A Decade of Sovereign Debt Litigation: Lessons from the NML v Argentina Case and the Road Ahead

Transcription

1 83 A Decade of Sovereign Debt Litigation: Lessons from the NML v Argentina Case and the Road Ahead Tomás M Araya* Introduction The seemingly endless litigation that has lasted for over a decade between certain holdout 1 creditors and the Republic of Argentina (the Republic or Argentina ) before the courts of New York provides countless lessons for the financial community, especially for those interested in sovereign debt. This article does not intend to analyse all causes that led to the current deadlock among the Republic, NML Capital Ltd (NML) and other holdout bondholders, the exchange bondholders and the New York courts. 2 Its purpose is much more * Tomás M Araya is a partner at M & M Bomchil (Buenos Aires, Argentina). The author would like to thank Pedro de Elizalde, who assisted in the preparation of this article. 1 Holdout creditors (or holdouts) are normally referred to as those creditors who withold their defaulted bonds, either originally held or purchased after default, in the hope of forcing the debtor to offer a better deal. 2 In fact, the injunction order, as amended by Judge Griesa on 21 November 2012, reaches any Participant, including the trustee, other paying agents, clearing entities lawyers and, generally, any person or entity who acts in active concert or participation with the Republic, to assist the Republic in fulfilling its payment obligations under the Exchange Bonds, including (1) the indenture trustee and/or registrars under the Exchange Bonds (including but not limited to The Bank of New York Mellon f/k/a The Bank of New York); (2) the registered owners of the Exchange Bonds and nominees of the depositaries for the Exchange Bonds (including but not limited to Cede & Co and The Bank of New York Depositary (Nominees) Limited) and any institutions which act as nominees; (3) the clearing corporations and systems, depositaries, operators of clearing systems, and settlement agents for the Exchange Bonds (including but not limited to the Depositary Trust Company, Clearstream Banking SA, Euroclear Bank SA/ NV and the Euroclear System); (4) trustee paying agents and transfer agents for the Exchange Bonds (including but not limited to The Bank of New York (Luxembourg) SA and The Bank of New York Mellon (including but not limited to The Bank of New York Mellon (London)); and (5) attorneys and other agents engaged in any of the foregoing or the Republic in connection with their obligations under the Exchange Bonds (NML Capital Ltd v Republic of Argentina, Nos 08-cv-6978 (TPG), 09-cv-1707 (TPG), 09-cv-1708 (TPG), 2012 WL (SDNY, 21 November 2012). This article refers to the injunction order issued on 23 February 2012, as amended on 21 November 2012, as the injunction ).

2 84 Business Law International Vol 17 No 2 May 2016 limited: to describe the court s main decisions and to propose a roadmap to settle the dispute in the coming months, now that a new administration has taken office in Argentina. 3 The countless rulings in the NML et al v Republic of Argentina saga over this decade have revealed that domestic courts are ill-equipped to force a sovereign debtor to pay a financial obligation when it decides to shelter assets beyond the reach of creditors. Indeed, over the decade, Argentina proved to be extremely successful in keeping assets out of the creditor s hands, 4 while its national authorities resorted to national and external support for the country s fight against the so-called vulture funds. To a certain extent, the case also confirms that sovereigns pay their debts because paying is more beneficial to them than not paying, not because of court orders. 5 In parallel, the case shows the need for a new set of accepted rules (contractual or statutory) to deal with the sovereign restructuring process, in order to avoid lengthy, disorderly and inefficient litigation. Indeed, the case demonstrates that a mere contractual approach (as the term was understood during the past decade) 6 does not provide the means for effective creditor coordination and may lead to results that are neither fair nor efficient. 3 On 10 December 2015 Mauricio Macri was sworn in as the new President of Argentina, replacing the former president Cristina Fernández de Kirchner, who had been in office for eight years ( ), after replacing her husband Nestor Kirchner (in office ). 4 The only time that a holdout was successful in seizing funds previously disbursed on Argentina s accounts was the case Aurelius Capital Partners, LP v Republic of Argentina, 584 F 3d 120, (2d Cir 2009), in which funds of the National Agency for the Promotion of Science and Technology (Agencia Nacional para la Promoción de Ciencia y Tecnología) were seized on the grounds that the operation upon which the funds of the agency were disbursed was a commercial activity in the United States. There were of course several other cases in which the holdouts inconvenienced the Republic (to name one, the retention of the warship ARA Libertad by the Ghana authorities in 2012). 5 Courts can inconvenience sovereigns, they cannot make them pay (Mark C Weidemaier and Anna Gelpern, Injunctions in Sovereign Debt Litigation (15 November 2013). 31 Yale Journal on Regulation, 189, 2014; UNC Legal Studies Research Paper No , available at SSRN: Mark C Weidemaier, Sovereign Debt After NML vs. Argentina (2013) 8(2) Capital Markets Law Journal The contractual approach advocates that sovereign debt crises may be solved through negotiations and contracts, basically through voluntary methods, which means that there is no third party that can impose the terms of an offer on dissident creditors (normally, bondholders). Lately, this approach has been broadened and strengthened, by the acceptance of collective action clauses in sovereign bonds, which were not common in New York bonds issued during the 1990s. See Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring (International Monetary Fund, October 2014) (available at pp/eng/2014/ pdf).

