On 16 June 2014 the U.S. Supreme Court denied Argentina’s petition for a writ of certiorari, effectively ending Argentina’s chance of overturning the Second Circuit’s controversial ‘payment’ interpretation of the pari passu clause, which requires Argentina to make ratable payments to the holdout bondholders if it makes any repayments to the exchange bondholders.
Judge Thomas P. Griesa of the U.S. Southern District of New York, the designated judge for the case, appears to have been hoping for a quiet June as he was due to be on vacation. The Supreme Court’s denial of certiorari came just ahead of the next payment date under the exchange bonds of 30 June 2014, by which date repayments were due (albeit there is a 30-day grace period which expires on 30 July 2014). Perhaps unsurprisingly, therefore, matters have not stood still and Judge Griesa’s hopes have been cruelly dashed.
Argentina has started making repayments on its exchange bonds to various entities in Argentina. This raises interesting issues as to the extra-territorial effect of those orders against non-parties and also about what should happen next as some of those third parties have been threatened with litigation by all concerned. Also, it raises challenging issues regarding the effects of these orders vis-à-vis bonds issued by Argentina under laws other than New York law.
Argentina’s plan to make repayments under the Exchange Bonds
Following the Supreme Court’s decision, Argentina’s President, Cristina Fernández de Kirchner, went on national television on 17 June 2014 to announce a plan to a further exchange of the exchange bonds (from 2005 and 2010) for bonds governed by Argentine law and payable in Argentina. Speaking of the payments due to NML and the other plaintiffs of approximately $1.5 billion, President Fernández stated that:
This represents a profit of 1,608 percent, in dollars! I believe that in all of organized crime there has never been a case of a profit of 1,608 percent in such a short time…What I cannot do as president is submit the country to such extortion.
This was followed by a speech by Argentina’s Economy Minister, Axel Kicillof, in which he further outlined the above-mentioned plan.
On 18 June 2014, a hastily convened hearing took place before Judge Griesa after which an order was made on 20 June 2014 that Argentina’s proposed plan is in breach of the orders of the court and prohibiting Argentina from carrying out the Economy Minister’s proposal.
On the same day the Second Circuit lifted the stay on its injunction of 21 November 2012 (the “Injunction”), meaning that Argentina is prevented from making payments under the exchange bonds unless it makes a ratable payment to the holdout bondholders at the same time. The Injunction had been stayed pending the appeal to the U.S. Supreme Court but it is now in force and giving rise to difficult issues especially as regards third parties affected by it.
On 23 June 2014, Argentina then made a further application for a stay to enable to settlement discussions to take place. This application for a stay was rejected by Judge Griesa, who appointed a “Special Master” to preside over settlement negotiations between the parties and clearly hoped this would sort matters out, including any repayments due on the exchange bonds.
Repayments by Argentina
On 26 June 2014 it came to light that Argentina was taking steps to make repayments to the exchange bondholders without making the requisite payments at the same time to the holdouts. Argentina had transferred over $538m to BNY Mellon and approximately $300m to Citibank Argentina. In the ordinary course of events those payments would have been transferred to the other entities in the repayment chain, such as the clearing systems, and paid to exchange bondholders.
Judge Griesa interrupted his vacation for a hearing the following day on 27 June 2014. At that hearing he made clear that the proposed payments to BNY were in breach of the court’s orders and should be repaid, saying that he would make “whatever order is appropriate nullifying this purported payment”.
Judge Griesa also clarified that the payments to Citibank, which were for repayment of the exchange bonds governed by Argentine law and payable in Argentina, were not prohibited and made a specific order to that effect.
This clarification was necessary because the Injunction simply prevents payments on the “Exchange Bonds”, which is defined at paragraph 2a as “the bonds or other obligations 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”.
The injunction therefore draws no distinction between different categories of exchange bonds. Judge Griesa seems to have been informed by NML in a rather general way at an earlier stage of proceedings that the payment process under the Exchange Bonds “without question” involves steps in the U.S.
The Injunction was to be sent to “Participants”, defined as “those persons and entities who act in concert with the Republic, to assist the Republic in fulfilling its payment obligations under the Exchange Bonds” including indenture trustees, the registered owners of the Exchange Bonds, nominees for the depositaries, clearing corporations, and trustee paying agents. The Injunction specifically listed Bank of New York Mellon, Euroclear, and Clearstream as participants. The participants were bound by the terms of the injunction and prohibited from aiding and abetting any violation of it by Argentina.
