Here's a prediction: When historians look back at the legacy of
U.S. Supreme Court Justice Antonin Scalia and his conservative
colleagues, they will pay close attention to the justices'
reluctance to extend the dominion of U.S. courts beyond our
country's borders. Scalia made that sentiment clear in his 2010
opinion in Morrison v. National Australia Bank, and the court is
right now considering the reach of a U.S. law that provides a
cause of action for human rights victims in Kiobel v. Royal Dutch Petroleum (Shell). Scalia, who has spoken about the danger
of applying rulings from international courts to cases in the
United States, believes that the same holds true in reverse: The
laws of the United States govern only the United States.
But in a ruling Friday in Argentina's long-running dispute
with vulture funds that hold defaulted Argentine bonds, the 2nd
Circuit Court of Appeals drew a line in the sand. The appeals
court held that Argentina cannot submit to the jurisdiction of
U.S. courts when it issues sovereign debt, then defy the power
of our courts to interpret the governing contracts with
bondholders. The 2nd Circuit reached that conclusion despite
Argentina's invocation of the Foreign Sovereign Immunities Act
-- and despite our own government's dire warning of a public
policy disaster if the court sided against Argentina. The
opinion, by Judge Barrington Parker for a panel that also
included Judges Rosemary Pooler and Reena Raggi, is notably
devoid of fiery pronouncements from a court that has repeatedly
(if reluctantly) agreed with Argentina that the FSIA precludes
bondholders from snatching the sovereign's assets in the United
States. But make no mistake. The 2nd Circuit is defending the
power of U.S. courts in the face of a defendant that has so far
refused to submit to their authority.
As Jon Stempel explained in a wonderfully lucid Reuters piece Friday, the 2nd Circuit's opinion came in a fight over
$100 billion in sovereign debt that Argentina issued in the
1990s and restructured in 2005 and 2010. The issue is whether
Argentina can continue to make payments to bondholders who
participated in the restructurings even as it refuses to pay
vulture funds that refused to participate in the restructurings.
More than 90 percent of Argentina's bondholders took the
exchange offer (which gave them between 25 and 29 cents on the
dollar) after Argentina explicitly warned that those who did not
participate would not receive payment on their defaulted notes.
Distressed debt funds including NML Capital and Aurelius Capital
nevertheless opted to hold onto their bonds. They've since
obtained billions of dollars in judgments against Argentina.
Argentina and its lawyers at Cleary Gottlieb Steen &
Hamilton have been extremely successful in thwarting execution
of those judgments, as the 2nd Circuit mentioned in a footnote
to Friday's ruling. So the hedge funds took a different tack in
the case that led to that decision. Argentina's 1994 Fiscal
Agency Agreement bonds included a so-called pari passu, or equal
footing, clause, which said that the sovereign's obligation to
bondholders "shall at all times rank at least equally with all
its other present and future unsecured and unsubordinated
external indebtedness." In 2011 NML, Aurelius and other vulture
funds that claim they're owed $1.4 billion in unpaid principal
and interest on those 1994 bonds argued that Argentina was
violating the pari passu clause by paying bondholders who
participated in the restructuring before it paid them. The
Argentine bonds were issued under New York law, so U.S. District
Judge Thomas Griesa of Manhattan has presided over the
litigation between Argentina and its bondholders. In a series of
rulings in early 2012, he agreed to enjoin Argentina from paying
the exchange bondholders before paying the hedge funds.
Griesa, who has seen Argentina refuse to pay up despite his
previous rulings in the hedge fund bond litigation, expressed
his frustration in the injunction rulings, in words the 2nd
Circuit quoted in Friday's decision. "The Republic has made
clear -- indeed, it has codified (in a 2005 law) -- its
intention to defy any money judgment issued by this court,"
Griesa wrote. "If there was any belief that the Republic would
honestly pay its obligations, there wouldn't be any need for
In its appeal of Griesa's orders, Argentina raised all sorts
of arguments, including the judge's supposedly incorrect
interpretation of the equal footing clause and his alleged
impinging on Argentina's rights as a sovereign. The U.S.
government chimed in on Argentina's side, asserting that
Griesa's reading of the equal footing clause could undermine
other foreign governments' attempts to restructure their debt.
"The district court's interpretation of the pari passu provision
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," the U.S. amicus brief said.
The bondholders' lawyers -- led by Gibson Dunn & Crutcher,
Dechert, Friedman Kaplan Seiler & Adelman and MoloLamken --
pointed out that Argentina's bonds were issued under New York
law. They argued (among many other things) that Griesa, as a
federal judge in New York, is empowered to interpret the laws of
That point was echoed, loudly, in the 2nd Circuit's ruling
Friday. "The (bond issue) is governed by New York law and
further provides for jurisdiction in 'any state or federal court
in The City of New York,'" the panel said, rejecting Argentina's
argument that the pari passu clause is boilerplate with settled
meaning in the sovereign debt community. In New York, the panel
said, a bond is a contract, so Griesa's task (and that of the
appeals court) was to interpret the contract. Argentina agreed
to that when it issued its bonds under New York law, the appeals
The judges also said that once Griesa determined that
Argentina had breached the equal footing provision when it put
exchange bondholders ahead of the vulture funds, "the court had
considerable latitude in fashioning the relief." Given
"Argentina's continual disregard for the rights of its ...
creditors and the judgments of our courts to whose jurisdiction
it has submitted," the 2nd Circuit said, Griesa's injunctions
were an appropriate remedy.
And because those injunctions didn't actually attach
Argentine property, the 2nd Circuit said, they're permissible
regardless of Argentina's immunity as a foreign sovereign.
"Argentina voluntarily waived its immunity from the jurisdiction
of the district court" because of the New York law provisions of
the 1994 bond offering, the 2nd Circuit said. "The FSIA imposes
no limits on the equitable powers of a district court that has
obtained jurisdiction over a foreign sovereign." Griesa's
injunctions, the opinion said, simply direct Argentina to comply
with its contractual obligations and "can be complied with
without the court's ever exercising dominion over sovereign
property." Reuters financial blogger Felix Salmon called this
the "weakest bit" of the 2nd Circuit's ruling. I happen to think
it's a welcome affirmation of the jurisdiction of U.S. courts.
The 2nd Circuit also said that the U.S. government's
concerns about widespread chaos in the bond markets were
misplaced, since collective action clauses in the overwhelming
majority of recent sovereign debt offerings have mitigated the
power of any single bondholder to hold up a restructuring. And
besides, the appeals court said, Spain, Portugal and Greece --
whose bonds Argentina cited in doomsday predictions -- weren't
issued under New York law.
The appeals court remanded the injunctions to Griesa to
clarify how the injunctions should impact the U.S. banks that
actually administer Argentine payments to exchange bondholders.
Argentina told Reuters Friday that it intends to "take all the
legal steps necessary to contest the decision."
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