NML Capital, Ltd. v. Republic of Argentina

• Decision Date: 26 October 2012
• Docket Number: Docket No. 12–157(CON).,Docket No. 12–185(CON).,Docket No. 12–909(CON).,Docket No. 12–164(CON).,Docket No. 12–914(CON).,Docket No. 12–111(CON).,Docket No. 12–924(CON).,Docket No. 12–938(CON).,Docket No. 12–926(CON).,Docket No. 12–920(CON).,Docket No. 12–971(CON).,Docket No. 12–109(CON).,Docket No. 12–968(CON).,Docket No. 12–923(CON).,Docket No. 12–951(CON).,Docket No. 12–170(CON).,Docket No. 12–943(CON).,Docket No. 12–176(CON).,Docket No. 12–916(CON).,Docket No. 12–105(L).,Docket No. 12–189(CON).,Docket No. 12–163(CON).,Docket No. 12–158(CON).,Docket No. 12–214(CON).,Docket No. 12–919(CON).
• Citation: 699 F.3d 246
• Parties: NML CAPITAL, LTD., Aurelius Capital Master, Ltd., ACP Master, Ltd., Blue Angel Capital I LLC, Aurelius Opportunities Fund II, LLC, Pablo Alberto Varela, Lila Ines Burgueno, Mirta Susana Dieguez, Maria Evangelina Carballo, Leandro Daniel Pomilio, Susana Aquerreta, Maria Elena Corral, Teresa Munoz De Corral, Norma Elsa Lavorato, Carmen Irma Lavorato, Cesar Ruben Vazquez, Norma Haydee Gines, Marta Azucena Vazquez, Olifant Fund, Ltd., Plaintiffs–Appellees, v. The REPUBLIC OF ARGENTINA, Defendant–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

699 F.3d 246

NML CAPITAL, LTD., Aurelius Capital Master, Ltd., ACP Master, Ltd., Blue Angel Capital I LLC, Aurelius Opportunities Fund II, LLC, Pablo Alberto Varela, Lila Ines Burgueno, Mirta Susana Dieguez, Maria Evangelina Carballo, Leandro Daniel Pomilio, Susana Aquerreta, Maria Elena Corral, Teresa Munoz De Corral, Norma Elsa Lavorato, Carmen Irma Lavorato, Cesar Ruben Vazquez, Norma Haydee Gines, Marta Azucena Vazquez, Olifant Fund, Ltd., Plaintiffs–Appellees,

v.The REPUBLIC OF ARGENTINA, Defendant–Appellant.

Docket Nos. 12–105(L), 12–109(CON), 12–111(CON), 12–157(CON), 12–158(CON), 12–163(CON), 12–164(CON), 12–170(CON), 12–176(CON), 12–185(CON), 12–189(CON), 12–214(CON), 12–909(CON), 12–914(CON), 12–916(CON), 12–919(CON), 12–920(CON), 12–923(CON), 12–924(CON), 12–926(CON), 12–939(CON), 12–943(CON), 12–951(CON), 12–968(CON), 12–971(CON).

United States Court of Appeals,Second Circuit.

Argued: July 23, 2012.

Decided: Oct. 26, 2012.

Theodore B. Olson (Matthew D. McGill, Jason J. Mendro, on the briefs), Gibson, Dunn & Crutcher LLP, Washington, D.C.; Robert A. Cohen, Charles I. Poret, Eric C. Kirsch, Dechert LLP, New York, N.Y., for Plaintiff–Appellee NML Capital, Ltd.

Stephen D. Poss, Robert D. Carroll, Goodwin Procter LLP, Boston, Mass., for Plaintiff–Appellee Olifant Fund, Ltd.

Michael C. Spencer, Milberg LLP, New York, N.Y., for Plaintiffs–Appellees Pablo Alberto Varela, et al.

