mr. Samp - Attorney Samp?
Richard Samp: Thank you, I appreciate the opportunity to be on the call. First, as a matter of full disclosure, I work for the Washington Legal Foundation and we filed a brief in the Second Circuit on Friday.
We have issued a press release about our brief and if anybody wants to get a copy of the press release on the brief itself, we are certainly willing to provide it.
Now, there has been perhaps, I think, some confusion in the press as to precisely what is before the court. And I don't think that the briefs that were filed helped to clear up the confusion particularly.
And the reason I say that is that the Second Circuit has already ruled. And unless it ends up being reversed either by and en banc court or the Supreme Court that is the law of the case.
And we've gotten beyond many of the basic issues that continue to be argued in these briefs and in the press. And as Paul has indicated, that decision is really a relatively straight forward interpretation of contractual agreements and New York law has been applied to those agreements.
The two very limited issues that are now before the court are first of all, how do you go about figuring out the formula for how much is to be paid to holdouts assuming that payments continue to other bondholders. And there actually any number of formulas that somebody could come up with.
The District Court came up with one formula and there are other bases for arguing that perhaps a lesser amount ought to be due to the plaintiffs. But under the underlying decision there still is a substantial payment under any formula that would be required to be made to the plaintiffs.
The other issue before the court has to do with the question of to whom does the injunction issued by the District Court extend? And Argentina actually spent a good portion of its brief addressing that issue.
And I find that whole discussion quite disingenuous because Argentina could make all of those issues mute if it were to comply with the injunction. But instead it has been making noises that perhaps it's going to find ways to evade the injunction.
To - for example, make payments outside of the United States to trustees for the bondholders and that would therefore (the) actions - that would be outside of the control of the U.S. court.
And it's for that very reason that Argentina is potentially going to try to evade U.S. court orders that the injunction has to extend to some other participants in the payment transactions.
And so for example, I think the most likely candidate for inclusion in the injunction is the trustee for the bondholders - the Bank of New York Mellon. And in fact, the Bank of New York Mellon filed its own brief in the case.
But if you read their brief carefully, they are not really objecting to the - being covered by the injunction. Their real objection is that they don't want to get hammered from two different sides.
So what they are saying to the court is if you make us bound by the injunction, the way we would like to operate is we would like to be able to refuse any payments that Argentina tries to make to us.
But at that point, they are fearful that some of the bondholders might sue them for violating their duties as the trustee.
So at that point I think what the Bank of New York Mellon would like is an order from the Second Circuit holding them harmless so that if they comply fully with the injunction that they would not then be liable to suit from the bondholders.
Now, as I've said, those are really the only issues before the Second Circuit at this point. Perhaps the (biggest) story in all of this is the United States has not participated.
They filed a brief in support of rehearing en banc. But they did not file a brief in support of this appeal on these two issues suggesting that they see nothing unremarkable about the form of the injunction entered by the district judge in November which is the subject of this appeal.
And in fact, the brief that the government did file a week ago in support of rehearing en banc, really isn't in support of Argentina at all. What the brief said was that, "We support rehearing en banc because we are little bit troubled by some of the broader language in the Second Circuit's opinion.
However, at the end of the day, we are not so sure that the result reached by the Second Circuit is wrong at all."
In particular, the United States government has serious problems with the Lock Law that this is not just a matter of a country saying, "We need a little bit of flexibility to allow us to arrange who gets priority in our payments so that we can work out restructuring."
Rather this is an absolute law that says that there shall be no payments whatsoever. And given that the bonds require equal treatment of all bondholders, the United States government essentially said, "We don't see any way you can call a law that prohibits payments to one class of bondholders to constitute equal treatment."
Now one thing that Argentina did say in its brief, was that well perhaps we'll perhaps we are willing to compromise. Maybe we would allow the holdouts to get payment under the same terms that everybody else who received exchange bonds in 2005 and 2010 were given.
Now, these really aren't quite the same terms because of course, given the time value of money to get the same terms now means that you're not getting as good terms as other people who have already been receiving payments.
But the more important point to be made is this is not really an argument to the court in terms of asking the court to enforce those kinds of terms. And perhaps, I think, the press may have misinterpreted what Argentina said because some of the press has been reporting that Argentina has asked the court to enforce its compromise.
Rather, as I interpret what Argentina is saying is, "Your honors, we are reasonable people. We are not the intransigent ones here. And to prove how reasonable we are being, we are showing that we might be willing to compromise if only the District Court's terrible order is not (finely) enforced."
And perhaps that is a good strategy to demonstrate Argentina's willingness to be flexible. However, what I think it mostly demonstrates is that the Lock Law is not inviolate.
