Sovereign debt: The Supreme Court of the United States denied the petition for a writ of certiorari filed by the Republic of Argentina

1. Introduction
On June 16, 2014 the Supreme Court of the United States (the “Supreme Court”) issued its decision in two cases where the Republic of Argentina is involved. These are two cases where the plaintiffs hold bonds issued by the Republic of Argentina prior to Argentina’s 2001 default and did not accept to enter the exchange offers carried out by Argentina in 2005 and 2010 which implied a haircut and/or deferral of payment, and preferred to litigate instead in order to collect the whole amount owed under the defaulted bonds.
The case which has generated an intense debate is the case relating to the pari passu clause issue. It is relevant since it is likely to have an impact in the situation of the bonds exchanged in 2005 and 2010. The other case, relates to the scope of the discovery that the plaintiffs may obtain at the post-judgment stage.
Firstly we describe the decision of the Supreme Court in the discovery case, followed by an analysis of the decision in the pari passu case and its consequences.

2. The Supreme Court’s decision in the discovery case: Justice Ginsburg’s dissent
On the same day the Supreme Court denied the petition for a writ of certiorari filed by the Republic of Argentina in the pari passu clause case, it also issued its decision on the so called “discovery” case. As opposed to the other case, in this case the Supreme Court granted the petition for a writ of certiorari filed by Argentina.
This proceeding was also heard by the courts of New York and had been filed by the same plaintiffs as the case relating to the pari passu clause (NML Capital, Ltd., together with other funds and individuals). The plaintiffs sought discovery of Argentina’s property in aid of executing the judgments. The plaintiffs requested serving subpoenas to two non-party banks (Bank of America and Banco de la Nación Argentina, New York Branch) for records relating to Argentina’s assets and international financial transactions, even abroad the United Sates, in order to execute the judgments and collect their credits.
The district court agreed with the plaintiffs’ claim ruling in their favor. The Court of Appeals for the Second Circuit (New York) (the “Court of Appeals”) affirmed the district court’s ruling. In its petition for certiorari before the Supreme Court, the Republic of Argentina alleged that the district courts’ order transgressed the Foreign Sovereign Immunities Act of 1976 (“FSIA”), which restricted the scope of the discovery.
The Supreme Court, by the majority’s opinion, held that no provision in the FSIA restricted post-judgment discovery of information relating to extraterritorial assets. Consequently, the Supreme Court resolved that serving of subpoenas on banks in the terms requested by the plaintiffs are permitted.
Justice Ginsburg dissented: she was reluctant to the fact that a United States’ court become a “clearinghouse of information” about any and all property held by Argentina abroad. She considered that the majority’s opinion was exorbitant and, accordingly, she would limit the discovery of information over a sovereign debtor to property used within or abroad the United States if (i) it is “in connection with … commercial activities” (as provided by the FSIA), and (ii) the plaintiffs prove that other nations would allow unconstrained access to Argentina’s assets and they would be able to enforce and execute a US judgment against the foreign sovereign in the relevant country. This is the only category of assets that, according to Justice Ginsburg, the discovery should be granted.

3. The Supreme Court’s decision in the pari passu case
In this case, the Supreme Court denied the petition for a writ of certiorari filed by the Republic of Argentina on February 18, 2014 to review the second ruling issued by the Court of Appeals  on August 23, 2013 in re: “NML Capital, Ltd. v. Republic of Argentina”.
In the decision of August 23, 2013 the Court of Appeals had affirmed Judge Thomas Griesa’s ruling who clarified how the “ratable payment” formula must operate pursuant to the pari passu clause and resolved that the orders issued within this case were binding to the banks who participate in the payment mechanisms of the exchanged bonds. The cornerstone argument of the Argentine Republic to obtain the Supreme Court’s review was related to the alleged violation to the FSIA, which implies the study of federal law.
Please see our articles published in Marval News # 131 and # 133 dated August 30, 2013 and October 31, 2013, respectively, for more details of the background, precedents and rulings in re: “NML Capital, Ltd. v. Republic of Argentina”; and our article published in Marval News # 132 dated September 30, 2013 for more information regarding the law for the reopening of the argentine sovereign debt exchange.
The Supreme Court had three options: to accept the case, to reject it or to invite the Solicitor General to file briefs and express an opinion whether the Supreme Court should accept  the case or not. Until the Supreme Court rejected Argentina’s petition, the ruling of the Court of Appeals was stayed.

4. Lifting of stay of enforcement of the Court of Appeals’ ruling
The ruling of the Court of Appeals issued on August 23, 2013 had resolved that enforcement of the decisions which ordered the Republic of Argentina to comply with the pari passu clause shall be stayed pending the resolution by the Supreme Court of the petition for a writ of certiorari. This enabled Argentina to continue making payments under the exchange bonds as scheduled.
The decision of the Supreme Court dated June 16, 2014 implied the lifting of the stay and the Court of Appeals formally so declared in its resolution of June 18, 2014. Consequently, the obligation to implement the ratable payment formula became enforceable thereof.

