Case of the Day: NML Capital v. Argentina

The case of the day is NML Capital v. Argentina (2d Cir. 2012). I did not cover the entertaining story of the arrest of the ARA Liberdad in Ghana for payment of Argentina’s sovereign debt, so to make up for it I am going to cover the Second Circuit’s most recent contribution to the saga.

When Argentina restructured its debt, it enacted law treating the bonds of investors who did not take Argentina’s offer less favorably than the bonds of investors who did. The idea was to give investors an incentive to take the offer; but the original Fiscal Agency Agreement had a pari passu clause. As a result of its new law, Argentina’s courts have refused to recognize or enforce foreign judgments in favor of holders of the original debt.

In February 2012, the district court entered an injunction ordering Argentina to make payments to the original debtholders whenever it makes payments to the holders of the reorganized debt, so as to comply with the pari passu clause. Argentina was unlikely to obey the injunction, so the court directed that notice of the injunction be given to ““all parties involved, directly or indirectly, in advising upon, preparing, processing, or facilitating any payment on the Exchange Bonds.” The idea was to put Argentina’s agents in New York at risk of aiding and abetting a violation of the injunction.

Argentina made several arguments on appeal from the injunction. Of note was its contention that the injunction violated the FSIA. 28 U.S.C. [section] 1609 provides that ““the property in the United States of a foreign state shall be immune from attachment arrest and execution.” Of course, an injunction—an order in personam—is not an attachment. But the cases say that courts cannot grant relief by an injunction that they cannot grant by way of an attachment. The Second Circuit rejected Argentina’s argument that the injunction was so similar to an attachement that the statute barred it. It concluded that the injunctions didn’t affect Argentina’s property at all, but merely ordered Argentina to comply with its contractual obligations. The injunction prohibits Argentina from paying some creditors while not paying others. But that, the court concluded, was merely incidental. If Argentina didn’t seek to pay other creditors, the injunction would not have any effect.

The court remanded the case for consideration of which third parties the injunction would enjoin, noting some uncertainty on that point, but it was clearly troubled by the prospect that New York banks that acted as intermediaries for the payment of funds from Argentina to the creditors who had taken Argentina’s exchange offer could be found in contempt of the injunction. The main concern seemed to be the possibility of a slowdown in the payment system, even as to payments unrelated to the payments at issue. But because of the remand, a final resolution of the third-party issue will have to await further developments in the district court.

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