Elliott Assoc. v. Banco De La Nacion

Decision Date01 August 1998
Docket NumberDocket Nos. 98-9268,98-9319
Citation194 F.3d 363
Parties(2nd Cir. 1999) ELLIOTT ASSOCIATES, L.P., Plaintiff-Appellant, v. BANCO DE LA NACION and THE REPUBLIC OF PERU, Defendants-Appellees
CourtU.S. Court of Appeals — Second Circuit

Appeal from two judgments entered in the United States District Court for the Southern District of New York (Sweet, J.), dismissing with prejudice plaintiff-appellant's complaints seeking damages for the non-payment of certain debt by defendants-appellees.

The judgments are reversed.

OTTO G. OBERMAIER, New York City (Brian S. Rosen, Eli Gottesdiener, Steven Shebar, Ross Morrison, Richard A. Simon, Daniel C. Richman, Weil, Gotshal & Manges, New York City), for Plaintiff- Appellant.

MARK A. CYMROT, Washington, D.C. (Peder A. Garske, Mark I. Bailen, Barbra M. Kolton, Baker & Hostetler, Washington, D.C.), for Defendants- Appellees.

THOMAS MOERS MAYER and PHILIP BENTLEY, Kramer Levin Naftalis & Frankel LLP, New York City, for Amici Curiae Angelo, Gordon & Co., L.P., The Baupost Group LLC, Contrarian Capital Management, LLC, Franklin Mutual Advisers, Inc. and Van Eck Associates Corporation.

NANCY JACKLIN, Clifford Chance, New York City, and PAUL SALTZMAN and SARAH M. STARKWEATHER, The Bond Market Association, New York City (Jayne S. Robinson and K. Ann McDonald, Robinson, Murphy & McDonald, New York City, of counsel), for Amicus Curiae The Bond Market Association.

JEFFREY T. KRAUS and JEFFREY P. DEJONG, Altheimer & Gray, Chicago, Illinois, for Amicus Curiae The Commercial Law League of America.

DANFORTH NEWCOMB and RICHARD A. LINGG, Shearman & Sterling, New York City (Michael M. Chamberlin, Aviva Werner, Emerging Markets Traders Association, New York City, of counsel), for Amicus Curiae Emerging Markets Traders Association.

STEVEN J. BLAUNER, Milbank, Tweed, Hadley & McCloy, New York City, for Amicus Curiae Loan Syndications & Trading Association, Inc.

Before: MCLAUGHLIN, LEVAL, and MICHEL*, Circuit Judges.

MICHEL, Circuit Judge:

Plaintiff-Appellant Elliott Associates, L.P. ("Elliott") appeals from the amended final judgments entered by the United States District Court for the Southern District of New York on September 3 and 15, 1998. The district court, after a bench trial, dismissed with prejudice Elliott's complaints seeking damages for the non-payment of certain debt by Defendants-Appellees The Republic of Peru ("Peru") and Banco de la Nacion ("Nacion") (together, the "Debtors") because it found that Elliott had purchased the debt in violation of Section 489 of the New York Judiciary Law ("Section 489"). See Elliott Assocs. v. Republic of Peru, 12 F. Supp. 2d 328 (S.D.N.Y. 1998). Because, contrary to the district court's interpretation, the pertinent case law demonstrates that Section 489 does not preclude relief in lawsuits, such as Elliott's, seeking primarily to collect on lawful debts and only filed absent satisfaction, we reverse the judgments of the district court.


Elliott is an investment fund with its principal offices located in New York City. Elliott was founded by Paul Singer in 1977 and he remains its sole general partner. One of the primary types of instruments that Elliott invests in is the securities of "distressed" debtors, that is, debtors that have defaulted on their payments to creditors. Singer testified that he invests in debt when he believes that the true or "fundamental" value of the debt is greater than the value accorded by the market. Elliott characterizes its approach to its investments as "activist." Thus, despite sometimes accepting the terms offered to other creditors, Elliott explains that it frequently engages in direct negotiations with the debtor and argues that, as a result, it has occasionally received a greater return than other creditors.

