Hedge Fund Elliot Management, creditor from Argentina’s default a decade ago won a court order in October to detain the Argentine naval ship ARA Libertad in a Ghana port.By Steven Davidoff to Dealbook
On Wednesday, the United States Court of Appeals for the Second Circuit issued a stay of a lower court’s order that would have required Argentina to set aside $1.33 billion to pay holders of its old, defaulted debt if and when it made any payments on its new debt.
It’s a minor victory for Argentina, but in this case it may have a ancillary effect, signaling a reversal of fortune for the country.
To understand the implications of the judicial order, a bit of history is needed.
This litigation arises out of Argentina’s default on $80 billion worth of sovereign bonds in 2001. In 2005 and 2010, Argentina subsequently pushed the holders of this debt to exchange the old bonds for new ones at 25 to 29 cents on the dollar. The stick here was Argentina’s steadfast refusal to pay any amount on the old bonds. Since that time, the remaining holders of the old bonds, including Elliott and Aurelius, have been enmeshed in worldwide litigation against Argentina to force it to pay.
In October, the appeals court handed the two hedge funds a stunning victory. The court ruled that the “pari passu” clause in the bond indenture for Argentina’s old debt required the country to make payments on its old debt any time it made a payment on its new debt. Pari passu is a Latin phrase meaning, roughly, “on equal footing.”
The court also held that, given Argentina’s continued refusal to pay this old debt, the Foreign Sovereign Immunities Act of 1976, which prevents courts from attaching the property of sovereigns, did not prohibit a federal court from ordering Argentina to comply with the pari passu clause by issuing an injunction to such effect.
The appeals court did not hand a complete victory to the hedge funds. It remanded the case to Judge Thomas P. Griesa, the lower court judge hearing the case, to decide two issues: whether the injunction requiring Argentina to make payments on the old bonds applied to third parties, and how much Argentina would be required to pay to holders of the old bonds if it made payments to holders of the new ones.
It appears Judge Griesa had clearly grown tired of Argentina’s intransigence. At a hearing earlier in November, he handed full victory to the plaintiffs. He ruled that Argentina must set aside the full $1.33 billion it owed to the plaintiffs if and when Argentina made a $3 billion payment due on Dec. 15 to holders of the new bonds.
Argentina, as a sovereign, could ignore this order, but Judge Griesa put teeth in it by applying it to third parties. He ordered the bond indenture trustee as well as the clearing systems that transmit money for Argentina to comply with this order.
The judge’s actions were particularly aggressive for two reasons. First, Article 4-A of New York’s Uniform Commercial Code provides a safe harbor for third parties from this type of injunction, the purpose of which is to ensure that only Argentina’s banks are drawn into these disputes. Argentina has argued that the bond indenture trustee is not its bank and so immune from the injunction. Argentina also argues that payment system operators are immune under long-settled New York law.
Judge Griesa additionally ordered the $1.33 billion due and owing to holders of the old bonds to be paid all at once instead of pro rata over time as holders of the new bonds are paid. The judge made the order effective immediately, refusing to stay his order until it had been fully considered by the appellate court. Argentina’s response was to appeal to the Court of Appeals and request an emergency stay.