Lifting the Injunctions: The end of “the trial of the century” in sovereign debt

By: Luis F. Gomez-Alfaro                                                                                                   

Introduction

The newly-elected government of Argentina has offered to pay all the holders of its sovereign debt.[1] This proposal is a striking reversal of Argentina’s decade-long position of only making payments to the holders of it restructured debt (“exchanged creditors”), but not to those that had refused to exchange their bonds at a 65% loss (“holdout creditors”).[2]  If the negotiations are successful, and the injunctions against Argentina are lifted, these developments will bring an end to the so called “trial of the century in sovereign debt restructuring,” [3] and cement a remarkable empowerment of holdout creditors in sovereign debt restructuring processes.

Argentina’s newly elected President, Mauricio Macri, has vowed to regain access to the sovereign debt markets.[4] Currently a series of judgments and injunctions[5] have rendered Argentina unable to make payments only to the exchanged creditors, and has effectively forced the South American nation to default on its sovereign debt. To illustrate the significance of Judge Thomas P. Griesa’s injunctions, and how lifting these equitable remedies will determine the resolution of this sovereign-debt landmark case, this note will: (1) present a short overview of Argentina’s sovereign-debt debacle; (2) explain how the failed debt restructuring  process lead to the District Court for the Southern District of New York issuing the unprecedented injunctions; and, (3) explain how Argentina’s new settlement offers will lead to a permanent lifting of the injunctions and the amicable resolution of the most contested sovereign-debt litigation.

Argentina’s sovereign debt debacle

Argentina’s great depression, from 1998 to 2002 generated the largest sovereign debt default in history.[6] After a surprising economic recovery, Argentina began restructuring a debt worth well over $100 billion.[7] The first restructuring attempt occurred on 2005 and it was followed on 2010 by a reopened restructuring exchange that had an even less attractive offer.[8] At the end of the two restructuring processes, Argentina had successfully exchanged almost 93% of its sovereign debt with the participating creditors securing an average of $.30 for every $1 owed by Argentina.[9]

An otherwise successful debt restructuring process began spiraling out of control with the emergence of a group of recalcitrant creditors refusing to exchange their bonds. These holdout creditors were led by investment funds that had purchased secondary-market Argentine debt with the intention to sue and hold out until they were paid in full.[10] These investors followed a litigation strategy, previously employed against Peru, and sued Argentina in the Southern District of New York.[11]

In making a case for full payment, the holdout creditors first relied on an alternative understanding of the pari passu clauses in the bonds,[12] followed by a request of equitable remedies to force Argentina to the negotiating table.[13]  On December 07, 2011, Judge Griesa of the Southern District of New York ruled for the holdout creditors finding that Argentina had violated the pari passu clause in its bonds by making interest payments to the exchanged creditors without also making payments to the holdout creditors.[14] On February 23, 2012, Judge Giresa not only ordered Argentina to make ratable payments to the holdout creditors but also issued injunctions[15] blocking financial institutions from making payments to the exchanged creditors until the holdout creditors also received payments.[16]

After Argentina pursued several appeals, the Supreme Court of the United States refused to take the case against Judge Griesa’s orders to pay the holdout creditors in full when it made any payments to the exchanged creditors.[17]  With the Second Circuit Court of Appeals lifting its stay, and the orders and injunctions in full effect, Argentina’s refusal to make payments at this stage would again have it defaulting on its debt and completely cut off from the international credit markets.[18]

The injunctions

After the holdout creditors secured partial summary judgments, some tried to enforce their judgments by seizing eligible Argentine property. Through this efforts, creditors attempted to seize: other defaulted bonds;  Argentina’s central bank funds on deposit at the Federal Reserve Bank of New York and at the Bank for International Settlements; taxes and revenues owed to Argentina; the Argentine President’s airplane; and even a military ship docked abroad.[19] Since the holdout creditors couldn’t have realistically seized enough eligible assets to satisfy their judgments,[20] the court also granted their requests for specific performance and of equitable remedies against Argentina’s continued violation of the pari passu clause.[21] These unexpected injunctions[22] mandated that “whenever the Republic paid on the exchange bonds, it needed to make a ratable payment to plaintiffs” (holdout creditors).[23]

