The integrity of the federal judicial system rests on the
bedrock principle that judges will put aside personal feelings
and issue rulings based on the facts and the law. No matter how
odious litigants (or their lawyers) may be, our system says
they're entitled to fair treatment. But judges are also human.
If you push them hard enough, over a long enough period of time,
they're going to push back. And that is why Argentina now faces
a dire choice: Either it puts $1.3 billion into an escrow fund
to pay off renegade bondholders who refused to participate in
the country's two rounds of sovereign debt restructuring or it
risks entering a technical default on $24 billion of
restructured bonds. Argentina's crisis is the product of almost
10 years of litigation, in which U.S. courts have labored to
honor the rights of a foreign sovereign -- and Argentina has
offered no such reciprocal respect for the power of our courts.
Argentina is imminently expected to ask the 2nd Circuit
Court of Appeals to reinstate a stay on a series of injunctions
issued earlier this year by U.S. District Judge Thomas Griesa of
Manhattan. You probably remember the background. The bond
exchange holdouts filed suits in federal court in Manhattan,
claiming that Argentina was violating the pari passu, or equal
footing, clause of their contracts when it paid exchange
bondholders without paying them. Griesa, who has been
supervising litigation between Argentina and the holdouts for
almost a decade, agreed. He enjoined Argentina from making
payments to exchange bondholders before paying the holdouts what
they're owed. In October, the 2nd Circuit affirmed Griesa,
sending the case back to him for clarification of the terms of
the payments Argentina must make to holdouts. After the appeals
court's ruling, Argentina's political leaders nevertheless vowed
not to pay the renegade bondholders, which they (and others)
call vultures.
At a hearing earlier this month, Griesa warned Argentina's
longtime lawyers at Cleary Gottlieb Steen Hamilton that if
their client continued to defy U.S. court rulings, "steps can be
taken to sanction any misconduct." Last Wednesday night, Griesa
laid down the law. Despite pleas by Argentina and the exchange
bondholders, the judge lifted the stay on his injunctions. He
ruled that Argentina may not pay the exchange bondholders the
$3.41 billion they're due in December unless it also puts up
$1.3 billion for the holdouts. With Argentina steadfastly
insisting it will not pay holdouts, Griesa's ruling puts the
country on the brink of an economic catastrophe.
There's a good argument to be made that the catastrophe is
of Argentina's own making. To understand why, you have to look
back to the 1990s, when Argentina issued the debt at the heart
of the dispute with holdouts. In those bond contracts, to
reassure investors, Argentina explicitly agreed to submit to the
jurisdiction of U.S. courts -- specifically, New York courts --
despite its immunity as a foreign sovereign.
Argentina went into default in 2002. More than 90 percent of
its bondholders eventually agreed to exchanges in 2005 and 2010
that gave them about 30 cents on the dollar. Some so-called
distressed debt investors, however, decided to take their
chances and litigate in federal court in Manhattan to enforce
their rights under the original bond contracts. Through those
suits, which began to be filed in 2003 and have since ended up
before Griesa, the holdouts have obtained billions of dollars of
judgments against Argentina.
But as hedge fund holdouts like NML Capital (part of Elliott
Capital) and Aurelius Capital tried to enforce those judgments
against a sovereign that vowed it would never pay, U.S. judges
sided with Argentina time and time again. Frequently it was
Griesa who blocked the hedge funds' attempts to get their hands
on Argentine assets; on the relatively rare occasions when he
gave the holdouts a green light, the 2nd Circuit usually
reversed him, citing Argentina's rights as a foreign sovereign.
In 2007, for instance, the appeals court ruled that Argentine
funds held at the Federal Reserve were immune from attachment,
even though they were being used to repay the International
Monetary Fund. In 2009, the 2nd Circuit thwarted the hedge
funds' bid for private funds held in the United States that were
about to be transferred to the Argentine government's social
security system. Last July, the appeals court rejected another
go at Argentine central bank money held at the Federal Reserve.