5. Judge Griesa’s decisions after the Supreme Court’s ruling
5.1. The hearing and the order of June 20
Two days after the Supreme Court’s decision, Judge Griesa called for a hearing with the attorneys for the parties. The hearing was requested by the counsel to the plaintiffs to stop the implementation of a new exchange of the bonds exchanged in 2005 and 2010 for new bonds to be issued under Argentine law, to be paid in Argentina.
Judge Griesa considered that the implementation of such a plan by the Argentine Republic would violate the “anti-evasion” orders which had already been issued within this case and are in force. The aim of these orders is to forbid Argentina from evading the court’s judgments and, as specified by the Judge, the danger existed that the exchange bondholders would be paid and the pari passu plaintiffs would not get paid, even when they had favorable rulings. Two days after (June 20) Judge Griesa issued an additional order prohibiting Argentina from carrying out such mechanism. As has occurred in prior rulings, the Judge mentioned the public speeches given by the Argentine authorities to support his decision.
During the hearing, the Argentine Republic focused on its willingness to negotiate in good faith with the plaintiffs before Judge Griesa.

5.2. Negotiation: the appointment of Daniel A. Pollack
On June 23, Judge Griesa appointed Daniel A. Pollack as Special Master to conduct and preside over the negotiations between the plaintiffs and the Argentine Republic. In his decision he specifies what his functions are and the terms under which the negotiation shall be conducted.

5.3. The denial of Argentina’s request of stay
By means of letters dated June 23 and 26, the Argentine Republic requested Judge Griesa a stay of the judgments to allow for the commencement of good faith negotiations with plaintiffs and, in the meanwhile, let the Republic comply with the payment of interests under the exchange bonds scheduled for June 30. The request was denied on June 26. In his decision, Judge Griesa considered that the Republic’s request was not appropriate since the injunctive relief is not applicable unless the Republic makes payments to the exchange bondholders (which did not occur at the moment in which the Judge issued his decision). He also specified that the negotiations to be conducted by Pollack will include the handling of the further payments due to exchange bondholders.

6. Impact of US courts decisions in the situation of the exchange bonds
6.1. The interest installment due on June 30 and the curing period
These judgments issued by the United States courts have an impact in the situation of the bonds restructured in 2005 and 2010. As provided by the payment schedule of such bonds, the first payment of interest immediately after these decisions was scheduled for June 30, 2014.
Under the terms of the restructured bonds (1) there is a curing period of thirty days after the applicable payment date to cure the failure of payment of principal or interest, as the case may be. As from the expiration of such period there would be an event of default for non-payment.

6.2. The Rights Upon Future Offers clause (“RUFO” clause)
In the Argentine Republic’s filing with Judge Griesa dated June 23, by which it requested the stay to engage in a dialogue with the plaintiffs, Argentina stated that the Court could not ignore the Rights Upon Future Offers clause (“RUFO” clause) could originate litigation in other jurisdictions that could destroy the successful restructuring of 92% of its defaulted debt.
The RUFO clause is part of the terms and conditions of the bonds issued within the debt restructurings carried out by Argentina in 2005 and 2010 which are governed by New York law, and it expires on December 31, 2014. The RUFO clause provides as follows: “Under the terms of the Pars, Discounts and Quasi-pars, if following the expiration of the Offer until December 31, 2014, Argentina voluntarily makes an offer to purchase or exchange or solicits consents to amend any Eligible Securities not tendered or accepted pursuant to the Offer, Argentina has agreed that it will take all steps necessary so that each holder of Pars, Discounts or Quasipars will have the right, for a period of at least 30 calendar days following the announcement of such offer, to exchange any of such holder's Pars, Discounts or Quasi-pars for the consideration in cash or in kind received in connection with such purchase or exchange offer or securities having terms substantially the same as those resulting from such amendment process, in each case in accordance with the terms and conditions of such purchases, exchange offer or amendment process.” (2)

6.3. The transfer of the funds and the June 27 hearing
The next payment due under the exchange bonds as scheduled in addition to the lack of stay of the decisions would trigger the Argentine Republic’s obligation to implement Judge Griesa’s ratable payment formula: if Argentina makes a payment due under the exchange bonds, it must also pay plaintiffs simultaneously 100% of the amount of principal and interests owed to the plaintiffs.
On June 26 the Argentine Republic transferred the funds to the relevant bank accounts in order to comply with the payment scheduled for June 30. One of them was the deposit made in the account of The Bank of New York Mellon (trustee under the exchange bonds issued under New York law) has with the Argentine Central Bank. Due to this payment, as requested by the counsel to the plaintiffs, Judge Griesa called for a hearing on June 27.
During the hearing, Judge Griesa said that the payment to the exchange bondholders should  not be made and he ordered The Bank of New York Mellon to return such funds to Argentina. He required the parties to negotiate before Daniel Pollack and reach an agreement which includes the rights of the restructured bondholders.

7. Closing remarks
We expect the parties will negotiate under the coordination of Mr. Pollack and reach a definition regarding the payment to the plaintiffs and the exchange bondholders before the end of July which is when the curing period to make the payments under the exchange bonds will expire.

 


1. See Prospectus Supplements dated January 10, 2005 and April 28, 2010 relating to the issuances of bonds exchanged in 2005 and 2010.
2. Same footnote as above.