3 Lessons from the NML v Argentina Case and the Road Ahead 85 In this sense, the case provides several arguments in support of a statutory or treaty approach 7 as a means to deal with sovereign debt crisis. As a result of the litigation and in order to reduce the holdout s incentives, on 29 August 2014, the International Capital Market Association (ICMA) released a new set of model clauses for sovereign bond contracts, including one-limb collective action clauses (CACs), which require only a single vote calculated on an aggregated basis across all affected bond series for the modification of the key financial terms of a bond, eliminating the series-byseries vote. 8 In addition, the case expedited the approval by the United Nations General Assembly of the Basic Principles on Sovereign Debt Restructuring Processes (the Basic Principles ), 9 which recognise the right of any sovereign state to restructure its sovereign debt, acting with good faith, impartiality and transparency (Basic Principles one to four) and state that sovereign debt restructuring agreements approved by a qualified majority of the creditors of a state are not to be affected, jeopardised or otherwise impeded by other states or a non-representative minority of creditors (Basic Principle nine). Not surprisingly, on 4 November 2015, Argentina became the first country to pass the Basic Principles into law The treaty approach sustains that contractual mechanisms are by their nature inadequate and insufficient to solve sovereign debt crisis and that some form of statutory or treaty-based bankruptcy regime, which extends the terms of an offer with supermajority support to dissident bondholders, should be applicable. See Anne Krueger, A New Approach to Sovereign Debt Restructuring (Washington, DC: International Monetary Fund, April 2002) pdf. For a description of the advantages and disadvantages of both systems, see Mark Jewett, Approaches to Sovereign Debt Resolution: Recent Developments in Rosa M Lastra and Lee C Buchheit (eds), Sovereign Debt Management (Oxford: Oxford University Press 2014), xix xxv. 8 See Anna Gelpern, A Sensible Step to Mitigate Sovereign Bond Dysfunction (Peterson Institute for International Economics) (29 August 2014). In 2012, Greece used a similar mechanism by statute (Greek Bondholder Act 4050/12, 23 February 2012), which was applicable for such bonds subject to Greek law (see Jeromin Zettelmeyer, Cristoph Trebesch and Mitu Gulati, The Greek Debt Restructuring: An Autopsy (Peterson Institute for International Economics, August 2013) 9 Resolution No A/RES/69/319 adopted by the United Nations General Assembly on its 69th session held on 10 September 2015 (available at view_doc.asp?symbol=a/res/69/319). The Resolution was adopted with the support of the so-called G77+China, with negative votes from Canada, Germany, Israel, Japan, the United Kingdom and the US and the abstention of most of the European Union countries, Australia, New Zealand, Colombia and Mexico, among others. 10 Law No 27,207 passed on 4 November 2015 and promulgated on 9 November Article 1 of Law 27,207 declares as public order the Basic Principles on Sovereign Debt Restructuring Processes (see anexos/ /254761/norma.htm.

4 86 Business Law International Vol 17 No 2 May 2016 Notwithstanding the foregoing, in order to untie the knot, the NML litigation would be likely to require private negotiations between the main actors (that is, the Republic and the major holdout bondholders), which may be complemented with a mechanism already known in sovereign debt restructuring processes: an exchange offer with exit consents. The Republic might also explore other options, such as a cash offer with the proceeds coming from an eventual (new) offering of bonds. Exit consents, which have been used in sovereign debt restructuring since Ecuador first used them in 2000, 11 permit amendment of the bonds that will be left in the hands of the holdout creditors after the restructuring closes, therefore making such bonds less valuable or more difficult to enforce. While certain terms (as payment terms) of the indenture can only be modified by unanimity, others may be amended provided a certain percentage of bondholders (which could be, for instance, per cent) plus the issuer agree to the changes. 12 Once such majorities are obtained which would require a prior settlement with NML and other major holdouts that hold a blocking position the Republic may be entitled to include collective actions clauses 13 on the 1994 Fiscal Agency Agreement (FAA) indenture and therefore extend the terms of a hopefully successful third exchange offer to non-consenting bondholders. 14 NML et al v Republic of Argentina: a summary Background In 2009, NML (a subsidiary of Elliot Associates) initiated a lawsuit against the Republic claiming that Argentina had breached (and continued to breach) its contractual duty to rank its payments obligations under its bonds at least 11 Lee C Buchheit and Elena L Daly, Minimizing Holdouts Creditors Sticks in Rosa M Lastra and Lee C Buchheit (eds), Sovereign Debt Management (Oxford: Oxford University Press 2014), Lee C Buchheit and Mitu G Gulati, Exit Consents in Sovereign Bond Exchanges (2000) 48 UCLA Law Review For a description of collective action clauses on sovereign bonds, see Mark C Weidemaier and Mitu Gulati, A People s History of Collection Action Clauses (2014) 54 Virginia Journal of International Law 51; Anne Gelpern, How collective action is changing sovereign debt, International Financial Law Review, 22(5), papers/gelpern pdf. 14 Rodrigo Olivares-Caminal explains that Argentina could not use exit consents in its 2005 offer as the delay in making the offer permitted an alignment of those bondholders who opposed the restructuring, which were able to control a blocking holding (see Rodrigo Olivares-Caminal, To Rank Pari Passu or not to Rank Pari Passu: That is the Question in Sovereign Bonds after the Latest Episode of the Argentine Saga (2009) 15 Law Business Review of the Americas 745 at 765). If there is a settlement with NML and other major holdouts (which are the ones holding a blocking position), then exit consents may become a viable alternative.

