I have been remiss in not pointing interested readers to Anna Gelpern’s terrific posts on the ongoing NML v. Argentina sovereign debt litigation that is going on here in New York. I want to highlight in particular her incredibly useful and interesting account of the scene last week when the U.S. Court of Appeals for the Second Circuit heard arguments challenging a lower federal court’s order that Argentina has an obligation to pay its holdout creditors at the same time it pays its restructured creditors via a “pari passu” clause in its sovereign debt contracts. The bottom line: Gelpern seems to predict the US court will order Argentina to pay its holdout creditors, but probably not the full amount they are seeking. And she doubts Argentina will pay up anyway.
Indeed, from an international law perspective, this last point is the most fascinating part of the argument. The lawyer for Argentina made clear to the court that Argentina would not comply with the court’s order to pay the holdouts. Period. Here is Gelpern’s description:
Big Bonus Feature: Sovereign Prerogative. One of the bigger bombshells of the day came from Argentina in the form of the statement that it would default on everyone unless the Court adopted something like its payment formula. The fact that the statement was made with the Vice President and the Economy Minister sitting in the room made it feel like an even bigger deal. Jonathan Blackman’s contention was that sovereigns do not and cannot — and Argentina will not — ”voluntarily obey” foreign judgments against their own domestic law and public policy. Argentina’s submission to U.S. jurisdiction was made subject to the understanding that under FSIA, some judgments could go unenforced, and them’s the ropes. Since NML was effectively (though not technically) trying to enforce a judgment, it was out of luck. Blackman’s hypothetical of an Iranian court order against the U.S. government seemed like a high-risk move under the circumstances. The threat of default prompted Ted Olson for NML to say that Argentina promised this extreme course ”to force this Court to back down … The Court cannot give into that!” ….
It is (to say the least) extraordinary when a party to a dispute makes the argument that it will simply not comply with an order of the court that has jurisdiction over it. As a matter of litigation strategy, it is simply bad tactics since it usually enrages the judges.
From an international law perspective, it should be clear that Argentina’s action, although defensible, is not in any way justified by international law, although it is not prohibited by international law either. What strikes me about the statement is that it is really quite “sovereigntist” and based on a realist, hard-nosed approach to international law and contracts.
As I discussed in an earlier post, Argentina has waived almost all of its sovereign immunity defenses when it issued the bonds, and agreed to New York law:
To the extent the Republic [of Argentina] or any of its revenues, assets or properties shall be entitled … to any immunity from suit, … from attachment prior to judgment, … from execution of a judgment or from any other legal or judicial process or remedy, … the Republic has irrevocably agreed not to claim and has irrevocably waived such immunity to the fullest extent permitted by the laws of such jurisdiction…
So Argentina agreed to give up its immunity defenses under international law and submit to the US courts.
If I understand Argentina, it is now saying to the US court: You try to enforce this order on us, and we walk away. We won’t pay anyone, including the other restructured creditors. Your only remedy is to try to attach our non-commercial assets, which you can’t do under US law. Ironically, if US law permitted such attachments, Argentina’s waiver would plainly subject it to such attachments.
I think this strategy could work for Argentina, although they deserve plenty of additional reputational damage for this move. They sold bonds in the US, waived their international law defenses, and raised billions of dollars. Arguably, they also agreed by contract to pay all creditors via its pari passu clause.
Now they are taking advantage of a quirk in US law to escape their obligations. They are even playing the “sovereignty” card, by pointing to their own domestic law as a basis for their refusal to pay. And respect for their sovereignty is probably why they get away with this move, as slimy as it seems to do so in this case. Maybe that’s the right result, but I wouldn’t want to celebrate it in any way.