Argentina v. Holdout Creditors:
Applying the Rule of Law
To Resolve Debt Default
Richard Samp
Chief Counsel
Washington Legal Foundation
December 11, 2013
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Washington Legal Foundation
Advocate for Freedom and Justice®
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
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Washington Legal Foundation
Advocate for Freedom and Justice®
Foreign Sovereign
Immunities 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
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Washington Legal Foundation
Advocate for Freedom and Justice®
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
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Washington Legal Foundation
Advocate for Freedom and Justice®
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
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Washington Legal Foundation
Advocate for Freedom and Justice®
2005 Exchange Offer
• In 2005, Argentina extended take-it-orleave-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
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Washington Legal Foundation
Advocate for Freedom and Justice®
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)
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Washington Legal Foundation
Advocate for Freedom and Justice®
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
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Washington Legal Foundation
Advocate for Freedom and Justice®
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
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Washington Legal Foundation
Advocate for Freedom and Justice®
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
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Washington Legal Foundation
Advocate for Freedom and Justice®
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
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Washington Legal Foundation
Advocate for Freedom and Justice®
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 attachment or execution unless it is commercial
• Question: does SDNY injunction amount
to attachment of Argentine property?
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Washington Legal Foundation
Advocate for Freedom and Justice®
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
WLF
Washington Legal Foundation
Advocate for Freedom and Justice®