White Hawthorne, LLC v. Republic Argentina
| Decision Date | 22 December 2016 |
| Docket Number | 16-cv-1042 (TPG),16-cv-1436 (TPG),16-cv-1192 (TPG) |
| Parties | WHITE HAWTHORNE, LLC, et al., Plaintiffs, v. THE REPUBLIC OF ARGENTINA, Defendant. BYBROOK CAPITAL MASTER FUND LP, et al., Plaintiffs, v. THE REPUBLIC OF ARGENTINA, Defendant. TRINITY INVESTMENTS LIMITED, Plaintiff, v. THE REPUBLIC OF ARGENTINA, Defendant. |
| Court | U.S. District Court — Southern District of New York |
In this action brought by certain holders of Argentine bonds, the Republic of Argentina moves for partial dismissal under Rule 12(b)(6) for failure to state a claim. For the following reasons, the court grants the Republic's motion.
Plaintiffs are certain institutional investors who hold beneficial interests in Republic-issued bonds governed by New York law. These plaintiffs own "FAA Bonds," issued under a 1994 Fiscal Agency Agreement ("1994 FAA"), and one plaintiff also owns a "Brady Bond," issued under a 1993 Fiscal Agency Agreement ("1993 FAA").
The 1994 FAA, § 1(c), contains a pari passu clause:
The Securities will constitute . . . direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu and 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 . . . .
The 1993 FAA, § 9(a)(ii), also features a pari passu clause, listed as an "Affirmative Covenant[]":
Argentina covenants and agrees that, so long as any Bond remains outstanding, Argentina shall . . . [e]nsure that at all times its obligations hereunder constitute unconditional general obligations of Argentina ranking at least pari passu in priority of payment with (A) all other Indebtedness of Argentina which by its terms is, or at the option of the holder thereof may be, payable in a currency other than Pesos and (B) all obligations of Argentina with respect to any Indebtedness issued by a Designated Argentine Governmental Agency which by its terms is, or at the option of the holder thereof may be, payable in a currency other than Pesos.
After the Republic suffered an economic crisis, the Argentine government declared a moratorium on payment of its sovereign debts on December 24, 2001. This meant that the Republic stopped making scheduled payments on its bonds, triggering defaults on the FAA Bonds and the Brady Bond. In the years shortly following the Republic's default, many holders of beneficial interests in Argentine bonds began filing actions against the Republic in this court.
In February 2016, over fourteen years after the Republic's default, plaintiffs filed suit in this court. Their suit came shortly after the Republic had published the "Propuesta," its global proposal to settle all its defaulted debts. Plaintiffs are seeking breach-of-contract damages based on nonpayment of principal and interest, as well as injunctive relief for alleged violations of the applicable pari passu clause. In a novel turn, plaintiffs also seek money damages for breach of the pari passu clause.
After plaintiffs amended their complaints, the Republic moved for partial dismissal under Rule 12(b)(6) for failure to state a claim. The Republic seeks dismissal of the claims for breach of the pari passu clauses and any claims that accrued more than six years before the operative complaints were filed. The court will now consider the Republic's motion.
To survive a motion to dismiss, a plaintiff must plead "enough facts to state a claim [for] relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007). The complaint must contain "factual content that allows the court to draw the reasonable inference that the defendant is liable forthe misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The complaint's "[f]actual allegations must be enough to raise a right to relief above the speculative level," Twombly, 550 U.S. at 545, and must permit the court "to infer more than the mere possibility of misconduct," Iqbal, 556 U.S. at 679. In making its determination, the court should reject "labels and conclusions" or "naked assertion[s] devoid of further factual enhancement." Id. at 678 (citations omitted). A claim should also be dismissed if it alleges facts that are "obviously without merit," such as when "its unsoundness so clearly results from the previous decisions of this court as to foreclose the subject." Hagans v. Lavine, 415 U.S. 528, 537 (1974).
One of the claims plaintiffs' raise in their amended complaints is that the Republic is in breach of the pari passu clause. The Republic moves to dismiss those claims.
