The brilliantly peripatetic Reuters finance columnist Felix Salmon alit last week on the topic of foreign sovereign immunity for nationalized banks. Salmon took issue with a piece in the Economist that argued a Manhattan federal district judge's rejection of the hedge fund Fir Tree's claim against Anglo Irish Bank "eviscerates law in New York" because Anglo Irish was nationalized in 2009 and is thus protected by the Foreign Sovereign Immunity Act. (I had a less alarmist take on the Anglo Irish ruling when it came down last November, noting that Fir Tree couldn't argue for the commercial-transactions exception to FSIA because it's based in the Cayman Islands.) Salmon pointed out that foreign sovereign immunity "has been the law in New York for as long as anybody can remember, and anybody writing contracts in New York knows about it."

His column reminded me of the latest wrinkle in the decade-long fight between Argentina and bondholders who refused to participate in either of the sovereign's restructuring of debt originally issued in the 1990s. The holdouts, mostly distressed debt hedge funds, have obtained billions of dollars in judgments in U.S. courts, only to be stymied by FSIA and the 2nd Circuit Court of Appeals in most of their attempts to attach Argentine assets to satisfy those judgments. In their most recent gambit, as I reported last month, two of the hedge funds and assorted other bondholders obtained an injunction from U.S. District Judge Thomas Griesa of Manhattan federal court that would require Argentina, under the equal treatment (or pari passu) provision in the original bond contracts, not to pay bondholders who participated in the restructuring without paying holdouts.

The United States joined Argentina in arguing that the injunction is an improper encroachment on Argentina's sovereignty under the FSIA, and a foreign policy disaster to boot. Griesa's interpretation of the equal treatment provision, the United States said in an amicus brief, "could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises."

I questioned the Justice Department's decision to stand shoulder-to-shoulder with a sovereign that has flouted the judgments of U.S. courts, but the U.S. brief said that the government has a foreign policy interest in assuring that private bondholders can't disrupt payment to the international financial institutions that act as preferred lenders. It also said Griesa's injunction "could cause heightened tensions in our foreign relations" because of "the strongly held view of many foreign states that they are not subject to coercive orders of U.S. courts."

But remember, the bonds in the Argentina dispute were issued under New York law, so a New York federal judge's interpretation of the bond contracts isn't exactly an unwarranted power grab. And in briefs filed in the last two weeks of April, the hedge funds shafted by Argentina show more regard for the judgment and discretion of U.S. courts than the Justice Department did in its amicus brief.

As a practical matter, argued Gibson, Dunn & Crutcher and Dechert in NML Capital's 89-page brief, the collective action clauses that the overwhelming majority of sovereign debt issues now include (at the urging of the United States) remove any possibility that a single bondholder could thwart a restructuring. Such clauses hold that a super-majority of bondholders can override a minority in approving changes to bond terms. (An amicus brief by Professor Kenneth Dam of the University of Chicago Law School, a former State and Treasury Department official, also asserts that collective action clauses mitigate the influence of any dissident bondholder. "The purported problem identified by the U.S., in other words, is of historical interest only," wrote Dam's counsel at Quinn Emanuel Urquhart & Sullivan.)

The secondary bond market, NML pointed out, has been adept at adapting to changing circumstances, as Greece's overwhelmingly successful sovereign debt restructuring in March demonstrated. There's much more danger to the market, the hedge fund said, if Argentina gets away with refusing to make good on its obligations than in enforcing the equal treatment clause. NML also asserted that the FSIA arguments by Argentina and the Justice Department are irrelevant, since the proposed injunction doesn't actually attach any Argentine assets but just dic tate s how those assets should be paid out.

Moreover, wrote Aurelius Capital's lawyers at Friedman Kaplan Seiler& Adelman and MoloLamken, in an argument I was particularly happy to see, the "parade of horribles" envisioned by Argentina and the United States won't occur because "they ignore district courts' discretion to shape equitable remedies." (Here's Aurelius' 41-page brief.) Yes, the hedge funds seem to believe that judges charged with overseeing New York law can actually fulfill that responsibility. "District court judges are capable of ensuring that specific performance will be reserved for exceptional cases like this one, where a sovereign persists in its refusal to pay despite a demonstrated ability to do so," Aurelius said. "Indeed, Judge Griesa, exercising his equitable discretion, has shown great solicitude for Argentina's restructuring efforts and the interests of its other bondholders."

NML highlighted Griesa's decade of overseeing the Argentina bond litigation. "In light of the district court's careful deliberations and profound familiarity with the facts and circumstances, this court should reject each of Argentina's affronts to its discretion," it urged the 2nd Circuit.(NML also noted the silliness of the U.S. argument that foreign governments don't think they're subject to "coercive" court orders. That's beside the point, NML said, because Congress has determined that courts can enjoin foreign sovereigns despite the FSIA.)

The 2nd Circuit has tentatively scheduled oral arguments for the week of May 29. Theodore Olson of Gibson, Dunn is slated to argue for NML. Olson or Jeffrey Lamken of MoloLamken will speak for Aurelius, and Jonathan Blackman of Cleary Gottlieb Steen & Hamilton is on the docket for Argentina. For the record, here's Argentina's reply to the hedge funds, filed last week.

(Reporting by Alison Frankel)

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