EMTA SPECIAL SEMINAR: ARGENTINA AND ITS PROSPECTS FOR SUPREME COURT REVIEW
Monday, September 16, 2013
EMTA
360 Madison Avenue, 17th Floor
(on 45th St. between Madison and 5th Aves.)
New York
This EMTA Special Seminar will provide analysis and commentary by a panel of legal experts on the recent US Appellate Court decision in NML Capital and Aurelius Capital v. Argentina and Argentina's appeal to the US Supreme Court.
3:00 p.m. – Registration
3:30 p.m. – Panel Discussion
Bruce Wolfson (Bingham McCutchen) - Moderator
Steven Froot (Boies, Schiller and Flexner)
Robert Cohen (Dechert)
Antonia Stolper (Shearman & Sterling)
Marco Schnabl (Skadden, Arps, Slate, Meagher & Flom)
Richard Samp (Washington Legal Foundation)
5:00 p.m. – Cocktail Reception
Additional Support Provided by Bingham McCutchen and Shearman & Sterling.
This Special Seminar is part of a continuing series of panels and presentations that EMTA is pleased to sponsor on various topics of interest to Emerging Markets investors and other market participants, and is part of EMTA's Legal & Compliance Seminars*.
*CLE credit will be available for NY attorneys. This seminar is non-transitional and appropriate for experienced attorneys only. Please click here for details on EMTA's Financial Hardship Policy.
EMTA SPECIAL SEMINAR: ARGENTINA'S PROSPECTS FOR U.S. SUPREME COURT REVIEW
Monday, September 30, 2013
Sponsored by TPCG Group
Sofitel St James
6 Waterloo Place
London SW1Y 4AN
This EMTA Special Seminar will provide analysis and commentary by a panel of experts on the recent US Appellate Court decision in NML Capital and Aurelius Capital v. Argentina and Argentina's appeal to the US Supreme Court.
3:15 p.m. – Registration
3:30 p.m. – Panel Discussion
Fernando Alvarez de la Viesca (TPCG Group Argentina-Uruguay) - Moderator
Yannis Manuelides (Allen & Overy)
Steven Froot (Boies, Schiller and Flexner)
Casey Reckman (Credit Suisse)
Julian Ku (Maurice A. Deane School of Law, Hofstra University)
Antonia Stolper (Shearman & Sterling)
5:00 p.m. – Cocktail Reception
Additional Support Provided by Allen & Overy, Credit Suisse and Shearman & Sterling.
This Special Seminar is part of a continuing series of panels and presentations that EMTA is pleased to sponsor on various topics of interest to Emerging Markets investors and other market participants, and is part of EMTA's Legal & Compliance Seminars*.
*CLE credit will be available for NY attorneys. This seminar is non-transitional and appropriate for experienced attorneys only. Please click here for details on EMTA's Financial Hardship Policy.
EMTA Hosted Panels on Argentine Case in New York and London
The recent US Second Circuit Court of Appeals decision affirming the Southern District Court of New York’s (SDNY) opinion and orders in the NML Capital, Aurelius Capital, et al case against Argentina has engendered a lively discussion in the EM market regarding next steps for Argentina and the impact of the decision on Argentine debt traded and its CDS implications if Argentina defaults on its existing debt obligations to 2005 and 2010 exchange bondholders. While the Second Circuit’s decision is stayed until the Supreme Court (SC) has reviewed whether or not it will hear Argentina’s appeals (and, most recently the SC has denied one of those appeals), there are still many interesting topics to explore. EMTA hosted Special Seminar panels of legal and other experts, who provided commentary and analysis on these topics.
New York Panel
The “Argentina and its Prospects for Supreme Court Review” Seminar in New York, with over 140 attendees, took place on Monday, September 16, 2013, at EMTA’s offices, and a cocktail reception followed the discussion. Puente sponsored the event, with additional support from Bingham McCutchen and Shearman & Sterling.
Bruce Wolfson (Bingham McCutchen) moderated the panel, which included Steven Froot (Boies, Schiller and Flexner), Robert Cohen (Dechert), Antonia Stolper (Shearman & Sterling), Marco Schnabl (Skadden, Arps, Slate, Meagher & Flom) and Richard Samp (Washington Legal Foundation).
