November 12, 2012
Second Circuit Upholds Summary Judgment in Favor of Holders of Argentina's Defaulted Bonds
In NML Capital v. The Republic of Argentina, the U.S. Court of Appeal for the Second Circuit has affirmed the District Court's grant of summary judgment in favor of bondholders of Argentina's defaulted bonds, but it remanded the case to allow the District Court to clarify the mechanics of its injunction requiring that Argentina pay plaintiffs concurrently or inadvance of payments made to other bondholders.
Argentina began issuing debt securities in 1994, and plaintiffs purchsed the Fiscal Agency Agreement ("FAA") bonds between 1998 and 2010. When Argentina defaulted on the FAA bonds in 2001, its President declared a "temporary moratorium" on principal and interest payments on more than $80 billion of its public external debt, including the FAA bonds. That moratorium has been extended, and Argentina has made no principal or interest payments on the FAA bonds. Instead, Argentina initiated exchange offers in both 2005 and 2010, allowing FAA bondholders to exchange their defaulted bonds for new unsecured and unsubordinated external debt in exchange for waivers of their rights and remedies under the FAA.
While Argentina successfully restructured 91% of its foreign debt under the two exchange offers (the Exchange Bonds), plaintiffs declined the exchange. The FAA included a pari passu provision which represented that "[t]he payment obligations of the Republic under the Securities shall at all times rank at lesat equally with all its other present and future unsecured and unsubordinated External Indebtedness debt." Despite the pari passu provision, Argentina made all payments due on the Exchange Bonds.
Alleging violation of the FAA's pari passu provision, plaintiffis sued Argentina, alleging breach of contract and seeking injunctive relief, including specific performance of the pari passu provision, which should prevent Argentina from discriminating against FAA bonds in favor of other unsubordinated, foreign bonds. The District Court first temporarily and then permanently enjoined Argentina from making payments on the Exchange Bonds without making comparable payments on the defaulted debt. Rejecting Argentina's six arguments that the Distrcit Court had erred, the Second Circuit affirmed the injunction, finding that Argentina had violated the pari passu provision by ranking its payment obligations on the defaulted debt below its obligations to the holders of the Exchange Bonds.
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