5 Lessons from the NML v Argentina Case and the Road Ahead 87 equally with all its other present and future unsecured and unsubordinated external indebtedness 15 and asked the court to grant an injunction that would prevent the Republic from further violating its pari passu (or equal treatment) obligation under paragraph 1(c) of the FAA that governs NML s bonds. The pari passu clause of the FAA read as follows: 1. The securities shall at all times rank pari passu and without any preference among themselves. 2. The payment obligations of the Republic under the securities shall at all time rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness. NML s petition was similar to the one filed by its parent company Elliot Associates against the Republic of Peru in 2000 before a Brussels court. After obtaining a judgment of US$55,660, from the Southern District of New York, Elliot took the case to the Brussels court relying on the pari passu clause of the 1983 debt s contract, which read as follows: The obligations of the Guarantor hereunder do rank and will rank at least pari passu in priority of payment with all other External Indebtedness of the Guarantor, and interest thereon. In short, Elliot argued that the pari passu clause gave the holders of the 1983 debt the right to participate pro rata in Peru s payment to other foreign creditors, which was what Peru was about to transfer via Euroclear to the European holders of its Brady Bonds. 16 Elliot convinced the Brussels court, which, in an ex ante proceeding, decided to block the payment to the Brady Bonds. In order to avoid a default with the Brady Bonds, Peru finally settled and paid Elliot Associates in full See n 40 below. 16 Elliot Assoc LP, General Docket No 2000/QR/92 (Court of Appeal of Brussels, 8th Chamber, 26 September 2000); Elliot founded its interpretation of the pari passu clause with a declaration of Professor Andreas Lowenfeld of New York University. See Mitu G Gulati and Kenneth N Klee, Sovereign Piracy (2001) 56 The Business Lawyer ; William Wilson Bratton, Pari Passu and a Distressed Sovereign s Rational Choices (2004) 53 Emory Law Journal ; Rodrigo Olivares-Caminal, The pari passu interpretation in the Elliot case: a brilliant strategy but an awful (mid-long term) outcome? (2011) 40 Hofstra Law Review 39; for a comprehensive description of the different interpretations of the pari passu clause in sovereign debt issuances, see Lee Buchheit and Jeremiah Pam, The Pari Passu Clause in Sovereign Debt instruments, Emory Law Journal, book 53, Special Edition 2004, 869 and, sustaining the opposite view, see Robert A Cohen, Sometimes a Cigar is Just a Cigar : The Simple Story of Pari Passu (2011) 40(1) Hofstra Law Review, article Elliot had paid US$11.4m to two international banks for a face value claim of US$20.7m. To settle the case, Peru had to pay Elliot US$56.3m (Mitu G Gulati and Kenneth N Klee, Sovereign Piracy, see n 16 above, 636). However, as the case was decided ex ante and by a Brussels court, it was not viewed as a definitive interpretation of New York law. In response to this decision, in November 2004, Belgium passed Law 4765 (C-2004/03482), which prohibits attachments of cash accounts held with Belgian clearing systems (see Rodrigo Olivares-Caminal, The Pari Passu Interpretation in the Elliot Case: A Brilliant Strategy but an Awful (Mid-Long Term) Outcome? (2011) 40(1) Hofstra Law Review, article 5, 39.

6 88 Business Law International Vol 17 No 2 May 2016 Judge Griesa s decision of 7 December 2011 On 7 December 2011, the Honourable Thomas Griesa, in charge of the Southern District Court of New York, accepted NML s petition and resolved that: 1. Argentina was required to rank its payment obligations pursuant to NML s bonds at least equally with all the Republic s other future unsecured and unsubordinated external indebtedness; 2. Argentina had violated the pari passu clause by lowering the ranking of its payment obligations to NML bonds in comparison to its other debts, present or future, unsecured and unsubordinated; and 3. such violation to the pari passu clause had occurred when: (a) Argentina made payments pursuant to the bonds issued as a result of the 2005 or 2010 exchange offers (the exchange bonds ), while simultaneously withholding payment of its obligations pursuant to NML s bonds; and (b) with the enactment of Law No 26,017 (known as the Lock Law ), which prohibited the national state from conducting any type of in-court, out-of-court or private settlement with respect to bonds that were eligible to participate in the 2005 exchange offer. 18 Judge Griesa s decision of 23 February 2012 On 23 February 2012, Judge Griesa decided that NML had no adequate remedy at law for the Republic s ongoing violation of the pari passu obligation and that equity and public interest required the issuance of an equity measure in order to compel Argentina to stop violating its contractually assumed obligations. Therefore, he ordered that every time Argentina pays any sum to the exchange bonds, including any bond issued in exchange of or in substitution for the bonds issued in the 2005 and 2010 Exchange Offers, the Republic has to concurrently or beforehand make a similar rateable payment to NML. Such rateable payment is to be obtained by multiplying the payment percentage multiplied by the total amount due to NML, with the payment percentage being the fraction calculated by dividing the amount actually paid by the total amount then due under the terms of the exchange bonds. In simple words, if Argentina would want to pay 100 per cent of the interest then due to the exchange bonds, it would have to simultaneously pay 100 per cent of the amounts then due to NML, notwithstanding that the amount due includes principal and interest. 18 Law No 26,017 was enacted on 9 February Section 3 prohibited the national state from conducting any type of in-court, out-of-court or private settlement with respect to bonds that were eligible to participate in the 2005 exchange offer.

