Second Circuit Issues Dramatic Ruling Against Argentina. Full-Text Opinion Online.

October 26, 2012

with analysis by Bill Singer

Plaintiffs appealed from permanent injunctions entered by the United States District Court for the Southern District of New York (Griesa, J.). The district court granted plaintiffs summary judgment and enjoined Argentina from making payments on debt issued pursuant to its 2005 and 2010 restructurings without making comparable payments on the 2001 defaulted debt. 

In December 2001, after Argentina defaulted, its President declared a "temporary moratorium" on principal and interest payments on more than $80 billion of its public external 14 debt including the Fiscal Agency Agreement ("FAA Bonds") Bonds.  Argentina offered holders of the FAA Bonds new exchange bonds in 2005 and 2010 at 25 to 29 cents on the dollar, and the country continued to make payments to holders of those Exchange Bonds while failing to make any payments to persons who still held the defaulted FAA Bonds.

Argentina has annually passed legislation renewing the moratorium and has made no principal or interest payments on the defaulted debt. Plaintiffs estimate that, collectively, their unpaid principal and prejudgment interest amounts to approximately $1.33 billion. After two exchange offers in 2005 and 2010, Argentina had restructured over 91% of the defaulted foreign debt.

Plaintiffs alleged that Argentina's conduct violated the Pari Passu Clause by 
  • subordinating their FAA Bonds to the Exchange Bonds; and 
  • lowering the ranking of their FAA Bonds below the Exchange Bonds. 

The Circuit Court found that an equal treatment provision in the bonds bars Argentina from discriminating against plaintiffs' bonds in favor of bonds issued in connection with the restructurings and that Argentina violated that provision by ranking its payment obligations on the defaulted debt below its obligations to the holders of its restructured debt. Pointedly, the Circuit Court found that the District Court had not abused its discretion in fashioning injunctive relief and that such a remedy was not in violation of the Foreign Sovereign Immunities Act ("FSIA").

The 2nd Circuit held that Argentina breached its promise, affirming the district court's judgments but remanding the proceedings to clarify the manner in which the injunctions will function, pointedly, the operation of the payment formula and the Injunctions' application to third parties and intermediary banks.