Edward A. Friedman, Daniel B. Rapport, Friedman Kaplan Seiler & Adelman LLP, New York, N.Y.; Jeffrey A. Lamken, MoloLamken LLP, Washington, D.C., for Plaintiffs–Appellees Aurelius Capital Master, Ltd., ACP Master, Ltd., Blue Angel

Capital I LLC, and Aurelius Opportunities Master Fund II, LLC.

Jonathan I. Blackman (Carmine D. Boccuzzi, Sara A. Sanchez, Michael M. Brennan, on the brief), Cleary Gottlieb Steen & Hamilton LLP, New York, N.Y., for Defendant–Appellant the Republic of Argentina.

David W. Rivkin, Suzanne M. Grosso, Debevoise & Plimpton LLP, New York, N.Y.; Ronald Mann, Esq., pro se, New York, N.Y., for Amici Curiae Prof. Ronald Mann and EM Ltd., in support of Plaintiffs–Appellees.

Walter Rieman, Andrew W. Amend, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, N.Y., for Amici Curiae Montreux Partners, L.P. and Wilton Capital, in support of Plaintiffs–Appellees.

Richard A. Samp, Washington Legal Foundation, Washington, D.C., for Amicus Curiae the Washington Legal Foundation, in support of Plaintiffs–Appellees.

Kevin S. Reed, Quinn Emanuel Urquhart & Sullivan, LLP, New York, N.Y., for Amicus Curiae Prof. Kenneth W. Dam, in support of Plaintiffs–Appellees.

John D. Clopper (Jeannette A. Vargas, Sarah S. Norman, on the brief), Assistant United States Attorneys, for Preet Bharara, United States Attorney for the Southern District of New York, N.Y.; Stuart F. Delery, Acting Assistant Attorney General, Mark B. Stern, Sharon Swingle, Attorneys, Appellate Staff, Civil Division, Department of Justice, Washington, D.C.; George W. Madison, General Counsel, Department of the Treasury, Washington, D.C.; Harold Hongju Koh, Legal Advisor, Department of State, Washington, D.C., for Amicus Curiae the United States of America, in support of Defendant–Appellant.

Paul Saltzman, Joseph R. Alexander, H. Rodgin Cohen, Michael Wiseman, The Clearing House Association L.L.C., New York, N.Y.; Sergio J. Galvis, Joseph F. Neuhaus, Michael J. Ushkown, Sullivan & Cromwell LLP, New York, N.Y., for Amicus Curiae the Clearing House Association L.L.C., in support of Defendant–Appellant.

Before: POOLER, B.D. PARKER and RAGGI, Circuit Judges.

BARRINGTON D. PARKER, Circuit Judge:

The Republic of Argentina appeals from permanent injunctions entered by the United States District Court for the Southern District of New York (Griesa, J.) designed to remedy Argentina's failure to pay bondholders after a default in 2001 on its sovereign debt. The district court granted plaintiffs summary judgment and enjoined Argentina from making payments on debt issued pursuant to its 2005 and 2010 restructurings without making comparable payments on the defaulted debt. We hold that an equal treatment provision in the bonds bars Argentina from discriminating against plaintiffs' bonds in favor of bonds issued in connection with the restructurings and that Argentina violated that provision by ranking its payment obligations on the defaulted debt below its obligations to the holders of its restructured debt. Accordingly, we affirm the judgment of the district court; we find no abuse of discretion in the injunctive relief fashioned by the district court, and we conclude that the injunctions do not violate the Foreign Sovereign Immunities Act (“FSIA”). However, the record is unclear as to how the injunctions' payment formula is intended to function and how the injunctions apply to third parties such as intermediary banks. Accordingly, the judgment is affirmed except that the case is remanded to the district court for such proceedings as are necessary to clarify these two issues. See United States v. Jacobson, 15 F.3d 19, 22 (2d Cir.1994).

