When Judge Thomas P. Griesa of the U.S. District Court for the Southern District of New York (Manhattan) held Argentina in contempt on Friday for the South American nation’s default on bond payments, few people likely perked up with attention about the possible implication for art restitution. But with a bit of indulgence, the connection is more important than it might first seem.
Argentina is embroiled in litigation with the holders of bonds that it issued, and on which it has defaulted (a vast oversimplication of the situation). The capital markets and geopolitics have watched for months as Argentina has negotiated and mediated with its creditors. The core dispute relates to Argentina’s negotiated resolution of its last bond default in 2001, a resolution to which not all of its creditors agreed. Those “holdouts” (principally Paul E. Singer’s NML Capital) have continued to press Argentina to honor its pre-2001 bond obligations, and therein lies the dispute.
The mechanics of the matter are complicated, but over the course of the dispute and complicated questions of creditor priority and allowable payments, one important aspect has been the deposit of interest payments into a form of escrow. Specifically, Argentina’s deposit of money that it is contesting that it owes with a third party pending resolution of the case: when Argentina failed to make certain payments on July 30, it argued that it was not actually in default because of that deposit of $539 million with the Bank of New York Mellon.
Last month, however, Argentina unilaterally passed legislation to replace BNY with the state-owned Banco de la Nación. The difference is important and clear: rather than a disinterested stakeholder, the money was moved back into Argentina’s exclusive control. That, in turn, undermines the notion that the default never occurred.
Having previously warned Argentina against making this move, the court held Argentina in contempt on Friday September 26, 2014.
So, you are probably still wondering, what does this have to do with the Art Law Report? The answer relates to the willingness of a court to find a sovereign defendant in contempt, and the follow-up question (still unanswered in Argentina’s case) of the court’s willingness to issue sanctions against such a foreign sovereign.
This may finally start to sound familiar to long time readers given one of the disputes we have been tracking for years: the Chabad Lubavitch movement’s lawsuit against the Russian Federation over the movement’s library. When the Argentine bondholders asked Judge Griesa to hold Argentina in contempt, both that nation and the United States weighed in to urge the court not to do so, for fear of breaching international protocol. The U.S. did the very same thing when Chabad asked the District of Columbia U.S. District Court to hold Russia in contempt, and again when Chabad asked for sanctions.
In both instances the Washington court ruled against the U.S.’s request, and the sanctions that began to accrue at $50,000 per day on January 16, 2013 (622 days ago) now stand at a staggering $31,100,000.
Russia, of course, has shown no sign of paying that, instead launching a retaliatory lawsuit and generally continuing to behave in the most disruptive way possible to the international art world (prefacing, regrettably, its military actions in 2014). And, the Foreign Sovereign Immunities Act still places strict limits on the ability to collect on foreign assets pursuant to such an order.
But the willingness of a federal court to take this kind of action against a sovereign defendant is a significant and important one. Russia has been an outlier in terms of intransigence, but as with any court power, the appearance of authority is often as important as the authority itself. There are any number of potential wartime restitution sovereign defendants that have shown no interest in confronting provenance problems, and that may be inclined to brush off court process as long as possible.
The Argentina bond case is probably the most-closely-watched litigation—of any kind—in the country right now. The sanction that may be requested is the very same $50,000 per day fine. For anyone that has or may have an art restitution case against a sovereign defendant, Judge Griesa’s next move will be very important.