On June 16, 2014, in the litigation of NML Capital, Ltd. et al., v The Republic of Argentina, the United States Supreme Court declined to hear Argentina’s petition for writ of certiorari to overturn the ruling of August 23, 2013 by the United States Court of Appeals for the Second Circuit in New York requiring Argentina to make its payments to all bondholders, those who accepted the exchange bonds as well as a group of holdout bondholders.

Petition Regarding Payment of the Bonds

The bondholders had urged the Justices of the Supreme Court not to hear the case, in part because they said Argentina had vowed not to comply with the ruling against it. “This court does not grant review to render decisions that the parties are free to ignore,” their brief said.

In a one-line order, the Supreme Court refused to hear Argentina’s appeal.1

As previously reported, Argentina defaulted in 2001 on over $81 billion of its bonds issued pursuant to a Fiscal Agency Agreement in 1994, the “1994 Bonds.” 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,” but at a loss of roughly 70%. 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.

The ruling by the Court of Appeals for the Second Circuit required Argentina to make “ratable payment” to the group of holdout holders of the 1994 Bonds pursuant to the pari passu clause in the Fiscal Agency Agreement. This would be 100% of the roughly $1.33 billion they are owed in principal and interest.2

Argentina has said it lacks sufficient funds to pay both the holders of the 1994 Bonds in full and the holders of the Exchange Bonds whose next payment is due June 30, 2014.3

As a result, Argentina must decide by the end of June whether to try and reach an agreement with the holdouts or default on its next debt service payment, the second default in 13 years.4

Even if Argentina is able to reach an agreement as to payment with the holdouts, sovereign debt restructurings will greatly be impacted in the future. This view is shared by many including the International Monetary Fund. Can holdout bondholders demand full payment, or possibly a partial payment through negotiation, even though others who exchanged their bonds took a loss? This fact may make future restructurings difficult since bondholders may be less inclined to take a large loss if they know that holdouts will be paid in full or negotiate successfully for some payment.5

Petition Regarding Subpoenas

In response to a second and separate petition, the Supreme Court issued a 7-to-1 decision to allow federal courts in the United States to issue subpoenas to banks to help creditors who have won judgments against Argentina to find its assets around the world.

Justice Antonin Scalia, writing for the majority, said the subpoenas were proper and did not offend the protections Congress granted Argentina and other countries in the U.S. Foreign Sovereign Immunities Act of 1976 (FSIA). He said Argentina had waived its immunity from jurisdiction of courts in the United States in contracts it signed when it sold the bonds. FSIA does make some kinds of property owned by a foreign country in the United States ineligible to be seized to pay a court judgment. “That is the last of the act’s immunity-granting sections,” Justice Scalia wrote. “There is no third provision forbidding or limiting discovery,” or court-ordered factual investigation, “in aid of execution of a foreign-sovereign judgment debtor’s assets.”

The Obama administration had urged the Justices to rule for Argentina in the subpoena petition. “The United States would be gravely concerned about an order of a trial court in a foreign country, entered at the behest of a private person, seeking to establish a clearinghouse in that country of all the United States’ assets,” Deputy Solicitor General Edwin S. Kneedler said at the argument hearing of the case in April. Justice Scalia said those concerns should be addressed to Congress which enacted FSIA. Justice Scalia said the administration’s fears “are better directed to that branch of government with authority to amend the act…”6

Romano I. Peluso