7 Lessons from the NML v Argentina Case and the Road Ahead 89 More importantly, the court s order reached not only Argentina but also all parties involved, directly or indirectly, in advising upon, preparing, processing, or facilitating any payment on the Exchange Bonds. Argentina s appeal On its appeal, Argentina developed several arguments, inter alia: 1. That the pari passu clause had to be construed as a prohibition of legal subordination of the bonds, without such clause imposing an obligation of effective payment. It affirmed that the enactment of the Lock Law had not altered the ranking of payment; therefore, the NML bonds continued being direct, unconditional, unsecured and unsubordinated obligations of Argentina, with identical ranking or priority of payment than the remaining obligations. In any case, if the New York courts were to reject this interpretation of the pari passu clause, the consequence of a lack of compliance of Argentina should be (as in the case of any other contractual breach) the expiration of the payments and the acceleration of the total amount of the debt pursuant to the bonds, which had already occurred. 2. That the appealed decision violated the Foreign Sovereign Immunities Act and that once the funds were transferred to the trustee bank, they ceased to be property of the Republic and, therefore, they could not be seized or sought by third parties. 3. That NML s claim was merely a monetary claim and it had not demonstrated that any irreparable damage had been caused, which is a sine qua non element for the issuance of an equitable remedy. In support of its position, Argentina recalled that NML had been litigating without introducing the alleged violation of the pari passu rule for more than five years; therefore, it was clear that there could not be an irreparable damage that justified the issuance of an order of this kind. 4. Finally, that the decision had to be revoked as it was against public order, since it produced irreparable damages to the Republic, its citizens and third parties. Second Circuit decision of 26 October 2012 On 26 October 2012, the Court of Appeals of the Second Circuit confirmed that there was enough evidence that Argentina had effectively lowered the ranking of the bonds that had not participated in the exchange offers vis-à-vis the exchange bonds and thus it had indeed breached the pari passu clause.

8 90 Business Law International Vol 17 No 2 May 2016 The court mentioned that Argentina itself had informed the Securities Exchange Commission (SEC) that the defaulted bonds had been included as a separated category from the ordinary Argentine external indebtedness and that according to the provisions of the Lock Law, the executive power had expressly been forbidden to reopen the restructuring process and to enter into any type of agreement or legal or out-of-court settlement regarding the bonds that had not accepted the exchange offers. The court concluded that while the first sentence of the pari passu clause ( The Securities will constitute direct, unconditional, unsecured, and unsubordinated obligations ) prohibited Argentina, as bond issuer, from formally subordinating the bonds by issuing superior debt, the second sentence ( The payment obligations of the bonds shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness ) prohibited Argentina, as bond payer, from paying on other bonds without paying on the FAA bonds. 19 Further, it rejected the argument that the only remedy was to accelerate the contractual maturity term, as the FAA did not include an express limitation on available remedies in case of breach. Finally, the court concluded that the equitable remedy provided by the challenged order was adequate, as the numerous money judgments issued by Judge Griesa over the decade of litigation had proved to be an ineffective remedy. The court also rejected that said order implied an attachment or property foreclosure for Argentina as the order did not require that Argentina pays to the bond holders nor it limits the use that Argentina may make of its tax reserves, it merely requires that Argentina meets its contractual duty of not altering the payment rank of its obligations. The court decided to remand the case to the district court in order for Judge Griesa to clarify the concept of rateable payment that Argentina should make in favour of the defaulted bondholders. Judge Griesa s order of 21 November 2012 On 21 November 2012, Judge Griesa clarified that given that the exchange bondholders would receive 100 per cent of the amount due, NML and the rest of the plaintiffs must also receive the total amount due regarding these bonds, notwithstanding that, in the first case, the Republic would only be 19 Thus the two sentences of the Pari Passu Clause protect against different forms of discrimination; the issuance of other superior debt (first sentence) and the giving of priority to other payment obligations (second sentence (NML, Second Circuit decision, 26 October 2012, p 18).

9 Lessons from the NML v Argentina Case and the Road Ahead 91 paying an interest instalment and, in the second, the payment would be of the total amount due plus interest. The practical implication of the decision was that it restricted Argentina from paying the exchange bonds unless it simultaneously paid in full any outstanding amount owed to the defaulted bonds. Second Circuit judgment of 23 August 2013 The decision was appealed by the Republic, certain exchange bondholders and certain third parties. On 23 August 2013, the Court of Appeals of the Second Circuit rejected the appeals and confirmed Judge Griesa s decision. Argentina s objections were rejected basically for the same arguments stated by the court on its 26 October 2012 decision: NML did not have a remedy at law since the Republic had made clear its intention to defy any money judgment issued by the court. The exchange bondholders objections were rejected under the argument that the potential risk that holdout litigation could interfere with payments to the exchange bonds had been highlighted by the Republic in its 2005 and 2010 exchange offers, so the court reasoned the exchange bondholders were aware of the risks and decided to assume them. The court also rejected the notion that its ruling would interfere with third parties. The court explained that as it had jurisdiction over the Republic, it also had jurisdiction to mandate third parties ( who act in active concert or participation ) to restrain from collaborating with Argentina on not complying with its order. Finally, it rejected the idea that the decision could disturb public order and that it could have implications for capital markets and the global economy, by encouraging holdouts not to accept future exchange offers in the framework of a restructuring process of sovereigns. The court made it very clear that its decision was specific for this case, taking into account Argentina s conduct as a uniquely recalcitrant debtor and in particular the current use in sovereign debt issuances of CACs, which enable an aggravated majority of bondholders to impose a restructuring agreement to potential holdouts. 20 This resolution became final when the Supreme Court of the United States decided to reject Argentina s petition for a writ of certiorari Cases like this are unlikely to occur in the future because Argentina has been a uniquely recalcitrant debtor and because newer bonds almost universally include collective action clauses ( CACs ) which permit a super-majority of bondholders to impose a restructuring on potential holdouts (NML Capital, Ltd et al v Republic of Argentina, Court of Appeals, 2013, (L)). 21 Republic of Argentina v NML Capital Ltd, 695 F 3d 201, 16 June 2014.