The 2nd Circuit has upheld a couple of small attachmen t s, but
U.S. courts have been incredibly mindful of Argentina's rights.
That's not to say, however, that Griesa or the judges of the
2nd Circuit haven't been keenly aware of Argentina's flagrant
disregard of judgments against it. In the 2009 decision on
Argentine social security funds, for instance, 2nd Circuit Judge
John Walker and U.S. Senior District Judge Clifford Wallace
(sitting by designation) wrote, "We understand the frustration
of the plaintiffs who are attempting to recover on judgments
they have secured. Nevertheless, we must respect the ... strict
limitations on attaching and executing upon assets of a foreign
state." Two years later, in the 2011 ruling that refused to
attach central bank money, 2nd Circuit Judges Roger Miner, Jose
Cabranes and Chester Straub explicitly noted Argentina's
"appalling" record of repaying creditors. "We share the district
court's understandable irritation at the Republic's 'willful
defiance of (its) obligations to honor the judgments of a
federal court,'" the appellate opinion said, and then repeated
its reluctant conclusion from 2009.
With attachment efforts seemingly doomed by foreign sovereign
immunity, NML Capital embarked on a new course against Argentina
in 2009. It began filing suits claiming that Argentina was
violating the equal footing clauses of its original bond
contracts. There's precedent for the argument; as I've reported,
a Belgian court (in a case involving Peruvian bonds) and a
California federal court (in a case against the Republic of
Congo) have previously ruled that equal footing clauses apply to
holdouts in foreign debt restructurings. Other he dge fund
holdouts picked up the strategy and filed their own pari passu
claims. But the holdouts knew that for a ruling from Griesa to
have any tangible effect on Argentina, they needed more than
just a district court judgment that the clause applies.
Argentina, after all, has ignored judgment after judgment
entered by Griesa. The hedge funds needed an injunction barring
Argentina from paying exchange bondholders unless it also paid
them.
That's where Argentina's flouting of previous rulings came
back to haunt it. Exercising his discretion, Griesa granted
injunctions to NML and eventually other holdout bondholders
because he said Argentina would otherwise ignore him. "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 these (injunctions)." Judges Barrington Parker, Rosemary
Pooler and Reena Raggi of the 2nd Circuit endorsed Griesa's
"considerable latitude" to fashion relief for the holdout
bondholders, given "Argentina's continual disregard for the
rights of its ... creditors and the judgments of our courts to
whose jurisdiction it has submitted." And with Argentina more
defiant than ever after the 2nd Circuit ruling, no one should
have been surprised that Griesa took the opportunity to show the
foreign sovereign who is the boss of his courtroom.
Argentina has already requested a rehearing of the 2nd
Circuit ruling from October, but I doubt that the appeals court
will take up Argentina's case en banc. The court rarely hears en
banc appeals, for one thing. For another, a broad swath of 2nd
Circuit court judges have heard one Argentine appeal or another,
so the court is quite aware of Argentina's history of
recalcitrance. That history could also impact the country's
chances of persuading the U.S. Supreme Court to take its case;
you can bet that the hedge funds will argue that Argentina is
unparalleled in its defiance of U.S. court judgments, so the
facts of its case are too idiosyncratic to merit Supreme Court
appeal.
Meanwhile, a little-noticed 2nd Circuit decision from last
August could augur more bad news for Argentina. Judges Cabranes,
Walker and Joseph McLaughlin affirmed Griesa's ruling that
Argentina's hedge fund creditors have the right to subpoena
information from the country's bankers about Argentine assets
held outside of the United States. The Argentine naval ship that
was seized by Elliott in October to satisfy a judgment wasn't
disclosed pursuant to one of these subpoenas, but the hedge
funds could end up with a handy list of future targets.
I left messages requesting comment with Carmine Boccuzzi and
Jonathan Blackman of Cleary, but neither called back.
(Reporting by Alison Frankel)