The injunctions were supported by the holdout creditor’s argument that two Argentine laws left them without an adequate remedy at law, and that the equities and the public interest supported the injunctions due to Argentina’s “repeated failures to pay plaintiffs and its unprecedented, systematic scheme to pay other debts without paying plaintiffs”.[24] These two Argentine laws were Law 26,017 (known as the Lock Law) and Law 26,547.[25] The “Lock Law” plainly prohibits future settlements to holdout creditors, and Law 26,547 prohibits offering more favorable settlements to the creditors that have sued Argentina.[26] Thus, these laws amounts to a legislatively blockade to compliance with the Court’s judgments and the injunctions. Further, the passing of a third Argentine law, the Sovereign Payment Law or Law 26,984, led to the Court holding Argentina in contempt for attempting to evade the injunctions through a complex scheme of transactions within Argentina.[27]

These injunctions were consequential because they had very effective extraterritorial effects on a sovereign debtor.  Extraterritorial compliance was assured because the court threatened to also sanction the trustees (like to The Bank of New York Mellon); the exchanged creditor as and their depositaries (like Cede & Co. and The Bank of New York Depositary); financial market utilities (like the Depository Trust Company, Clearstream Banking, and Euroclear); trustees (like the Bank of New York Luxembourg and The Bank of New York Mellon); and, their attorneys and other agents.[28]  The order’s in terrorem effect on third parties was designed to force Argentina back to the negotiations.[29] These injunctions were also sui generis because instead of requiring payment to any of the creditors, they left Argentina with the choice of either paying every creditor ratably or defaulting on all of its debt by being unable to make payments directly or through any financial institutions.[30]

Faced with the holdout creditors strategy, and unable to receive the agreed exchange payments, many of Argentina’s exchanged creditors became “me too” plaintiffs by also filing motions for partial summary judgments in 2015. These exchanged creditors obtained the same pari passu summary judgments as the holdout creditors due to Argentina’s course of conduct that has led to not paying any plaintiff.[31] Further, the court also extended “me too” injunctions to the exchanged creditors, citing Argentina’s failure to entertain meaningful settlement negotiations and its scheme to make payments only to the exchange bondholders in violation of the court’s original injunctions.[32] Argentina’s appeal of these last orders is pending before the Second Circuit.[33]

The resolution of the case

Having defaulted on its debt, unable to pay its restructured creditors, mired in litigation, and cutoff form the sovereign debt market, the newly elected Argentine government reopened negotiations through the court-appointed mediator, Special Master Daniel A. Pollack.[34] After his election, President Macri dispatched its newly appointed Secretary of Finance and a delegation of senior government officials to hold talks with the representatives of the holdout creditors leading the case in New York. On January 2016, discussions began under the auspices of the Special Master.[35] One month later, on February, 2016, Argentina had presented a settlement offer which lead Mr. Pollack to declare that the case was “now well on its way to being resolved,”[36] and that “Argentina has continued to reach Agreements in Principle with its Bondholders, large and small.”[37]

As a product of the negotiations, Argentina proposed an offer with two settlement categories: the Standard Offer and the Pari Passu Offer.[38] The Standard Offer provides for a cash payment equal to the original principal of the bond plus 50% as interest.[39] The Pari Passu Offer provides that (1) creditors with injunctions and judgments are to receive the full amount of that judgment, less a 30% discount, and (2) that creditors with judgments are to receive payment equal to the current accrued value of the claims, less a 30% discount.[40] Importantly, Argentina conditioned the offers to obtaining legislative approval by the Argentine Congress and the vacating of the injunctions by the District Court of the Southern District of New York.[41]

Together with the removal of the holdout creditors’ injunctions, Argentina also moved to vacate all the “me-too” injunctions; however, because Argentina still has an on-going appeal (remnant of its previous strategy) the court couldn’t vacate the injunctions, and instead gave Argentina an indicative Ruling.[42]  In that decision, the court stated that it has the inherent power to vacate the injunctions if the requested modification would not thwart the purpose behind them.[43] Affirming that a total compliance with the injunctions was not an absolute precondition to their modification,[44] and that the court may vacate an injunction even though the purpose of the decree has not been completely realized,[45] the court stated a willingness to lift the injunctions in light of Argentina’s good-faith willingness to negotiate with the holdouts.[46]