10 92 Business Law International Vol 17 No 2 May 2016 Argentina s intent to pay notwithstanding the injunction On 26 June 2014, a week after the Supreme Court denied the Republic s petition for a writ of certiorari, Argentina defied Judge Griesa s orders by transferring the equivalent of approximately US$539m payable to the exchange bondholders into the Bank of New York s (BONY) account in the Argentine Central Bank (BCRA) pursuant to payments due on the exchange bonds. Judge Griesa subsequently ruled that the Republic s payments were in violation of the injunction, mandated to freeze the funds disbursed and ordered BONY to retain such funds, pending further instructions. 22 Argentina s appeal was later dismissed by the Second Circuit. 23 As a result, bondholders have not yet been paid. In this regard, Argentina has tried to replace BONY as indenture trustee with Nación Fideicomisos SA by enacting Law No 26,984, an attempt that has caused Judge Griesa to declare the Republic in civil contempt. 24 The Me Too complainants obtained the same protection as NML On 30 October 2015, Judge Griesa extended the injunction to plaintiffs included in 49 actions (known as the Me Too plaintiffs), which had already obtained summary judgment on their actions. The court (1) ordered the Republic specifically to perform its obligations to plaintiffs under the pari passu clause by making rateable payments to plaintiffs any time it makes, or attempts to make, payment on the exchange bonds; and (2) enjoined the Republic from violating the pari passu clause and from taking any action to evade the purposes and directives of this order. The amount involved in these actions is approximately US$6.1bn. The decision was appealed by the Republic and a decision from the Court of Appeals is still pending at the time of writing. 22 NML Capital Ltd et al v Republic of Argentina, 6 August 2014, 1:08-cv (TPG). Retention of the funds was extremely dangerous for Argentina, as in a different but related case Judge Griesa had construed the Republic s waiver of sovereign immunity to include BCRA s assets, therefore, and allowed the seizing of funds held in the bank s accounts for the collection of claims arisen against Argentina. If a similar interpretation were to be given to BCRA s involvement in the transfer and payment of the exchange bonds, the entity would be liable for the Republic s debts and the frozen funds in BONY s accounts could have been seized for the collection of NML s claims. On appeal, the Court of Appeals of the Second Circuit reversed and remanded Judge Griesa s order, mandating that BCRA should be treated as a separate legal entity and forbidding the seizing of funds held in BCRA s accounts of the collection of claims not directly arisen against the bank (EM Ltd et al v Banco Central de la República Argentina et al, No cv (L) (2nd Cir 2015)). 23 NML Capital Ltd et al v Republic of Argentina, 22 October 2014, 2d Cir (L). 24 NML Capital Ltd et al v Republic of Argentina, 29 September 2014, 1:08-cv (TPG).

11 Lessons from the NML v Argentina Case and the Road Ahead 93 Main criticisms of the courts decisions It is well known that prior to initiating its restructuring process, a sovereign debtor must put in place different techniques to discourage holdouts. The most popular technique is to threaten holdouts with a prolonged default unless they agree to join the restructuring, trying to convince them that they would be better off if they exchange their old bonds for new ones. 25 In addition to including these warnings in the risk factors of its exchange offer prospectus, 26 Argentina decided to strengthen this message by including in its offer a most-favoured creditor (MFC) or rights upon future offers (RUFO) clause, which sought to assure participant creditors that holdouts would not get a better deal. 27 This promise was further strengthened by the enactment of the so-called Lock Law, which prohibited the national executive power (1) from reopening the exchange process established in 2005 with respect to the untendered bonds (article 2); and (2) from paying or making any kind of settlement regarding the defaulted bonds (article 3) Lee C Buchheit and Elena L Daly, Minimizing Holdouts Creditors Sticks in Rosa M Lastra and Lee C Buchheit (eds), Sovereign Debt Management (Oxford: Oxford University Press 2014), The Argentine prospectus expressly stated that Eligible Securities that are not tendered may remain in default indefinitely. Eligible Securities not exchanged pursuant to the Offer will remain outstanding. Argentina has announced that it has no intention of resuming payments on any Eligible Securities that remain outstanding following the expiration of the Offer. Consequently, if you elect not to tender your Eligible Securities pursuant to the Offer there can be no assurance that you will receive any future payments in respect of your Eligible Securities (see p 18 of the Prospectus Supplement to Prospectus, 27 December 2004, available at edgar/data/914021/ /y04567e424b5.htm). 27 Pages S-18 and S-69 of the 2005 prospectus set out the scope of the so-called RUFO clause: Rights Upon Future Offers: Under the terms of the Pars, Discounts and Quasipars, 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 Quasi-pars 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. See Anna Gelpern, What bond markets can learn from Argentina, IFLR April, 2005, p 19 ( 28 Article 3 of the Lock Law No 26,017 sets out that the national State shall be prohibited from conducting any type of in-court, out-of-court or private settlement with respect to bonds that were eligible to participate in the 2005 exchange offer.

