Argentina v. Holdout Creditors: Applying the Rule of Law To Resolve Debt Default Richard Samp

1. Argentina v. Holdout Creditors: Applying the Rule of Law To Resolve Debt Default Richard Samp Chief Counsel Washington Legal Foundation December 11, 2013

2. Traditional Rule • Sovereign governments were immune from suit in the courts of a foreign nation • U.S. and European nations used “gunboat diplomacy” to assist their creditors • That option in no longer viable, but creditor won’t lend if it can’t enforce payment, and nations want access to credit markets

3. Foreign SovereignImmunities Act • Adopted in 1976 to provide clear rules regarding when immunity applies • No immunity for a nation’s commercial activities; per Supreme Court in Weltover, that includes issuing bonds • Nations may waive immunity from suit, but not from debt collection efforts

4. Argentine Default History • Argentina is world-champion defaulter; it has repeatedly defaulted for 200 years • Bonds at issue now were issued in 1994 • In light of its default history, Argentina had to agree to waive all immunity claims and to be governed by New York law

5. The 2001 Default • By 2001, Argentina owed $80 billion and economic downturn prevented payments • In similar situations, most sovereign debtors sit down with creditors and try to negotiate a work-out • Argentina simply announced “moratorium” and did nothing until 2005, by which time it had assets to make substantial payments

6. 2005 Exchange Offer • In 2005, Argentina extended take-it-or-leave-it offer: accept “Exchange Bonds” worth less than 30% of old bonds, or get nothing at all. • About 76% of bondholders accepted, and they have been paid interest ever since • Argentina adopted “Lock Law” prohibiting any payments to holdouts

7. The Holdouts Strike Back • Some holdouts filed suit and obtained judgments v. Argentina in S.D.N.Y. • Argentina refused to pay judgments • Efforts to find non-exempt Argentina anywhere in world have been largely unsuccessful (e.g., assets of Argentina central bank, Argentine navy training ship)

8. Pari Passu Clause • Most bond agreements include a provision requiring sovereign debtors not to subordinate the creditor’s debt to debt owed to other creditors • Meaning of such clauses is disputed • S.D.N.Y.: Argentina violated the clause in the 1994 bonds by denying “equal treatment”: paying interest on Exchange Bonds while barring payment to holdouts

9. The District Court Injunctions • March 2012: SDNY injunction bars payments to Exchange Bondholders unless Argentina also pays holdouts • October 2012: 2d Cir affirms but remands for clarification • November 2012: SDNY stands pat • August 2013: 2d Cir again affirms, and grants stay pending cert petition

10. Action in the Supreme Court • Oct. 2013: Supreme Court denies cert petition seeking review of 2d Cir.’s initial affirmance (in Oct. 2012) of injunction • Denial may have been based in part on the preliminary nature of that affirmance • Cert petition from 2d Cir.’s second ruling is due Feb. 2014; with extensions & CVSG, decision on review may not be until 2015

11. Other Supreme Court Action • Case names are confusing; the lead holdout is NML Capital, Ltd. • Supreme Court may well agree to hear another case named NML v. Argentina, involving document discovery • Solicitor General has recommended that cert be granted in the “discovery” case and says 2d Cir erred in ordering discovery

12. Injunctive Relief Under FSIA • Both “discovery” and “pari passu” cases turn on FSIA limits on injunctive relief • Secs. 1609-1611 provide that property of foreign sovereign is immune from attach-ment or execution unless it is commercial • Question: does SDNY injunction amount to attachment of Argentine property?

13. Other Issues • Did the district court properly interpret pari passu clause? Supreme Court unlikely to address that issue of NY contract law • Will the injunction hamper renegotiation of other sovereign debt? 2d Cir. didn’t think so, given Argentina’s uniquely recalcitrant status, and the historical ability of negotiators to get past “holdout” issues