Mr. Wolfson provided some background to the case, as well as a geo-political back-drop. Mr. Cohen informed the audience as to where the case stood procedurally, and in particular he distinguished the certiorari petition (cert) pending with the SC and the en banc hearing petition pending with the Second Circuit, as well as the SDNY March 5, 2012 injunction. He reiterated that the Second Circuit’s August 23, 2013 decision affirmed the lower court’s decision; therefore, the March 5 injunction prohibiting anyone from assisting Argentina in evading the lower court’s decision would apply to that decision. However, some of the panelists indicated that they would not be surprised if Argentina and/or the exchange bondholders attempted a “work-around” of some sort (although Mr. Schnabl suspected that Argentina would not jeopardize its position by antagonizing either the Second Circuit or the SC until they reached their decisions on the petitions, despite evidence to the contrary by Kirchner’s oratory for internal consumption). In the meantime, the plaintiffs are subject to a stay until the SC reviews Argentina’s petition for a review of the case. However, some panelists indicated that they would not be surprised if the plaintiffs attempted to enforce the lower court order in another court.
Mr. Froot stated that it was unlikely for anything of note to happen quickly in the courts in the next few months. Argentina must first obtain a decision on the petitions for rehearing and rehearing en banc filed by both Argentina and others before it can obtain cert on the August 23 Second Circuit opinion affirming the lower court’s ruling. While it is rare for there to be a grant of en banc review by the Second Circuit (especially since the August 23 opinion was unanimous, except for the standing issue, which converted the exchange bondholders’ appeal into an amicus brief), this case is exceptional in many ways and “hard facts make bad law”. Froot pointed out that, even if rehearing is denied, the process of briefing on the cert petitions can absorb several months, since Argentina’s petition would not be due for 90 days, and oppositions and replies normally occupy another 60 or more days before the Justices hold a conference to consider the petition.
Mr. Samp cleared up some of the confusion surrounding the SC’s consideration of Argentina’s petition for cert regarding the earlier, October 2012 Second Circuit ruling by describing the process – the significance of the SC’s decision to consider this petition at its September 30, 2013 conference, the possible outcomes and how will they be communicated, and the possible role that various organs of the United States government might play. He explained that the September 30 conference was a long conference (considering the many petitions for cert that accumulated over the SC’s Summer recess), and hence not a particularly good day to get one’s petition heard. If granted, the petitioner may be informed on October 1; if denied, possibly on October 7. Or, the SC may hold over its decision for future conferences or indefinitely. Any petition not acted upon by the end of January 2014 will not be heard until the 2014-2015 term. And, if the petition is granted, the stay continues until the SC rules (possibly not until Spring 2015). If the SC asks the Solicitor General (SG) for its opinion on whether to hear Argentina’s petition, the SG will need to start the time-consuming task of soliciting views within the US government. While the SG generally recommends that petitions be denied (since there are not as many good reasons to grant petitions), if it recommends a hearing, then the likelihood of the SC granting such hearing is approximately 50%.
Samp also stated that there was a low probability the Second Circuit would grant Argentina’s petition for re-hearing en banc, and that it is unlikely to decide anytime soon, given the polling of individual judges that is required prior to such a decision. And, because Argentina has no interest in moving the process any faster than absolutely necessary, it is likely that it will not file its cert petition until the 90th day after denial of the en banc request.
Froot elucidated the legal questions actually at issue currently before the courts. Since the SC is not interested in state law issues like contract interpretations, such as the meaning of pari passu (although Samp clarified that the SC has the authority to reinterpret state law), the two areas of interest are: (1) whether the injunctions violated the Foreign Sovereign Immunities Act (FSIA, a federal statute) by attempting to take the property of Argentina indirectly by means of an injunction where a direct order accomplishing the same result by attaching Argentina’s funds would not be permissible (and is unprecedented) and (2) whether the equitable relief granted by the district court’s injunctions (also a federal issue) should be permitted, given that only contractual money damages are at stake, and therefore a legal remedy (a direct order to pay) would redress the injury.
Wolfson reminded the panelists that the Second Circuit states in its August 23 order, as well as in a footnote to its October 2012 opinion, that it affirmed the SDNY’s holding that Argentina’s extraordinary behavior in this case breached the specific equal payment provisions of its contract with the hold-outs; rather than that pari passu requires ratable payment in all cases (and, therefore, that its decision would have limited precedential value), it held that the District Court did not abuse its discretion in granting equitable relief in the form of an injunction ordering ratable payment as a remedy for a breach of contract.