The Argentina executive branch has been coming into court and saying, "Well, our hands are tied. The legislature in Argentina has told us that we can never make payments.
So by ordering payments you are essentially requiring a default of all bond payments because that's the only option that we would have."
But the offer of compromise that Argentina has made really puts the lie to that assertion because Argentina essentially said in its brief, "We are willing to go to the legislature and get a change in the law."
Richard Samp: Excuse me?
Richard Samp: Hello, this is Richard Samp.
Robert Raben: I think you may be on the wrong call - whoever is interposing. Go ahead Richard.
Richard Samp: Okay.
Robert Raben: Let's open it up to questions.
Richard Samp: All right, so the final point is to make is that Argentina is essentially admitting that it has the power to change the Lock Law any time it wants to so that it is not in any way prohibited from making the sorts of payments that would allow it to avoid a default.
I'm happy during the course of question and answer to discuss other issues that are raised in the various briefs. In particular, many of the exchange bondholders have filed briefs expressing the view that the injunction is unfair to them.
I don't think there is much merit to those arguments and I would be happy to go into the details of that during the question and answer session.
Robert Raben: Thank you so much. We appreciate both of you recapping this important and slightly complicated set of issues. Let's open it up to questions operator.
Operator: Thank you ladies...
Robert Raben: Go ahead.
Operator: Ladies and gentlemen if you would like to register a question, please press the 1 followed by the 4 on your telephone. You'll hear a three tone prompt to acknowledge your request.
If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your headset before entering (a) request.
Again press 1 - 4 to register any questions by telephone.
Robert Raben: I'll just start with a very - very quick one. One of the procedural questions that you - one of the procedural issues in play is this petition for a rehearing so that the entire Second Circuit would hear it which would slow down this process in - significant way.
What are the - to the extent you can guess, what are the odds that that will occur - that the Second Circuit will agree to rehear the entire matter in front of the larger panel of judges?
Richard Samp: Well I will jump in. This is Richard Samp - just to say that while it is always possible, very - very few cases have rehearing en banc (granted). I've heard that it is well less than 1/10 of 1%.
The more likely possibility is that if the United States supports a petition for (certiorari) on the U.S. Supreme Court that that would at least be plausible that that would happen.
The Second Circuit never grants rehearing en banc unless it first asks the opposing party to file a brief responding to the petition. That has not happened yet.
So the failure of the Second Circuit to ask for a response suggests that perhaps it is not at this point seriously considering granting rehearing en banc.
Paul Keenan: This is Paul Keenan. I definitely agree with that in terms of (cert) to the Supreme Court, you know, I think it's important to note that under the fairly famous Supreme Court case (Eerie) - the Supreme Court is very reluctant to hear questions of - that are purely questions of state law.
And if you go back and look at the Second Circuit decision, putting the injunction and some of the procedural issues aside, in terms of appealing the substance of that decision - I think it's unlikely to be heard - highly unlikely to be heard by the Supreme Court because it's mostly about the interpretation of New York State contract law.
And that's really not the kind of question that a Supreme Court is likely to hear.
Robert Raben: Okay, thank you. We open it to questions.
Operator: Ladies and gentlemen as a reminder, to register a question press 1 - 4. There are no questions from the phone lines at this time.
Richard Samp: Let me add a point to what Paul said. The vast majority of the issues that were decided by the Second Circuit are issues of New York law. And I agree with him that those are unlikely to attract the interest of the Supreme Court.
The one possible issue they would agree to hear is the scope of the FSIA - the Foreign Sovereign Immunities Act which limits the ability of the United States courts to enter judgments against foreign countries.
And Argentina has maintained in this case that the scope of the injunction violates the FSIA. The Second Circuit rejected that argument. But because that is an issue of federal law, that is a plausible issue for Supreme Court review.
I agree with the Second Circuit's decision rejecting Argentina's argument but at least they would have some leg to stand on to seek review of that issue.
Robert Raben: Thank you very much. We deeply - deeply appreciate your continued attention to this. We hope for a much faster resolution of this issue than what we are seeing.
Argentina has dragged its heels from 10 years and we know that this gets complicated. We are at your service to answer any follow-up questions. And you can contact us at the ATFA Web site info at Atfa.org or (media at) Atfa.org and I will respond to you ASAP.
Thank you so much attorneys for explaining this to us and we'll stop here.
Operator: Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.
http://www.atfa.org/atfa-media-teleconference-transcript-legal-experts-say-second-circuit-initial-pari-passu-ruling-remains-intact/
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