Foreign Debt – Actions against Argentina

In the last two months, a district court of the Southern District of New York resolved cases where enforcement of its defaulted foreign debt was sought against the Republic of Argentina, namely, three lawsuits by individual bond holders and two class actions.

The class action motions were denied and the motions of the individual bond holders were granted.

The class action motions were denied because of procedural reasons, such as precise definition on the class and identification of the bonds included in the motion. In these cases, the court expressly recognized that the effort to negotiate a debt restructuring plan will be an important channel for attempting to resolve the Argentine debt problem and, to such effect, it is necessary that the persons included in the class action and, therefore, excluded from a voluntary restructuring plan, are clearly identified.

In connection with the individual claims, the court denied the defenses asserted and the stay requested by the Argentine Republic, and granted the plaintiffs’ motions. The Court referred to a case started against the Banco Popular de Perú during the crisis in such country, in which, after granting two stays of six and two months respectively in order to allow the completion of the bank’s liquidation procees, the court granted the plaintiff’s motion. In this case regarding Peru, the Court of Appeals agreed with the decision of the district court of finally granting the motion on the grounds that, even if the United States encourages participation in foreign debt resolution proceedings, such participation is recognized as strictly voluntary and the principle of ensuring the enforceability of a debt under contract law must prevail. Applying this same reasoning, in the individual cases against Argentina, the court declined to grant the stay requested by the Argentine Republic because there is no assurance as to the success and timing of the negotiations regarding the Argentine foreign debt.

The enforceability in Argentina of foreign resolutions that bondholders may obtain could be limited by application of public policy principles. Moreover, mandatory provisions of Argentine legislation requiring payment obligations under judicial decisions to be included in the General Budget would delay any local proceedings. Consequently, we understand that, in order to effectively collect their credits, the plaintiffs would eventually resort to the foreclosure of attachable assets of the Argentine Republic located abroad.

The referred judgments highlight the need to quickly progress with the negotiations regarding the Argentine foreign debt restructuring, so that, on the one hand, Argentina may seek to obtain stays in the individual claims and, on the other hand, Argentina may avoid the increase in the number of creditors that may demoralize and start legal actions because of an unjustified delay in the foreign debt negotiations.