Cohen agreed that the SDNY and Second Circuit opinions may not be precedential due to the particularly bad behavior of the defendant in this case, while Schnabl was less convinced, claiming that there would be more hold-outs in future restructurings. Cohen also suggested that the recent Grenada case (in which the judge did not accept the plaintiff’s pari passu argument because Grenada did not claim that it will never pay its creditors, just that it could not afford to pay them) proves that the Argentine case may not be precedential and/or do harm to future restructurings.
Further enumerating federal law issues that the SC should consider, Froot stated that, in their amicus brief filed in support of Argentina’s first cert petition, the exchange bondholders also suggested that (1) the Griesa injunctions exceeded federal equitable power by punishing innocent parties by forcing Argentina to pay its other creditors as a condition of paying the exchange bondholders and (2) the exchange bondholders’ Fifth Amendment due process rights were violated because the federal government via the judiciary would be taking property from one private party to benefit another private party without any benefit to the public generally. This is illegitimate on its face and it is unlikely that the exchange bondholders will be compensated under the Fifth Amendment’s takings clause.
Ms. Stolper provided some insight into market reaction after the various decisions to date. The overall view of the sell-side was that Argentina did not intend to default on its obligations to the exchange bondholders; therefore, the market would not sell off its Argentine exposure. Moreover, customers of the sell-side are not particularly interested in helping hold-outs, so much of the discussion in those circles involves how the market will move forward. Clearly, the end of New York as a principal financial center is not near. Wolfson added that one does not need to choose another country for the contract’s governing law, simply changing the pari passu clause to a palatable provision for creditors and debtors should be sufficient.
Wolfson asked the panelists for their predictions on the following:
1. What is the likelihood that the Supreme Court will solicit the views of the Solicitor General? The responses ranged from relatively low (Stolper), to 30% or less (Schnabl and Samp, since the merits of the FSIA argument are not particularly strong, and there is no conflict among the Circuits), to 35% (Wolfson), to 70% (Froot, because of the IMF’s interest).
2. If the SC asks the SG to weigh in, what is the likelihood that the SG recommends granting cert? The responses ranged from very low (Stolper and Schabl), to 40% (Wolfson), to 50% (Samp, because of foreign policy considerations since the US did not file in support of the first cert petition, and it is an important issue), to 50-60% (Froot, but not necessarily for merit reasons).
3. If the SG recommends granting cert, what is the likelihood that the SC takes the case? The responses ranged from more likely than not (Wolfson and Samp), to better than 70% (Stolper), to 90% (Froot and Cohen).
4. If the SG does not recommend granting cert, what is the likelihood that the SC takes the case anyway? The responses ranged from zero (Schnabl), to 20% (Stolper and Cohen), to under 30% (Froot).
5. If the SC grants cert, what is the likelihood that it will rule in favor of Argentina? The responses ranged from definitely against Argentina (Cohen), to the SC will probably reject cert, but if it takes it, then it will lambast Argentina (Schnabl), to the Court of Appeals decision will be upheld (Stolper), to 10% that SC would reverse, which increases slightly if the US government files an amicus brief on the merits (since the SG is not likely to file on the merits) (Samp), to high because, if the case was sufficiently important to review, then the likelihood of reversal is very high (Froot).
London Panel
The “Argentina’s Prospects for U.S. Supreme Court Review” Seminar in London, with approximately 65 attendees, took place on Monday, September 30, 2013, at the Sofitel Saint James, and a cocktail reception followed the discussion. TPCG Group sponsored the event, with additional support from Allen & Overy, Credit Suisse and Shearman & Sterling.
Fernando Alvarez de la Viesca (TPCG Group Argentina-Uruguay) moderated the panel, which included Yannis Manuelides (Allen & Overy), Steven Froot (Boies, Schiller and Flexner), Casey Reckman (Credit Suisse), Julian Ku (Maurice A. Deane School of Law, Hofstra University) and Antonia Stolper (Shearman & Sterling).