The court also explained that since the pari passu clause never required that injunctions be granted, the injunctions have always been a discretionary remedy and not an entitlement.[47] It further explained that the changed circumstances have now render the injunctions inequitable and indicated, through the indicative ruling, that it would vacate the injunctions upon the occurrence of two conditions precedent: (1) The repeal of all Argentinian legislation hampering a settlement with the holdout creditors, including the Lock Law and the Sovereign Payment Law;  and (2) for all creditors in the case to enter into agreements in which they receive full payment in accordance with the specific terms of each such agreement.[48]

Conclusion

In the aftermath of Argentina’s new offers, the sovereign debt market was left with the blueprint for how to effectively request and use injunctions to force recalcitrant sovereigns to the negotiating table. The District Court for the Southern District of New York, with its effective use of its equitable remedies, has effectively brought the most-contested sovereign debt case to a resolution by actively rebalancing the bargaining power between the sovereign debtors and its holdout creditors.


 

[1] Indicative Ruling, EM Ltd. v. Argentina, No. 14 Civ. 8303 (TPG) (S.D.N.Y. Feb. 19, 2016) (ECF No. 49).

[2] Hal S. Scott, Sovereign Debt Default: Cry For The United States, Not Argentina, Harvard Law

School Washington Legal Foundation, Critical Legal Issues, Working Paper Series No. 140, (forthcoming, Sep. 2006).

[3] Joseph Cotterill, Bad day to be a recalcitrant sovereign debtor, Financial Times –FT Aplhaville (June 14, 2014), http://ftalphaville.ft.com/2014/06/16/1878332/bad-day-to-be-a-recalcitrant-sovereign-debtor/?

[4] Benedict Mande, Mauricio Macri vows to end Argentina’s isolation, Financial Times, (Oct. 28, 2015) http://www.ft.com/intl/cms/s/0/c77cae92-7d6b-11e5-98fb-5a6d4728f74e.html#axzz41xskfSw0

[5] NML Capital, Ltd. v. Republic of Argentina, Nos. 08-cv-6978(TPG), 09-cv-1707 (TPG), 09-cv-1708 (TPG) (S.D.N.Y. Feb. 23, 2012) and NML Capital, Ltd. v. Republic of Argentina, Nos. 08-cv-6978(TPG), 09-cv-1707(TPG), 09-cv-1708(TPG), 2012 WL 5895784 (S.D.N.Y. Nov. 21, 2012).

[6] J. F. Hornbeck, Argentina’s Defaulted Sovereign Debt: Dealing with the Holdouts, Congressional Research Service at 8 (Feb 6, 2013).

[7] Hal S. Scott, Sovereign Debt Default: Cry For The United States, Not Argentina, Harvard Law

School Washington Legal Foundation, Critical Legal Issues, Working Paper Series No. 140, (forthcoming, Sep. 2006).

[8] Anna Gelpern, Sovereign Damage Control, Peterson Institute for International Economics, Policy Brief (May 2013).

[9] International Monetary Fund, Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring, Staff Report for the Executive Board (2014) at 8.

[10] J. F. Hornbeck, Argentina’s Defaulted Sovereign Debt: Dealing with the Holdouts, Congressional Research Service at 8 (Feb 6, 2013).

[11] EM Ltd. v. Republic of Argentina (2010) Federal Court for the Southern District of New York 720 F. Supp. 2d 273.

[12] See Order, NML Capital Ltd. v. Republic of Argentina, No. 08-cv- 6978 (S.D.N.Y. Dec. 7, 2011).

 [13] See Order § 2(a), NML Capital Ltd. v. Republic of Argentina, No. 08-cv-6978 (S.D.N.Y. Feb. 23, 2012).

[14] Id.