At the hearing counsel for the euro exchange bondholders sought to distinguish between the dollar exchange bonds and the euro exchange bonds by emphasising that payments under the euro exchange bonds do not take place in the U.S. and are therefore outside the court’s jurisdiction. This issue is what will have to be dealt with by the Court in the coming weeks.
The third parties
The fact that repayments have been made to various third parties by Argentina has shifted the focus to those parties, who have been placed in an invidious position. The third parties have received letters from the holdouts, the euro exchange bondholders and Argentina requiring different action and threatening litigation if the third parties do not comply.
For example, with respect to the moneys received by BNY Mellon in Argentina as trustee, the holdouts want the moneys received paid back to Argentina or paid to a U.S. court pursuant to an interpleader motion; whereas, the euro bondholders have threatened litigation in England if BNY Mellon does either of those things. It is also understood that proceedings have been commenced in Belgium to compel the trustee not to comply with the Injunction and instead to distribute payments to exchange bondholders.
Argentina has also threatened litigation against BNY Mellon if repayments are not made. Last Wednesday it also placed a two-page legal notice in The Wall Street Journal explaining that it has "duly deposited" with BNY Mellon the amounts of interest due on the exchange bonds and that failure to make the payment would be a failure on the part of the bank as trustee and not a default.2 Argentina argues that payments to the defaulted bonds would breach covenants of the exchange bonds.
After the hearing, on 29 June 2014, the euro bondholders submitted an emergency application for clarification of the Injunction so as to clarify that it does not apply to foreign parties who process payments on the euro exchange bonds. As they succinctly put it: "the Euro Bonds involve only foreign entities exchanging foreign currency on foreign soil". They alleged that NML had misled the court, by stating that the payment process involved steps in the U.S. and as a result various third parties, such as Euroclear and Clearstream, were included in the Injunction when they should not have been.
On 2 July 2014, Euroclear filed a similar motion for clarification and formally joined in the Euro bondholders’ clarification motion on 9 July 2014. Euroclear relied heavily on the exclusion for the Argentine exchange bonds (payable in pesos and dollars in Argentina) and sought by analogy to say that payment of the euro exchange bonds should also be excluded. They also relied on various provisions of Belgian law which protects the Euroclear system. Clearstream also filed a similar motion for clarification on 7 July 2014.
On 10 July 2014, BNY Mellon also filed a motion for clarification regarding what it should do with the money it has received. It has proposed maintaining the status quo and retaining the funds in Argentina pending the determination of what is to happen to the funds. It considers that this would reduce its potential liability exposure.
On 11 July 2014 the plaintiffs partially objected partially to the clarification motions filed by Euroclear and Clearstream in respect of the payments which Citibank is now permitted to make in respect of Argentine bonds. The plaintiffs object to payment of these bonds insofar as they are in dollars, as these constitute External Indebtedness under the Fiscal Agency Agreement and fall within the Injunction. They say the dollar bonds have never been treated differently and should not be excluded.
Further submissions by the various parties and non-parties are due to be exchanged by 25 July 2014, including the plaintiffs’ opposition to the Euro bondholders’ clarification motion, with a hearing due to take place at some point, presumably before 30 July 2014 when the grace period ends.
Meanwhile it has also been reported that whilst the Special Master has met with NML and Argentina individually, they have not yet sat down at the negotiating table together.
Summary
Argentina has raised the stakes in this litigation by starting to make repayments under its exchange bonds without making the ordered ratable repayments to the holdouts. This has shifted the focus to the third parties who have already received those funds or who appear further down the repayment chain, such as the clearing systems. Those parties have been dragged into this litigation reluctantly and face potential litigation from the holdouts, the exchange bondholders and Argentina depending on what they do.
The New York court is obviously keen to ensure that its orders are respected. That is entirely understandable with regards to Argentina, the defendant in this litigation, but where third parties are concerned, who are not subject to the U.S. Court’s jurisdiction, care must be taken not to prejudice those parties, who are currently damned in the U.S. if they do and damned elsewhere if they don’t. It remains to be seen how the court will cut through this Gordian Knot but two things at least seem clear: this next stage in proceedings will be as hard fought as previous stages and Judge Griesa’s holiday is well and truly over.
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1 We won’t pay $1.5bn to US: Cristina Fernandez (Jun. 17, 2014), http://www.presstv.ir/detail/2014/06/17/367383/argentina-not-to-pay-15bn-to-us/.
2 Mary Anastasia O’Grady, The Argentine Bond Mess Gets Messier, WALL S. J. (July 13, 2014), http://online.wsj.com/articles/ogrady-the-argentine-bond-mess-gets-messier-1405291417.
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