12 94 Business Law International Vol 17 No 2 May 2016 It is still unclear how important the Lock Law was to the success of the 2005 exchange offer. 29 What is clear is that it eventually ended up being a boomerang for the Republic as it provided the basis for the holdouts to sustain that a violation of the pari passu clause of the 1994 FAA had occurred, 30 once the Court of Appeals confirmed that Argentina s pari passu clause should be read as including not only the obligation to rank the securities equally, but also to pay the securities equally. 31 As noted by the US in its brief as amicus curiae before the Supreme Court in support of reversal, longstanding market practice supported a narrow reading of the pari passu clause; 32 however, the Court of Appeals decided to put market practice aside and adopted the broad reading. A serious objection to the injunction is that under US law the equity powers should be used by the courts only in extraordinary circumstances, to avoid an irreparable harm and when the prejudices caused are not monetary damages exclusively. 33 In a prior case, the Second Circuit had held that Irreparable injury means the kind of injury for which money cannot compensate, and therefore monetary loss will not suffice unless the movant provides evidence of damage that cannot be rectified by financial compensation Several authors have pointed out that the Lock Law was passed to reassure investors that the Republic would not enter into any type of negotiation or payment with the holdouts as there were doubts caused by the final wording of the MFC clause, which omitted the world settlement it had been included in a prior version of the clause and therefore left the door open to issuer buybacks (see Rodrigo Olivares-Caminal, To Rank Pari Passu or not to Rank Pari Passu: That is the Question in Sovereign Bonds after the Latest Episode of the Argentine Saga (2009) 15 Law Business Review of the Americas 745, especially at 755). 30 See Olivares-Caminal, n 29 above and also Anna Gelpern, What bond markets can learn from Argentina, IFLR April, 2005, See Second Circuit decision of 26 October 2012 above. 32 [M]arket understanding has consistently reflected that a borrower does not violate (the pari passu) clause by electing as a matter of practice to pay certain indebtedness in preference to the obligations outstanding under the agreement in which the clause appears (brief for the US as amicus curiae in support of reversal at 12, NML (2d Cir 4 April 2012) (No cv (L)). 33 Brenntag Int l Chem, Inc v Bank of India, 175 F 3d 245, 249 (2d Cir 1999) and Jackson Dairy, Inc v HP Hood & Sons, Inc, 596 F 2d 70, 72 (2d Cir 1979). See also Kevin C Kennedy, Equitable Remedies and Principled: the Michigan Experience ( ) 74 U Det Mercy L Rev Sperry Int l Trade, Inc v Gov t of Israel, 670 F 2d 8, 12 (2d Cir 1982) and Tucker Anthony Realty Corp, 888 F (2d Cir 1975).

13 Lessons from the NML v Argentina Case and the Road Ahead 95 A decision forcing a debtor to pay cannot be based on equity as courts may not grant, by injunction, relief which they may not provide by attachment. 35 The Court of Appeals sustained that the injunction was not an attachment as it permitted the Republic s use of the funds for any means, except paying the exchange bonds as long as it did not make a rateable payment to the defaulted bonds. However, by restricting the Republic s ability to pay the exchange bondholders, the injunction obliged the Republic to choose between the lesser of two evils: pay the holdout bonds or default in all bonds (exchange bonds and holdout bonds, which had been in default as from 2002). Clearly, the injunction s final objective was to cut the Republic s ability to pay the exchange bondholders as well as any access to the financial markets in order to induce it to pay. Consequently, in practice, the US court decision forced the Republic to make a monetary payment to the holdouts. Further, the injunction imposed several costs on third parties, some of them directly connected to the restructuring (as the trustee, the settlement and payments agents as well as legal and financial advisers); and others not so directly connected, as the exchange bondholders and even Argentine residents, who ended up suffering the costs of a default. Ordinarily, injunctions that impose significant costs and risk on third parties are seen as contrary to the public interest. 36 In addition, there are two significant elements in this case that weigh against the injunction: first, many of the third party institutions named by Judge Griesa are located outside the US, which raises serious extraterritorial jurisdictional objections, 37 and, secondly, the debtor is a sovereign S&S Machinery Co v Masinexportimport, 706 F 2d 411 (2d Cir 1983). In this case, the court considered the precedence of an injunction that restrained the use of assets that were immune from attachment under the FSIA. See also Weston Compagnie de Finance et D Investissement SA v Republica del Ecuador, 823 F Supp 1106, (SDNY 1993) (denying an injunction that directed sovereign to return funds that had passed through New York but were now located abroad). 36 Mark C Weidemaier and Anna Gelpern, Injunctions, see n 5 above, Indeed, four holders of euro-denominated debt securities issued by Argentina (the socalled Euro bondholders ) initiated an action against the trustee in the English High Court of Justice, Chancery Division (Knighthead Master Fund LP v The Bank of New York Mellon (2014), HC , which is still ongoing as at the time of writing. 38 The brief for the US as amicus curiae in support of reversal (n 31 above) describes the sovereign immunity objections in detail. See also Mark C Weidemaier, Sovereign Immunity and Sovereign Debt (2014) U Ill L Rev 67 (available also at SSRN, papers.ssrn.com/sol3/papers.cfm?abstract_id= ; Weidemaier and Gelpern, n 5 above. Further, it shall be recalled that the United Nations Convention on Jurisdictional Immunities of States and Their Property provides that Any failure or refusal by a State to comply with an order of a court of another State enjoining it to perform or refrain from performing a specific act or to produce any document or disclose any other information for purposes of a proceeding shall entail no consequences other than those which may result from such conduct in relation to the merits of the case. In particular, no fine or penalty shall be imposed on the State by reason of such failure or refusal (Art 24(1)). The Convention, which is still not in force, was adopted during the 65th plenary meeting of the General Assembly by Resolution A/59/38 of 2 December 2004 (see un.org/pages/viewdetails.aspx?src=ind&mtdsg_no=iii-13&chapter=3&lang=en).

