(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Alison Frankel
NEW YORK, June 16 Argentina is just about out of
legal options in its blood feud with NML Capital, Aurelius
Capital and other holdout bondholders.
On Monday, the U.S. Supreme Court refused outright to hear
Argentina's appeal of a ruling from the 2nd U.S. Circuit Court
of Appeals that prohibits the foreign country from making
payments to bondholders who exchanged defaulted debt without
also paying holdout hedge funds that have won about $1.5 billion
in judgments against Argentina. Argentina had been hoping the
justices would at least ask for briefing from the U.S. Solicitor
General, which would have bought it some time.
But time is up for Argentina: The country's next payment to
exchange debtholders is due on June 30, and if it fails to pay
the hedge funds at the same time or tries to restructure its
bonds to evade U.S. courts, Argentina risks monetary sanctions
and being held in contempt of court.
Such a ruling would further blacken Argentina's reputation
in global debt markets -- but it wouldn't have much actual
effect on whether the hedge funds are able to collect what
they're owed. According to Michael Mukasey of Debevoise &
Plimpton, a former U.S. attorney general and former chief U.S.
district judge in Manhattan, Argentine assets in the United
States would probably still be protected by the Foreign
Sovereign Immunities Act even if Argentina were found in
contempt and hit with sanctions. "What can (U.S. courts) do
about it?" Mukasey said. "Not a whole lot."
Mukasey was one of six former federal judges who submitted a
friend-of-the-court brief urging the Supreme Court to reject
Argentina's appeal, arguing that Argentina didn't deserve the
justices' consideration because its lawyers had already told
judges at the 2nd Circuit that Argentina would not "voluntarily
obey" U.S. court directives. In a subsequent brief at the
Supreme Court, Argentina pledged to comply with U.S. court
orders, but warned that if the justices didn't agree to hear its
appeal, it might be forced to default on its debt.
NML, meanwhile, said in a separate proceeding in the lower
courts that Argentina had a secret plan in case it was rebuffed
at the Supreme Court. According to the hedge fund, a leaked memo
from Argentina's lawyers at Cleary Gottlieb Steen & Hamilton
showed that Argentina intended not simply to default on its
exchanged debt but immediately to restructure the bonds to put
them out of the reach of U.S. courts.
While Argentina's petition was before the Supreme Court, NML
told U.S. District Judge Thomas Griesa of Manhattan, who is
presiding over Argentina's litigation with the hedge fund
holdouts, that Argentina was flauting Griesa's October 2013
injunction barring it from changing bond mechanisms in order to
evade payments to the hedge funds.
NML asked Griesa to issue a supplemental injunction to
clarify that Argentina is permanently prohibited from making
such changes. At a June 3 hearing, Cleary partner Carmine
Boccuzzi said the firm was just outlining options for its client
and that Argentina had no plan to restructure its debt. "We have
never advised a client just to turn their nose up to the court's
orders and to evade them," Boccuzzi told Griesa.
Griesa found earlier this month that the Cleary memo is
privileged but hasn't done anything else with NML's motion. If,
however, Argentina follows through with what Cleary called its
"best option" and restructures its debt to avoid paying the
hedge funds, NML and the other holdouts will undoubtedly ask
Griesa to hold Argentina in contempt and hit it with sanctions.
The U.S. government has twice argued in federal circuits
that foreign sovereigns cannot be held in contempt of U.S.
courts. In 2006, the 5th Circuit agreed; but in a 2011 ruling
called FG Hemisphere v. Democratic Republic of Congo, the D.C.
Circuit said that the Foreign Sovereign Immunities Act does not
bar a federal court from holding that another country is defying
its orders. "There is not a smidgen of indication in the text of
the FSIA that Congress intended to limit a federal court's
inherent contempt power," the D.C. Circuit opinion said.
The Supreme Court signaled a similar view of the law on
Monday -- in another dispute between Argentina and NML. In a
unanimous decision, the court authorized NML to conduct
court-approved discovery on Argentine assets even though the
Justice Department sided with Argentina in opposing the
The opinion, written by Justice Antonin Scalia, said that
FSIA protection is limited to the two immunities Congress
specified in the law, and that if the Justice Department is
worried about the policy implications of otherwise subjecting
foreign nations to U.S. court orders, it should ask Congress to
amend the law.
"Today's decision," said FSIA lawyer Richard Klingler of
Sidley Austin (who was not involved in the NML case), "says that
if you're a foreign sovereign, you don't get special rules
unless Congress said so."
Nevertheless, as the D.C. Circuit pointed out in the 2011
Congo case, FSIA protects even the assets of foreign sovereigns
found in contempt. Argentina's hedge fund opponents have been
attempting for a decade to execute some $15 billion in judgments
against the country. They haven't been very successful, despite
some of the most creative theories ever to surface in
post-judgment enforcement litigation. Monetary sanctions against
Argentina would add to the total due to the hedge funds -- but
wouldn't help them collect it.
Will Cleary Gottlieb face any consequences if Argentina
restructures its bonds and is found in contempt? Klingler said
that if Argentina does attempt to evade U.S. court orders, Judge
Griesa in Manhattan will probably press Cleary for more details
on what the firm knew about its client's plans. He and Mukasey
both said, however, that as long as Cleary lawyers could show
that they had a reasonable and good-faith basis for their
representations to Judge Griesa, the firm should be fine.
I emailed Boccuzzi, Cleary partner Jonathan Blackman, a
Cleary spokeswoman and Argentina Supreme Court counsel Paul
Clement of Bancroft. None got back to me.
Argentina's president, Cristina Fernandez de Kirchner, is
scheduled to deliver a speech Monday night on the standoff with
the hedge funds. We'll know then whether Argentina will live up
to its pledge to comply with U.S. court orders.
(Reporting by Alison Frankel; Editing by Andrea Evans)