[15] NML Capital, Ltd. v. Republic of Argentina, Nos. 08-cv-6978(TPG), 09-cv-1707 (TPG), 09-cv-1708 (TPG) (S.D.N.Y. Feb. 23, 2012).

[16] Id.

[17] NML Capital, Ltd. v. Republic of Argentina (2014) US Supreme Court Cert. denied 13-990.

[18] J. F. Hornbeck, Argentina’s Defaulted Sovereign Debt: Dealing with the Holdouts, Congressional Research Service at 8 (Feb 6, 2013).

[19] W. Mark C. Weidemaier & Anna Gelpern, Injunctions in Sovereign Debt Litigation, 31 YALE J. REG. 189, 191 (2014).

[20] Id.

[21] NML Capital, Ltd. v. Republic of Argentina, Nos. 08-cv-6978(TPG), 09-cv-1707 (TPG), 09-cv-1708 (TPG) (S.D.N.Y. Feb. 23, 2012) and NML Capital, Ltd. v. Republic of Argentina, Nos. 08-cv-6978(TPG), 09-cv-1707(TPG), 09-cv-1708(TPG), 2012 WL 5895784 (S.D.N.Y. Nov. 21, 2012).

[22] Id.

[23] Id.

[24] Indicative Ruling, EM Ltd. v. Argentina, No. 14 Civ. 8303 (TPG) (S.D.N.Y. Feb. 19, 2016) (ECF No. 49) at 3.

[25]  Id.

[26] NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246, 250-52 (2d Cir. 2012).

[27] See, Am. & Suppl. Order, NML Capital, Ltd. v. Republic of Argentina, No. 08-cv-6978 (S.D.N.Y. Oct. 3, 2014).

[28] NML Capital, Ltd. v. Republic of Argentina, Nos. 08-cv-6978(TPG), 09-cv-1707(TPG), 09-cv-1708(TPG), 2012 WL 5895784 (S.D.N.Y. Nov. 21, 2012).

[29] Karen Halverson Cross, The Extraterritorial Reach of Sovereign Debt Enforcement, 12 Berkeley Bus. L.J. 111 (2015).

[30] See NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246, 259 (2d Cir. 2012).

[31] Op. & Order, NML Capital, Ltd. v. Republic of Argentina, No. 14 cv-8601 (S.D.N.Y. June 5, 2015).

[32] Op. & Order 10, NML Capital, Ltd. v. Republic of Argentina, No. 14-cv-8601 (S.D.N.Y. Oct. 30, 2015).

[33] Notice Civil Appeal, NML Capital, Ltd. v. Republic of Argentina, No. 15-3675 (2d Cir. Nov. 10, 2015).

[34] Indicative Ruling, EM Ltd. v. Argentina, No. 14 Civ. 8303 (TPG) (S.D.N.Y. Feb. 19, 2016) (ECF No. 49) at 15.

[35] Id.

[36] Statement of Daniel A. Pollack, Special Master in Argentina Debt Litigation, dated Feb, 29, 2016.

[37] Statement of Daniel A. Pollack, Special Master in Argentina Debt Litigation, dated Mar. 04, 2016.

[38] Indicative Ruling, EM Ltd. v. Argentina, No. 14 Civ. 8303 (TPG) (S.D.N.Y. Feb. 19, 2016) (ECF No. 49) at 8.

[39] Id.

[40] Id.

[41] Id.

[42] See, Fed. R. Civ. P. 62.1

[43] Indicative Ruling, EM Ltd. v. Argentina, No. 14 Civ. 8303 (TPG) (S.D.N.Y. Feb. 19, 2016) (ECF No. 49) at 10. (citing Sierra Club, 732 F.2d at 256 and Chrysler Corp. v. United States, 316 U.S. 556, 562 (1942)).

[44] Id. at 11-12 (citing Badgley v. Santacroce, 853 F.2d 50, 54 (2d Cir. 1988)).

[45] Id. at (citing United States v. Eastman Kodak Co., 63 F.3d 95, 102 (2d Cir. 1995)).

[46] Id. at 13.

[47] Id. at 21.

[48] Id. at 23.

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