Second Circuit Appeals Court Ruling in Favor of Plaintiffs in Argentina Case

05 September 2013

Romano I. Peluso, CCTS, consultant and retired Senior Vice President and Corporate Trust Manager at Law Debenture Trust Company of New York, co-authored with Robert I. Landau the sixth edition of Corporate Trust Administration and Management, and holds an MBA from New York University. He has written articles on financial and business news for practically his entire career and for the American Bankers Association for more than 25 years.


The United States Second Circuit Court of Appeals in New York, in NML Capital, Ltd, et al., v The Republic of Argentina, ruled on August 23, 2013 that if Argentina keeps up its payments to bondholders who accepted a discounted restructuring offer of new bonds, that it must also make “ratable payment” to a group of holdout bondholders. This would be 100 percent of the roughly $1.33 billon they are owed in principal and accrued interest.1

As previously reported in the NML Capital Ltd. et al., v The Republic of Argentina article that was uploaded on the Law Debenture Trust Company of New York website on March 8, 2013, Argentina defaulted in 2001 on over $81 billion of its debt issued in 1994. The plaintiffs’ bonds are in default and are subject to federal court judgments which are unsatisfied. No payments have been made on the defaulted Bonds since 2001.2

In 2005 and again in 2010, Argentina made exchange offers to holders of the 1994 Bonds, pursuant to which bondholders who tendered such Bonds received new bonds (the “Exchange Bonds”). As a result of the two exchange offers, approximately 91% of the 1994 Bonds were tendered and the Exchange Bonds have been kept current by Argentina.

Argentina has stated that it does not intend to make any further payments on the plaintiffs’ unexchanged 1994 Bonds. Further, Argentina adopted legislation (the so-called “Lock Law”) that prohibited it from making any arrangement to pay the unexchanged 1994 Bonds.

The plaintiffs had applied to the United States District Court for the Southern District of New York for a determination that Argentina’s proposal to make full payment on the Exchange Bonds while making no payments on the 1994 Bonds constituted a breach of the pari passu clause in the 1994 Fiscal Agency Agreement “by lower[ing] the rank of [the plaintiffs’] bonds in violation of [the pari passu clause]  when it made payments currently due under the Exchange Bonds, while persisting in its refusal to satisfy its payment obligations currently due under the [plaintiffs’] Bonds” and through enactment of the Lock Law.

District Judge Thomas P. Griesa issued the following Injunction - Whenever the Republic pays any amount due under terms of the bonds or other obligations issued pursuant to the Republic’s 2005 and 2010 Exchange Offers … the Republic shall concurrently or in advance make a “Ratable Payment” … to [Plaintiffs].

It is important to note that on June 24, 2013, Argentina filed a petition for a writ of certiorari in the United States Supreme Court asking the Court to review the October 26, 2012 decision of the Second Circuit which interpreted the pari passu clause in the 1994 Fiscal Agency Agreement to require equal treatment of both the 1994 Bonds and the Exchange Bonds. The Second Circuit also held that injunctions mandating ratable payments to the 1994 Bondholders before or concurrent with payments to the Exchange Bondholders did not violate the Foreign Sovereign Immunities Act. The Supreme Court will not decide the petition until late September (when the Court in recent years has granted review) or the order list issued on the first Monday in October (when the Court denies review of the vast majority of petitions briefed over the summer recess).3

Though the Second Circuit sided with Judge Griesa, it delayed the enforcement of his decision while the Supreme Court decides whether to take the case.

 The Second Circuit’s August 23 opinion in summary:

  • Strived to portray this case as involving the unique conduct of Argentina, not typical of the conduct of other financially-troubled sovereigns, and Argentina’s unique pari passu clause.
  • Cataloged and then rejected all the multiple arguments by Argentina and the other entities that supported Argentina’s position.
  • Stated that its decision did not control the interpretation of all pari passu clauses or the obligations of other sovereign debtors under pari passu clauses in other debt instruments. The Second Circuit simply affirmed the District Court’s conclusion that Argentina’s extraordinary behavior was a violation of the particular pari passu clause found in the Fiscal Agency Agreement under which the 1994 Bonds were issued.
  • Stated that the Second Circuit had invited Argentina to propose an alternative payment formula and schedule for the 1994 Bonds to which it was prepared to commit. Instead, the proposal submitted by Argentina ignored the 1994 Bonds and proposed an entirely new set of substitute bonds. In sum, no productive proposals were forthcoming.4

The Second Circuit’s decision essentially says that Argentina cannot pay any creditors if it does not pay all of them, and that banks in the United States and presumably around the world – could face contempt charges if they allow Argentina to make payments to only those lenders it wishes to pay.5

A maneuver by Argentina’s government to try to pay creditors by circumventing U.S. court orders sent most of the country’s debt prices plunging on August 27, 2013. Argentina President Cristina Fernandez de Kirchner on August 26th said the government will offer to pay the investors of the Exchange Bonds in Buenos Aires rather than New York. There is risk of contempt charges in doing so. The government also plans to reopen the debt swap allowing investors holding the 1994 defaulted Bonds to exchange them for new bonds, at a large discount.6

The case may have ramifications for future global debt-restructuring offers. International Monetary Fund officials have said that if the holdout bondholders prevail, investors may be more inclined to resist other nations’ debt restructuring offers, in the hopes of getting a fuller payout. However, the Second Circuit played down these broader implications. “This case is an exceptional one with little apparent bearing on transactions that can be expected in the future,” the Court said in its ruling.7

The Supreme Court’s decision whether to hear the case is awaited.

1.    Romig, Shane and Chad Bray, “Argentina Bond Showdown Is Set,” The Wall Street Journal, August 24-25, 2013.
2.    Peluso, Romano I.,”NML Capital, Ltd, et al., v The Republic of Argentina,” www.lawdebus/news/2013/march, March 8, 2013.
3.    Shearman & Sterling LLP, Client Publication, “Don’t Cry for Me Argentine Bondholders: Argentina Seeks Supreme Court Review,” June 27, 2013.
4.    Shearman & Sterling LLP, Client Publication, “Don’t Cry for Me Argentine Bondholders: The Second Circuit Rules,” August 27, 2013.
5.    Norris, Floyd, “Not Crying For Argentina But Fearful Of a Ruling,” The New York Times, August 30, 2013.
6.    Romig, Shane, “Argentina Bonds Fall on Debt Swap,” The Wall Street Journal, August 28, 2013.
7.    Endnote 1.

Written by
Romano I. Peluso, CCTS

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