Capital v. Republic of Argentina

• Citation: 17 N.Y.3d 250,2011 N.Y. Slip Op. 05581,952 N.E.2d 482,928 N.Y.S.2d 666
• Parties: NML CAPITAL, Respondent–Appellant,andMontreux Partners et al., Respondents,v.REPUBLIC OF ARGENTINA, Appellant–Respondent.
• Decision Date: 30 June 2011
• Court: New York Court of Appeals Court of Appeals

17 N.Y.3d 250

952 N.E.2d 482

928 N.Y.S.2d 666

2011 N.Y. Slip Op. 05581

NML CAPITAL, Respondent–Appellant,andMontreux Partners et al., Respondents,

v.REPUBLIC OF ARGENTINA, Appellant–Respondent.

Court of Appeals of New York.

June 30, 2011.

Cleary Gottlieb Steen & Hamilton LLP, New York City (Carmine D. Boccuzzi, Jonathan I. Blackman and Christopher P. Moore of counsel), for appellant-respondent.Dechert LLP, New York City (Robert A. Cohen and Dennis H. Hranitzky of counsel), for respondent-appellant.Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York City (Walter Rieman of counsel), and Goodwin Proctor LLP, Boston, Massachusetts (Stephen D. Poss and Robert D. Carroll of counsel), for respondents.

OPINION OF THE COURT

GRAFFEO, J.

In this case the United States Court of Appeals for the Second Circuit has certified questions that require us to interpret the terms of bonds issued by the nation of Argentina. We are asked to determine whether Argentina's obligation to make biannual interest-only payments to bondholders continued after maturity or acceleration of the indebtedness and, if so, whether the bondholders were entitled to CPLR 5001 prejudgment interest on payments that were not made as a consequence of the nation's default.

In 1998, Argentina issued a series of floating rate accrual notes (FRANs) that were scheduled to mature in April 2005 when the principal was due to be repaid in full to bondholders. The FRANs were governed by a series of bond documents (a Fiscal Agency Agreement, Prospectus, Prospectus Supplement and Floating Rate Accrual Notes Certificate) directing that they were to be interpreted according to New York law. As the issuer, Argentina assumed the obligation to pay the bondholders interest-only payments twice a year, on April 10 and October 10, “until the principal hereof is paid or made available for payment,” at a floating interest rate calculated and published by a determination agent pursuant to a complex formula. The formula was structured in such a manner that, for each six-month period, the interest rate would rise or fall depending on Argentina's financial health as measured by certain market indicators.¹ Acceleration clauses were also included in the bond documents, permitting bondholders to accelerate the due date of the principal in the event of a default by the issuer.

From the date it issued the bonds until October 2001, Argentina fulfilled its obligations under the FRANs by making the interest-only payments twice a year as required. Given Argentina's relatively stable economy during that period, the floating interest rate (published by Morgan Stanley, the determination agent retained by Argentina) related to the biannual payments fluctuated between 9% and 14.4% per annum. However, after a severe financial crisis in late 2001, Argentina announced that it would no longer service its approximately $80 billion in external debt, including the FRANs at issue in this case. As a consequence of that pronouncement, the floating interest rate rose meteorically, reaching approximately 101% per annum (50.526% per biannual period) in April 2005, the last date such a calculation was made by Morgan Stanley, whose contract expired at that time. Since December 2001, Argentina has not made any of the biannual interest payments nor has it repaid any of the principal owed to the bondholders that brought this litigation. Argentina's failure to make interest-only payments and its 2001 declaration of a moratorium on servicing foreign debt were both “events of default” under the terms of the bond documents.

Plaintiffs are companies that acquired the FRANs at different points in time, some before Argentina's financial collapse and some after. In total, plaintiffs acquired FRANs representing approximately $290 million in unpaid principal, with the lead plaintiff in this litigation—NML Capital—holding bonds valued at $102 million. In February 2005, NML Capital accelerated about $32 million of that debt. The principal relating to the remaining FRANs became due on the April 2005 maturity date.

Plaintiffs commenced numerous separate actions against Argentina in the United States District Court, Southern District of New York, seeking damages for the nation's default on the bonds, and the claims were subsequently consolidated. Argentina did not dispute that it breached its obligations under the FRANs and was required to repay the principal indebtedness. But after plaintiffs were granted summary judgment on liability, a controversy arose concerning the appropriate calculation of damages.