In August or September of 1995, Singer was approached by Jay Newman to discuss investing in distressed foreign sovereign debt. Newman, an independent consultant, had worked in the emerging market debt field at major brokerage houses Lehman Brothers, Dillon Read, and Morgan Stanley, as well as managing his own offshore fund, the Percheron Fund. The secondary market for such debt first developed in the early 1980s when the original lender banks began selling the non-performing debt of countries that had ceased servicing their external debt to other investors, including brokerage firms, in order to reduce the banks' exposure and to permit them to lend additional funds to developing countries. The Debtors submitted evidence at trial that, from 1993 onwards, Newman had acted with attorney Michael Straus to solicit investors and provide advice to offshore fund Water Street Bank & Trust Company, Ltd. ("Water Street"). The Debtors alleged that, at Water Street, Newman and Straus purchased the sovereign debt of Poland, Ecuador, Ivory Coast, Panama, and Congo, and filed lawsuits seeking full payment of the debt with Straus acting as the trial counsel. The Debtors' contention at trial in the instant case was that Newman and Straus moved to Elliott from Water Street because it was a good "substitute plaintiff" in that it specialized in the purchase of distressed assets, had funds available to invest, and, unlike Water Street, which had refused in discovery to disclose the names of its individual investors, was unconcerned about exposing the identity of its principals.


At Newman's recommendation, in October 1995, Elliott purchased approximately $28.75 million (principal amount) of Panamanian sovereign debt for approximately $17.5 million. In July 1996, Elliott brought suit against Panama seeking full payment of the debt. Elliott obtained a judgment and attachment order and, with interest included, ultimately received over $57 million in payment.

At the time of Elliott's purchase of Panamanian debt, Panama was finalizing its Brady Plan debt restructuring program. The term "Brady Plan" derives from a March 1989 speech by Nicholas Brady, then Secretary of the United States Treasury, urging commercial lenders to forgive some of the debt that they were owed by less developed countries, restructure what remained, and continue to grant those countries additional loans. See generally, Ross P. Buckley, The Facilitation of the Brady Plan: Emerging Markets Debt Trading From 1989 to 1993, 21 Fordham Int'l L.J. 1802 (1998). Brady Plans contemplate that, in return for such voluntary partial debt forgiveness, the less developed country will submit to an economic austerity program supervised and monitored by the International Monetary Fund (the "IMF"). The purpose of implementing Brady Plans is to avoid the recurrence of debt defaults by less developed countries that have occurred from 1982 onwards. Typically, the terms of a Brady Plan are negotiated with the debtor country by an ad hoc committee of the nation's largest institutional creditors, generally known as the "Bank Advisory Committee." The members of the Bank Advisory Committee commit to restructuring the debt that they hold on the agreed terms and those terms are also offered to other creditors. However, while the members of the Bank Advisory Committee usually agree to be bound by the negotiated terms, the other creditors are under no such obligation to accept those terms.

In January 1996, Newman recommended that Elliott purchase Peruvian sovereign debt. Newman testified at trial that he believed that Peruvian sovereign debt was a good investment because of the sweeping economic reforms implemented by President Alberto Fujimori following his election in November 1990 in the wake of a severe six-year recession. Newman testified that he viewed Peru's Brady Plan, announced in October 1995, as undervaluing Peru's outstanding debt. In particular, Newman contended that the large commercial bank creditors that made up the Bank Advisory Committee had institutional incentives to accept reduced terms for the debt they held, such as the desire to make additional loans and to operate domestically within the country, and that he believed that the Bank Advisory Committee had not been privy to all material financial information, including Peru's rumored repurchase of a significant proportion of its debt.

Between January and March 1996, Elliott purchased from international banks ING Bank, N.V. ("ING") and Swiss Bank Corporation ("Swiss Bank") approximately $20.7 million (in principal amount) of the working capital debt of Nacion and Banco Popular del Peru ("Popular"), a bankrupt Peruvian bank. The debt was sold under a series of twenty-three letter agreements (the "Letter Agreements"). Elliott paid approximately $11.4 million for these debt obligations and all of the debt was guaranteed by Peru pursuant to a written guaranty dated May 31, 1983 (the "Guaranty"). Under their express terms, both the Letter Agreements and the Guaranty were governed by New York law. In connection with this transaction, Elliott executed two separate assignment agreements with ING and Swiss Bank, dated March 29, 1996, and April 19, 1996, respectively.

The Peruvian sovereign debt purchased by Elliott was working capital debt, rather than syndicated bank debt. Working capital debt does not involve an agent bank, but instead consists of direct loans between single lenders and borrowers, whereas syndicated bank debt is debt syndicated by a lead bank, which maintains books and records for all holders. Because the buyer has to rely upon the seller, rather than an agent bank, to convey good title, working capital debt typically trades at a discount of several percentage points from syndicated debt. The Debtors argued at trial that Elliott chose to purchase working capital debt because it sold at a greater discount to value than syndicated debt and thus would have more value in a lawsuit seeking full payment of the debt, despite being more difficult to trade on the secondary market due to its illiquidity.


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