The pari passu clause has played a significant role in the Argentine litigation. The 1994 FAA's pari passu clause provides that the FAA Bonds "shall at all times rank pari passu and without any preference among themselves," and that the Republic's "payment obligations" on the FAA Bonds "shall at all times rank at least equally" with certain indebtedness payable in a currency other than Argentine Pesos. See 1994 FAA §§ 1(c), 11. The 1993 FAA's pari passu clause promises that the Republic's obligations on the Brady Bond "shall . . . rank[] atleast pari passu in priority of payment" with certain indebtedness payable in a currency other than Argentine Pesos. See 1993 FAA § 9(a)(ii).
Although the meaning of the pari passu clause has been hotly disputed, the Republic's "extraordinary conduct" during its prior administration led this court to find breach of the clause in December 2011. See Order, NML Capital Ltd. v. Republic of Argentina, No. 08-cv-6978 (S.D.N.Y. Dec. 7, 2011). The Republic's failure to make scheduled payments on its debts was part of this conduct, but it was only one element in a complicated set of circumstances. In subsequent orders, the court emphasized that what constituted breach was the Republic's "entire and continuing course of conduct," including harmful legislation like the Lock Law and incendiary statements by the former administration. See Op. & Order at 25, NML Capital Ltd. v. Republic of Argentina, No. 14-cv-8601 (S.D.N.Y. June 5, 2015). Likewise, the Court of Appeals held that it was the "combination of Argentina's executive declarations and legislative enactments" and its entire "course of conduct" that constituted breach of the pari passu clause. NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246, 260, 264 n.16 (2d Cir. 2012) (emphases added). In short, the Republic violated the pari passu clause not merely by being a sovereign nation in default, but by being "a uniquely recalcitrant debtor." See NML Capital v. Republic of Argentina, 727 F.3d 230, 247 (2d Cir. 2013) (emphasis added).
As this court recognized earlier this year, the Republic's November 2015 election of Mauricio Macri "changed everything." Order at 13, NML Capital, Ltd. v. Republic of Argentina, No. 14-cv-8601 (S.D.N.Y. Feb. 19, 2016) ("IndicativeRuling"). President Macri's government "has consistently declared its desire to resolve the disputes," which "marked a turning point in the Republic's attitude and actions." Id. at 7. The court was not alone in acknowledging the Republic's transformation. Daniel Pollack, the Special Master appointed to oversee negotiations, praised the Republic's leaders for their "courage and flexibility in stepping up to and dealing with this long festering problem which was not of their making," and the U.S. Treasury Secretary "commended the Republic's good-faith efforts to resolve the disputes." Id. at 8-9.
Plaintiffs' amended complaints ignore these significantly changed circumstances. What plaintiffs allege the Republic has done comes nowhere close to the "extraordinary conduct" that led this court and the Court of Appeals to find breach of the pari passu clause. Rather, plaintiffs recite ancient history and rely on conduct that this court has recognized is no longer occurring, such as the effects of the now-repealed Lock Law and Sovereign Payment Law. See Order, NML Capital, Ltd. v. Republic of Argentina, No. 08-cv-6978 (S.D.N.Y. Apr. 22, 2016) ("Vacatur Order"). And plaintiffs quote statements made by former Republic officials—people who no longer set the policy as to the "treatment" of plaintiffs' bonds, and whose proclamations differed dramatically from those of the Macri administration. Once the court sets aside these historical digressions, the amended complaints boil down to a simple but inadequate allegation: that mere payment to other creditors, including payment encouraged by this court to settle claims on other defaulted debt, constitutes a violation of the pari passuclause. In short, plaintiffs allege breach due to the Republic's decision to pay other creditors while plaintiffs hold out for a better deal.
Nonpayment on defaulted debt alone is insufficient to show breach of the pari passu clause. As the Court of Appeals made clear, it did not hold "that a sovereign debtor breaches its pari passu clause every time it pays one creditor and not another, or even every time it enacts a law disparately affecting a creditor's rights." NML Capital, Ltd., 727 F.3d at 247; accord Exp.-Imp. Bank of Republic of China v. Grenada, No. 13-cv-1450, 2013 WL 4414875, at *4 (S.D.N.Y. Aug. 19, 2013) (). The U.S. Government, too, has maintained the position that simply paying some creditors and not others does not constitute breach. See Br. for the United States as Amicus Curiae in Supp. of Reversal at 12, NML Capital, Ltd. v. Republic of Argentina, No. 12-105(L) (2d Cir. Apr. 4, 2012) (...
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