Ms. Stolper provided some background on the case by describing the basic pari passu clause at issue under New York contract law, Judge Griesa’s SDNY opinion and injunction, the Second Circuit’s affirmation of the SDNY opinion after requesting more information on ratable payment and parties affected by the injunction, and Argentina’s petition to the SC for cert (which cert petition can be granted, denied or not responded to immediately if the SC requests the views of the SG). Argentina also petitioned the Second Circuit for rehearing and rehearing en banc of the August 2013 decision, and that decision could be announced anywhere from today until four or more months from now. The expectation is that it will be denied since the Second Circuit is notorious for denials. Cert to the SC can’t be filed until the Second Circuit decision is made on the rehearing request. Argentina has 90 days to file the cert and plaintiffs have 60 days to respond.
Prof. Ku explained that the SC has pure discretion on whether to accept cert, it does not have to provide a reason for denial, and usually it only grants cert on 1% of the petitions it receives (adjusting for prisoner petitions, it’s more like 4%). Reasons to grant cert include whether the lower courts are divided (not the case here) and whether there is an important question of federal law at issue that needs to be clarified (this is the closest standard that might fit Argentina’s case). The decision to solicit the SG’s views relates to whether the SC should hear the case, not the SC’s decision on the merits. If the SG’s views are requested and the SG recommends a hearing, it is 42 times more likely that the SC will grant cert, and it is a strong signal from the SC that it is interested in reviewing the case. The SG has to represent multiple Executive Branch departments, so it may take the SG four to six months to elicit a unified US position. Four out of nine Justices have to agree to grant cert.
Mr. Froot reminded the panelists that the SG filed a supporting petition, representing the Departments of Justice and State, as well as the US Treasury, in favor of Argentina when Argentina sought a rehearing of the October 2012 SDNY opinion. He then went on to provide a summary of the legal issues at stake (see New York Panel Summary).
Mr. Manuelides, in response to the question of what would happen if the Argentine case were brought before a UK court, posited that, in a sense, a similar case had already been brought in the UK a long time ago, eliciting similar arguments. In Kensington International v. Congo, the plaintiff also requested equitable relief for a violation of the pari passu clause. There too the debt (loans, not bonds) was purchased at a distressed price. While the UK judge had no problem finding that the debt was indeed owed to the plaintiff, it refused to grant equitable relief in part because it was likely to adversely affect third parties.
Manuelides discussed other relevant considerations before UK courts would grant equitable relief, such as the general principle that the court should have the ability to police and enforce the order and the specific principle deriving from the State Immunity Act 1978 that equitable relief could only be granted against a sovereign if there was express consent by the sovereign. Manuelides then considered the question of whether a final NY equitable relief order could be recognized and enforced in the UK and elsewhere in Europe. He noted that there was no “single recognition entry” in the EU, and recognition would have to be done on a country-by-country basis. Insofar as the UK was concerned, there was no precedent for the recognition of an equitable relief order, although some supporting non-binding precedent could be found in recent cases in Canada and Jersey. As a first step to such recognition, certain tests laid down by the State Immunity Act 1978 would have to be satisfied, but these are probably easily satisfied given the express and broad submission to jurisdiction and waiver of immunity language contained in the NY law governed bonds. Finally, Manuelides noted that the UK courts were more likely to follow a stricter “black-letter law” approach and leave policy to Parliament, as occurred in the cases brought against African countries where Parliament, through the Debt Relief (Developing Countries) Act 2010, put a limit on the amounts that creditors of Highly Indebted Poor Countries could recover.
Mr. Alvarez de la Viesca asked the panelists for their predictions on the following:
1. What is the likelihood that the SC will grant cert for Argentina’s first petition? Both Stolper and Froot said that the SC will likely deny cert for the case before it or ignore the petition until the second petition is submitted (which can’t be filed until there’s a decision from the Second Circuit on the rehearing petitions). Even if the Second Circuit denies rehearing on October 1 (which is unlikely, given that the Court took five months to decide the rehearing petitions last time), Argentina has 90 days to file its brief, and then there’s a 60-day window for plaintiffs’ opposition briefing and a 10-day reply period, which brings us beyond March 1, 2014, and the SC’s term ends in June, which makes it virtually impossible for the SC to hear the case during the 2013-2014 term. Therefore, the earliest the case could be briefed and argued if the SC grants cert would be the Fall of 2014 (and if the SG’s opinion is requested before a decision is made on cert, then possibly not until the Spring of 2015 or even later).