BACKGROUND

Overview

In 1994, Argentina began issuing debt securities pursuant to a Fiscal Agency Agreement (“FAA Bonds”). A number of individual plaintiffs-appellees bought FAA Bonds starting around December 1998. The remaining plaintiffs-appellees, hedge funds and other distressed asset investors, purchased FAA Bonds on the secondary market at various times and as recently as June 2010.¹ The coupon rates on the FAA Bonds ranged from 9.75% to 15.5%, and the dates of maturity ranged from April 2005 to September 2031.

The FAA contains provisions purporting to protect purchasers of the FAA Bonds from subordination. The key provision, Paragraph 1(c) of the FAA, which we refer to as the “ Pari Passu Clause,” provides that:

[t]he Securities will constitute ... direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu without any preference among themselves. The payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness....

J.A. at 157 (emphasis added) (“External Indebtedness” is limited to obligations payable in non-Argentine currency. J.A. at 171.).² We refer to the second sentence of the Pari Passu Clause as the “Equal Treatment Provision.” Following the 2001 default on the FAA Bonds, Argentina offered holders of the FAA Bonds new exchange bonds in 2005 and 2010 (the “Exchange Bonds”). Argentina continued to make payments to holders of those Exchange Bonds while failing to make any payments to persons who still held the defaulted FAA Bonds.

After Argentina defaulted, its President in December 2001 declared a “temporary moratorium” on principal and interest payments on more than $80 billion of its public external debt including the FAA Bonds. Each year since then, Argentina has passed legislation renewing the moratorium and has made no principal or interest payments on the defaulted debt. Plaintiffs estimate that, collectively, their unpaid principal and prejudgment interest amounts to approximately $1.33 billion.

The plaintiffs allege that Argentina's conduct violated the Pari Passu Clause by both subordinating their FAA Bonds to the Exchange Bonds and lowering the ranking of their FAA Bonds below the Exchange Bonds. The primary issues on appeal are whether Argentina violated the Pari Passu Clause, and if so, whether the remedy the district court ordered was appropriate.

Argentina's Restructurings

In 2005, Argentina initiated an exchange offer in which it allowed FAA bondholders to exchange their defaulted bonds for new unsecured and unsubordinated external debt at a rate of 25 to 29 cents on the dollar. In exchange for the new debt, participants agreed to forgo various rights and remedies previously available under the FAA. To induce creditors to accept the exchange offer, Argentina stated in the prospectus under “Risks of Not Participating in [the] Exchange Offer” the following:

Existing defaulted bonds eligible for exchange that are not tendered may remain in default indefinitely. As of June 30, 2004, Argentina was in default on approximately U.S. $102.6 billion of its public indebtedness.... The Government has announced that it has no intention of resuming payment on any bonds eligible to participate in [the] exchange offer ... that are not tendered or otherwise restructured as part of such transaction. Consequently, if you elect not to tender your bonds in an exchange offer there can be no assurance that you will receive any future payments in respect of your bonds.

2005 Prospectus, J.A. at 465 (second emphasis added).

That same year, in order to exert additional pressure on bondholders to accept the exchange offer, the Argentine legislature passed Law 26,017 (the “Lock Law”) declaring that:

Article 2—The national Executive Power may not, with respect to the bonds ..., reopen the swap process established in the [2005 exchange offer].

Article 3— The national State shall be prohibited from conducting any type of in-court, out-of-court or private settlement with respect to the bonds....

Article 4—The national Executive Power must ... remove the bonds ... from listing on all domestic and foreign securities markets and exchanges.

2005 Lock Law, J.A. at 436 (emphasis added). The 2005 exchange offer closed in June 2005 with a 76% participation rate, representing a par value of $62.3 billion. Plaintiffs did not participate.

In 2010, Argentina initiated a second exchange offer with a payment scheme substantially identical to the 2005 offer. To overcome the Lock Law's prohibition against reopening the exchange, Argentina temporarily suspended the Lock Law (the “Lock Law Suspension”).³ Like the 2005 prospectus, the 2010 exchange offer prospectus also warned of “Risks of Not Participating in the [2010 restructuring]”:

Eligible Securities that are in default and that...