NML Capital Ltd. (NML), a hedge fund affiliated with Paul Singer’s Elliott Management Corp. (Elliott), won two favorable rulings from the Supreme Court of the United States (the Court) on Monday, June 16, related to its, now, decade long litigation with the Republic of Argentina over the country’s 2001 default on $100 billion of its debt. The Argentinian bonds were restructured in 2005 and again in 2010, and most bondholders swapped their defaulted bonds out for new, less favorable securities. NML and Elliott, however, did not accept either of the reduced payouts, choosing, rather, to commence 11 separate lawsuits against Argentina beginning in 2003. NML prevailed in each of its actions pending in the United States District Court for the Southern District of New York, winning more than one billion dollars in judgments.
Offering no analysis, the Court refused to hear Argentina’s appeal of the Second Circuit’s August 23, 2013, decision that Argentina had violated contractual provisions in its bond indenture resulting in a $1.4 billion judgment against the country in favor of bondholders who declined to participate in the restructurings.
In its brief to the Court, Argentina warned that if required to pay the “massive” judgment to NML, the country may face yet another default when payments become due on discounted bonds on June 30, 2014. After the ruling was handed down, Argentina’s president, Cristina Fernández de Kirchner, reassured holders of restructured debt that the country would not default.
In a separate opinion, the Court affirmed an August 20, 2012, Second Circuit decision allowing NML to proceed with discovery and issue subpoenas to two third-party banks purportedly holding Argentinian assets in an effort to find and attach the assets in satisfaction of NML’s judgment.
Argentina argued that the 1976 Foreign Sovereign Immunities Act (FSIA) prohibited discovery of extraterritorial assets, a position supported by the Solicitor General of the United States. The Court rejected this argument, noting that Argentina waived its sovereign immunity in its bond offering and that nothing in the FSIA prevents a creditor from pursuing post-judgment discovery related to extraterritorial assets of a foreign sovereign judgment debtor.
In a lone dissent, Justice Ginsburg stated that the subpoenas were improper unless NML first showed that the discovery would reveal assets that are not subject to any FSIA exceptions making them recoverable in satisfaction of the judgment. The majority decision rejected this argument deciding there are no grounds requiring creditors like NML to prove that they are entitled to seize property before subpoenas can be issued. Writing for the majority, Justice Scalia concluded that the issue of what to do should NML’s subpoenas reveal assets protected by the FSIA was an issue for the district court and another day.
During a hearing held on June 18 in the United States District Court for the Southern District of New York before Judge Griesa—who rendered the original ruling requiring payment—lawyers representing Argentina advised, for the first time, that government officials would commence negotiations with a group of the holdout bondholders during the week of June 23. Argentina’s willingness to negotiate with the holdout group represents a significant change in their litigation posture to date, and could evidence its concern that the occurrence of a default would be too costly. During the hearing, Argentina’s lawyers also ruled out the suggestion made by Argentina’s finance minister earlier this week of exchanging bonds governed with U.S. law for those governed by Argentine law.
The implications of these opinions are noteworthy. First, the decisions, at the least, could heighten the risk that Argentina will default for the second time in 13 years (notwithstanding President Kirchner’s assurances to the contrary). Second, distressed debt and other investors should consider the decisions for the legal precedent they might set for future sovereign debt restructurings. For example, bond investors may be motivated to resist participation in debt restructuring negotiations preferring, instead, the “holdout” approach in the hope of a greater return down the road. Third, the decision highlights creditors’ broad post-judgment discovery rights in that the Supreme Court emphasized that a judgment creditor is permitted to pursue discovery of assets even if those assets are ultimately immune from attachment in satisfaction of the underlying judgment.