2. What is the likelihood that the SC will solicit the views of the SG? The responses ranged from relatively low because there are other, more important cases before the SC relating to Argentina, US representatives stated the IMF will not submit an amicus brief and the US government is not united on whether it wants to submit an amicus brief (Stolper), to 50% since the FSIA is involved (Ku), to 50% (Reckman, even though it’s more likely that the SC won’t hear the case at all), to 70% (Froot, because of the foreign relations issue with other countries, because France filed an amicus brief and because the case involves a substantial amount of money).
3. If the SC asks the SG to weigh in, what is the likelihood that the SG recommends granting cert? Most panelists thought the odds are high, especially if it takes only four Justices to ask for an SG opinion and four to grant cert (since it’s likely that Justice Sotomayor will recuse herself as she has in the past because of her relationship with President Kirchner).
4. If the SG does not recommend granting cert, what is the likelihood that the SC takes the case anyway? The responses ranged from zero (Stolper), to 20% (Froot, who learned that was the statistical right answer from the New York panel), to under 30% (Ku).
5. What is the likelihood that, if the SC grants cert, the merits of this case are argued and decided in the first half of 2015? Stolper responded that it’s highly likely, and pointed out that would be in the middle of the Argentine Presidential campaign, with elections scheduled for October 2015. Or, the case could end earlier, in the Spring of 2014, if the SC denies cert (Froot). It all depends on how long the rehearing process continues, whether the SC requests the SG’s views and how long the SG takes to respond (Ku).
In response to how Argentina and the market could respond to upcoming developments on the legal front, Ms. Reckman provided some political and economic context for Argentina today and looking ahead over the course of the SC process. Reckman also addressed in the London panel the final question that was left on the table in the New York panel: how would Argentina ultimately respond to an adverse outcome and where would that leave bondholders?
The base, most anticipated result is an adverse outcome for Argentina in 2014 or 2015. While there may be technical default risk, the political arena is positive since it’s unlikely that Kirchner will accumulate a majority of votes (which explains the current rally for Argentine bonds). If the legal case extends beyond 2014, Argentina can’t make future offers on the same terms as those for 2005 and 2010 bonds. Argentina has heavy maturities in 2015, and if the reserves can’t cover all of them, Argentina will need to be softer on its negotiations with the hold-outs. On a Plan B work-around (which Stolper, Froot and Ku thought unlikely, given the courts’ overall attitude toward Argentina and the March 5, 2012 order against evasive actions, which order is still in effect), there are risks and liquidity concerns related to swapping New York governed bonds for local law debt, and some investors may not be permitted to hold such local law bonds (although there seem to be many cross-over players from high yield and distressed debt). Reckman’s recommendation is market weight, with GDP warrants attractive, but they too may be impacted by the litigation.
Stolper advocated a much-needed global settlement (similar to the one in which Argentina was involved in 1991), given all of its outstanding judgments and attachments, as well as its continued need for more funds.
Update
Since the panel discussions, on October 7, the SC rejected Argentina’s petition for cert regarding the Second Circuit’s (first) October 2012 ruling; on October 10, Judge Griesa clarified that the March 5, 2012 anti-evasion Order remains in effect; on October 15, the plaintiffs filed a motion with the Second Circuit to vacate the Second Circuit’s stay; on October 25, Argentina and the exchange bondholders filed an opposition to such motion; on November 1, the Second Circuit denied the plaintiffs’ motion to vacate the stay until resolution of any cert petitions to the Supreme Court; and on November 18, the Second Circuit denied the rehearing and rehearing en banc petitions filed by Argentina, as well as the rehearing petitions filed by the various intervenors. Rumors abound about some form of negotiated settlement talks between Argentina and the hold-outs (and possibly the exchange bondholders), but at press time none of those rumors could be confirmed.
EMTA will continue to closely monitor developments in the on-going litigation against Argentina, and its members are encouraged to visit the Litigation area of EMTA’s website for the recent materials. As a reminder, EMTA continues to collect and post legal materials regarding EM sovereigns involved in disputes with creditors.
Relevant documents made available to the panel audiences can be located at http://www.emta.org/template.aspx?id=8289.
For more information, please contact Aviva Werner at awerner@emta.org.