In particular, Argentina raised several arguments affecting plaintiffs' entitlement to prejudgment interest. First, the nation maintained that it should not be required to pay prejudgment interest at the contract rate—the floating interest rate calculated biannually based on the complex formula in the bond documents. Because the interest rate rose to extraordinary levels, Argentina asserted that the rate was unconscionable, usurious and amounted to a liquidated damages clause that imposed an unenforceable penalty The District Court rejected these arguments, finding that the floating interest rate provision was enforceable (2009 WL 721736, 2009 U.S. Dist. LEXIS 21530). The Second Circuit affirmed this aspect of the District Court's analysis on the merits, without certifying any questions regarding those issues to this Court.

Argentina's second contention involved prejudgment interest on the biannual interest-only payments. The nation acknowledged that, in addition to prejudgment interest on unpaid principal, it was required to pay 9% statutory prejudgment interest pursuant to CPLR 5001 on the interest payments it failed to render between the date of its default and the date the FRANs matured or were accelerated. However, Argentina disputed that it had any obligation to continue biannual interest payments after the FRANs matured or were accelerated and further contended that 9% statutory interest should not be imposed on such payments because this constituted the impermissible collection of “interest on interest” under New York law.

Plaintiffs countered that Argentina had a duty under the plain language of the bond documents to continue the biannual interest payments post-maturity or post-acceleration of the debt until the principal was paid in full. Because the nation failed to make such payments (in fact, it ceased making interest payments in December 2001), plaintiffs maintained that they were entitled to collect the unpaid interest-only payments as damages, plus 9% statutory interest on those payments from the date they were due until the date of entry of a judgment.

The District Court partially credited each of the parties' arguments. Based on the language in the bond documents, the court agreed with the bondholders that Argentina was obligated to pay interest-only payments after the bonds matured until the principal was paid and, therefore, the bondholders were entitled to 9% statutory interest on the unpaid post-maturity interest-only payments. But, with respect to the subset of bonds that were accelerated, the court sided with Argentina. Relying on Capital Ventures Intl. v. Republic of Argentina, 552 F.3d 289 (2d Cir.2009), cert. denied 558 U.S. ––––, 130 S.Ct. 202, 175 L.Ed.2d 241 (2009), the District Court held that the nation's liability for biannual interest payments ceased on the date of acceleration and, therefore, the 9% statutory interest was not owed post-acceleration (2009 WL 721736, 2009 U.S. Dist LEXIS 21530).

Argentina and NML Capital cross-appealed to the Second Circuit. After affirming the District Court's determination that the floating interest rate provision in the bond documents was enforceable, the Second Circuit concluded that the remaining issues concerning the biannual interest payments and the calculation of prejudgment interest raised unresolved issues of New York law. Accordingly, the Second Circuit certified the following three questions for our review:

“[1] Is a bond provision requiring the issuer of the bond to make, on dates certain, bi-annual interest payments on principal ‘until the principal hereof is paid’ properly construed as an obligation to pay interest for so long as the principal is outstanding, including after the date of maturity?

“[2] Is a bond provision requiring the issuer of the bond to make, on dates certain, bi-annual interest payments on principal ‘until the principal hereof is paid’ properly construed as an obligation to pay interest for so long as the principal is outstanding, including after acceleration?

“[3] If either of the foregoing questions is answered in the affirmative, does that obligation provide a valid basis for awarding statutory interest under N.Y. C.P.L.R. § 5001(a) on post-maturity or post-acceleration interest payments that came due but were never paid?” (621 F.3d 230, 244 [2010].)

We accepted the certification (15 N.Y.3d 859, 909 N.Y.S.2d 689, 936 N.E.2d 455 [2010] ).

I.

Since this appeal primarily involves a dispute concerning the calculation of prejudgment interest, we begin with some general principles of New York law pertaining to that topic. Under CPLR 5001, interest on a sum awarded as a result of a breach of contract is computed from the earliest date that the claim accrued, “except that interest upon damages incurred thereafter shall be computed from the date incurred” (CPLR 5001[a], [b] ). Thus, CPLR 5001 permits a party that prevailed in a breach of contract action to obtain prejudgment interest (postjudgment interest is addressed in CPLR 5003). And where a contract provides for periodic payments or installments, the defaulting party is required to pay prejudgment interest on any missed payment from the date the payment became due ( see Spodek v. Park Prop. Dev. Assoc., 96 N.Y.2d 577, 733 N.Y.S.2d 674, 759 N.E.2d 760 [2001] ).

When a claim is predicated on a breach of contract, the applicable rate of...