14 96 Business Law International Vol 17 No 2 May 2016 In this regard, the injunction reaches the Republic s use of property located outside the US (as payment to the exchange bonds would take place outside the US, when the Republic transfers the funds to the trustee s account in BCRA), which should be immune from the US courts under the Foreign Sovereign Immunities Act (FSIA) of Finally, the injunction caused several practical problems as it was (and still is) not clear which type of bonds are to be included within the definition of external indebtedness, which was relevant as the pari passu clause grants the defaulted bonds an equal treatment vis-à-vis all its other present and future unsecured unsubordinated External Indebtedness, notwithstanding that the injunction itself did not speak about External Indebtedness but about Exchange Bonds. 39 The issue under discussion was basically whether the US dollardenominated bonds governed by Argentine law were or were not to be considered external indebtedness. The FAA defines external indebtedness by opposition: basically, external indebtedness is any obligation payable in a foreign currency that is not domestic foreign currency indebtedness (DFCI). 40 DFCI is defined by the FAA in three ways: 1. by a description of seven bonds issued between 1991 and 1993; 2. by any indebtedness issued in exchange, or as replacement, of such bonds; and 3. any other indebtedness payable in a currency other than the lawful currency of Argentina, which is (a) offered exclusively within Argentina or 39 As noted, exchange bonds were defined in the injunction as such bonds issued pursuant to the Republic s 2005 or 2010 exchange offers or any subsequent exchange of or substitution for the 2005 and 2010 exchange offers that may occur in the future (see Judge Griesa s decision of 23 February 2012 above). 40 The FAA provides that external indebtedness shall be any obligations for borrowed money payable in a currency other than the lawful currency of the Republic provided that no Domestic Foreign Currency Indebtedness, as defined below, shall constitute External Indebtedness (p 204 of the Prospectus Supplement to Prospectus dated 27 December 2004, available at data/914021/ /y04567e424b5.htm).

15 Lessons from the NML v Argentina Case and the Road Ahead 97 (b) issued in payment, exchange, substitution, discharge or replacement of indebtedness payable in the lawful currency of Argentina. 41 The issue was (and still is) discussed not only by the plaintiffs and the Republic, but also by several participants in the payment process, who asked for clarification measures as to the scope of the injunction. At first, Judge Griesa made no distinction whatsoever; in fact he issued an order providing that the injunction does not as matter of law prohibits [sic] payments by Citibank s Argentine branch on Peso- and US Dollar-denominated bonds governed by Argentina law and payable in Argentina that were issued by the Republic of Argentina in 2005 and 2010 to customers whom it acts as custodian in Argentina (Judge Griesa s order of 27 June 2014). Nonetheless, afterwards in several rulings at Citibank s clarification requests, he held that payment of US dollar-denominated exchange bonds governed by Argentine law would indeed fall under the scope of the injunction as they were offered not exclusively in Argentina and therefore could not be considered as DFCI 41 Domestic Foreign Currency Indebtedness means (1) the following indebtedness to the extent not redenominated into pesos pursuant to Argentine law and thereby converted into Domestic Indebtedness: (a) Bonos del Tesoro issued under Decree No. 1527/91 and Decree No. 1730/91, (b) Bonos de Consolidación issued under Law No. 23,982 and Decree No. 2140/91, (c) Bonos de Consolidación de Deudas Previsionales issued under Law No. 23,982 and Decree No. 2140/91, (d) Bonos de la Tesorería a 10 Años de Plazo issued under Decree No. 211/92 and Decree No. 526/92, (e) Ferrobonos issued under Decree No. 52/92 and Decree No. 526/92, (f) Bonos de Consolidación de Regalías Hidrocarburíferas a 16 Años de Plazo issued under Decree No. 2284/92 and Decree No. 54/93, (g) Letras de Tesorería en Dólares Estadounidenses issued under the Republic s annual budget laws, including those Letras de Tesorería issued under Law No. 24,156 and Decree No. 340/96, (h) Bonos de Consolidación issued under Law No. 24,411 and Decree No. 726/97, (i) Bonos Externos de la República Argentina issued under Law No. 19,686 enacted on June 15, 1972, (j) Bonos del Tesoro a Mediano Plazo en Dólares Estadounidenses issued under Law No. 24,156 and Decree No. 340/96 and (k) Bonos del Gobierno Nacional in Dólares Estadounidenses issued under Decree No. 905/2002, Decree No. 1836/2002 and Decree No. 7396/2003; (2) any indebtedness issued in exchange, or as replacement, for the indebtedness referred to in (1) above; and (3) any other indebtedness payable by its terms, or which at the option of the holder may be payable, in a currency other than the lawful currency of Argentina which is (a) offered exclusively within Argentina or (b) issued in payment, exchange, substitution, discharge or replacement of indebtedness payable in the lawful currency of Argentina (p 204 of the Prospectus Supplement to Prospectus dated 27 December 2004, n 26 above).

