In an extraordinary Wednesday afternoon hearing lasting over two hours, the multibillion-dollar drama over Argentina’s sovereign debt played out before the U.S. Court of Appeals for the Second Circuit.
Counsel for Argentina, Jonathan Blackman of Cleary Gottlieb Steen & Hamilton, effectively asked the court to force Argentina’s holdout creditors–the so-called "vulture funds" that have refused to accept less than face value in a restructuring–to accept the haircut that they rejected. The bondholders that accepted the restructuring, represented by David Boies of Boies, Schiller & Flexner, suggested in a similar spirit that the Second Circuit use its equitable powers to fashion a remedy giving Argentina’s holdout creditors "what they would have got if they restructured." (It wasn’t clear whether Boies was speaking only of near-term payments, or of the bonds’ long-run value.)
Most extraordinary, Blackman openly warned the Second Circuit that if it ordered Argentina to fully pay holdout creditors–who collectively seek over $10 billion–Argentina would default on $24 billion in restructured debt. Essentially, Blackman held a gun to Boies’s head and said to the court: "Stop me before Argentina defaults again." Boies begged the court to take the threat seriously, and argued that the proper role of the Second Circuit in this case was, like a bankruptcy court, to fashion the most equitable practical remedy.
The Second Circuit held in October that Argentina was obligated under the pari passu clause in its bonds to make an "equal payment" to the holdout creditors if it serviced the restructured debt. On remand Manhattan U.S. District Judge Thomas Griesa proposed the broadest possible remedy–requiring Argentina to pay 100 percent of its debt to the holdout creditors. He also enjoined the trustee for the creditors, Bank of New York Mellon, and the payment clearing banks from helping Argentina to evade the injunction by processing payments to the restructured bondholders. (For our past coverage of the controversy, please see the links below.)
Cleary’s Blackman coyly remarked that Griesa’s order "wouldn’t be voluntarily obeyed." Circuit Judge Reena Raggi, who questioned Argentina aggressively all afternoon, responded angrily that it was basically "dictating" terms to the court by threatening "contumacious" behavior. Under questioning by Raggi near the hearing’s end, Blackman said bluntly: "We’re not paying it, that’s right." Blackman emphasized that Argentina as a sovereign nation cannot be forced to violate its announced public policy against giving priority to the holdout creditors. Boies for one, took Blackman’s threat at face value, telling the court that, rather than make the holdouts whole, "All [Griesa's order] will do is create a second default."
Arguing for holdout creditor and hedge fund Elliott Associates, Theodore Olson of Gibson, Dunn & Crutcher began by quoting Argentina’s president, who declared after the Second Circuit’s last ruling: "Not one dollar to the vulture funds." However, Judge Rosemary Pooler noted that politicians have been known to change their views, and Blackman represented that Argentina’s executive would ask its legislature to enact a law allowing it to pay the holdout creditors on the same scale as those who accepted a haircut on the order of 65 percent in 2005 and 2010.
Raggi suggested an intermediate option: to make Argentina current on its obligations to the holdouts under the original bonds, and then to start servicing their bonds on a regular basis under the terms of the restructured bonds. It was not clear whether the Second Circuit would itself fashion the remedy — whatever form it might take — or whether it would remand the case again to Griesa.
Pooler said that a remand might be appropriate if only to determine whether Elliott Associates has purchased credit default swaps that would enrich it if Argentina defaults on its new bonds under the pressure of Elliott’s lawsuit. Could it be, she wondered, that a new default is exactly what the hedge funds are betting on?
Olson responded that he had no knowledge of such an arrangement, but it would be legally irrelevant. Pooler suggested that such an arrangement might bear on the balance of equities. If it’s true that Elliott has purchased derivatives of this sort, and if it sits on the ISDA determinations committee, which determines what credit events trigger the CDS, that would appear to be a "pretty severe conflict of interest," she said.
The judges appeared sympathetic to Boies’s attempt to paint his clients as innocent victims. But Olson undercut that tactic by noting that the restructured bondholders lobbied Argentina’s legislature to pass the "lock law" that forbids payments to the holdouts.
Much of the rest of the argument was devoted to the power of a court to enjoin an indenture trustee and other payment intermediaries. James Martin of Reed Smith, arguing for Bank of New York, said that his client cannot be considered to be acting in concert with Argentina unless it’s actively involved in Argentina’s decision to evade the injunction. Boies compared the relationship of the custodian bank to his clients as that of a parent of a child. Going a step further, Boies argued: "Bank of New York is essentially us." That argument was undercut when it emerged on Raggi’s questioning of Boies that Argentina pays a fee to Bank of New York beyond its payments to the exchange bondholders.
However distasteful the New York courts may find Argentina after eleven years of avoiding payments to the holdouts, Blackman concluded with a plea to the judges to "do no harm." Affirming Griesa’s orders, he argued, would not only hurt Argentina, but also the vital systems for processing bank payments and restructuring sovereign debt. And it would hurt the New York financial industries by driving business to London.
One interest that it would not hurt is that of New York law firm litigation departments. In a final warning that rings true, Blackman said that Griesa’s docket will quadruple if the Second Circuit affirms his broad injunction, as other bondholders will rush to protect their interests. "This is not the end," he said repeatedly. "It’s not the end."
The appellate judges did not say when they would rule. But they did say that Argentina’s petition for a panel rehearing was denied. Argentina’s next payment to creditors is due March 31.
Of related interest:
The Global Lawyer: Elliott and the Vultures v. Cleary and the Deadbeats
NML Wins Another Round in Argentine Bondholder Battle
Second Circuit Declines to Refer Argentina Debt Ruling to New York State Court of Appeals