16 98 Business Law International Vol 17 No 2 May 2016 (Judge Griesa s order of 28 July 2014 and especially Judge Griesa s order of 12 March 2015). 42 The classification of Argentine bonds as either external indebtedness or DFCI and the scope of the injunction have also been particularly relevant to the Republic s issuance of Bonar 24 bonds in April 2015, for over US$1.4bn. Following the issuance of Bonar 24 bonds by Argentina, NML requested for such bonds to be considered as external indebtedness and therefore for the court to recognise that payment of the bonds would violate the pari passu clause of the defaulted bonds, thus making the injunction applicable to payment on obligations due on the Bonar 24 bonds and on all external indebtedness to be issued in the future. 43 Conversely, Argentina argued that, as the new bonds are subject to Argentine law and offered exclusively within Argentina, they should qualify as DFCI and the injunction would not be applicable. This issue is relevant as it relates to the effectiveness of the injunction to keep Argentina out of the markets, as an inducement to force the Republic to negotiate with the holdout bondholders. In conclusion, the injunction is subject to the following objections: It was decided upon a broad interpretation of the pari passu clause that, despite not being unreasonable, the injunction was neither longstanding market practice nor supported by US case law. The remedy chosen by the court to sanction the Republic s violation of its pari passu clause failed to take account of the injunction s costs and benefits and was excessive, as it obliged the Republic to choose between the lesser of two evils: either pay the full amount due under the holdout bonds simultaneously with the payment of interest to the exchange bonds or default on all bonds (exchange and holdout bonds, which have been in default as from 2002). The court used its equity powers to force a monetary payment when it ordered specific performance, as in practice such order in a bond contract implies ordering payment. 42 The controversy was finally solved regarding Citibank s participation when Citibank and NML reached an agreement, which was ratified by Judge Griesa, permitting Citibank s subsidiary in Argentina to make certain payments under obligations due on the exchange bonds in exchange for Citibank s waiver of any and all rights of appeal associated with the injunction and any related court order. This caused the Argentine Central Bank (BCRA) to impose severe sanctions on Citibank s certain managers who participated or complied with the agreement, which were appealed by Citibank and remain undecided by the Argentine courts as at the time of writing. 43 On 16 July 2015, the District Court granted NML s and other holdout funds motion to amend and supplement their complaints in order expressly to provide that the Bonar 24 bonds fall within the injunction.

17 Lessons from the NML v Argentina Case and the Road Ahead 99 The injunction advanced on matters reserved by sovereign immunity law and imposed an unfair restriction on third parties, some of them located in foreign countries and therefore out of the court s jurisdiction. Notwithstanding the legal objections to the injunction, the major player responsible for the current status of the litigation is the Republic itself and Fernández de Kirchner s Administration, which, by not adopting the required measures to settle the matter in due time, allowed the holdout bondholders to present themselves as the parties looking for a just and fair reconciliation of the Argentine debt crisis caused by a populist government. The road ahead The 2012/2014 decisions from Judge Griesa and the Court of Appeals were undoubtedly connected with the Republic s attitude of disrespect of the US judicial system and its incorrect assessment that the defaulted bonds had ceased to be enforceable due to the 93 per cent support received by the 2005/2010 exchange offers and certain Argentine laws and decisions, including National Supreme Court decisions. 44 This argument, though attractive for politicians, was simply not correct as a matter of law. First, because in the absence of a law, convention or contractual provision applicable to the Republic s outstanding bonds issued under the FAA, the Republic may not per se extend the terms of an exchange offer to the defaulted bonds, which are entitled to maintain their original contractual rights; and secondly, because Argentine domestic legislation is not applicable to the holdout litigation cases, which are subject to New York law, as agreed in the original indenture upon which the bonds were issued. Argentina s ultimate problems stem from the injunction which is keeping it out of the financial markets not from the several unpaid money judgments. Therefore, the Republic s goal should be to have the injunction revoked or somehow limited, or that a stay is granted while meaningful 44 Claren Corporation c/ E.N arts 517/518 CPCC exequatur s/ varios, Corte Suprema de Justicia, 6 March 2014, C 462. XLVII (in this case, the Argentine National Supreme Court rejected an exequatur requested by a holdout with a final decision obtained in the New York courts, sustaining that it violated Argentine public order as the decision was against the restructuring process undertook by the Republic in accordance with the laws and decrees issued in 2004, that led to the 2005 (and afterwards the 2010) exchange offers).