The Second Circuit has affirmed the injunctions against Argentina in NML Capital, Ltd. v. Republic of Argentina, a case that we have been following in this blog (see here and here), although the amended injunctions shall be stayed pending the resolution by the Supreme Court of a timely petition for a writ of certiorari.

Argentina had refused to pay certain holders of sovereign bonds issued under a 1994 Fiscal Agency Agreement (“FAA”). Argentina promised that, in the event of default, unpaid interest and principal would become due in full. Argentina promised to treat the FAA Bonds at least equally with its other external indebtedness. By defaulting on the Bonds and enacting legislation specifically forbidding future payment on them (the “Lock Law”), and continuing to pay interest on subsequently issued debt, Argentina breached its promise of equal treatment.

There are certain facts that the Court flagged in the opinion that may help understand the reasoning behind the decision. Basically, the Court stated that they invited Argentina to propose an alternative payment formula and schedule for the outstanding bonds to which it was prepared to commit. Instead, Argentina ignored the outstanding bonds and proposed an entirely new set of substitute bonds. Moreover, the Court added that, at the oral argument, counsel for Argentina told the panel that it “would not voluntarily obey” the district court’s injunctions, even if those injunctions were upheld by the Court. Further, the Court mentioned that Argentina’s officials had publicly and repeatedly announced their intention to defy any rulings of the Court and the district court with which they disagree, quoting Argentina’s Economy Minister (“Argentina isn’t going to change its position of not paying vulture funds . . . . We will continue to follow that policy despite any ruling that could come out of any jurisdiction, in this case New York.”) and relying on Argentina’s President’s statements, who criticized the “justice system” overseen by the Court, stating that it “evidently is unaware of its own legislation.”

Argentina argued that the amended injunctions violate the Foreign Sovereign Immunities Act (“FSIA”) by forcing Argentina to use resources that the statute protects. However, the Court thought otherwise, since the injunctions “do not attach, arrest, or execute upon any property” as proscribed by the statute. Rather, the injunctions allow Argentina to pay its FAA debts with whatever resources it likes. Absent further guidance from the Supreme Court, the Court remained convinced that the amended injunctions are consistent with the FSIA.

Additionally, the Court highlighted that the undisputed reason that plaintiffs are entitled immediately to 100% of the principal and interest on their debt is that the FAA guarantees acceleration of principal and interest in the event of default. The Court believed it was equitable for one creditor to receive what it bargained for, and is therefore entitled to, even if other creditors, when receiving what they bargained for, do not receive the same thing, due to the fact that the first creditor is differently situated from other creditors in terms of what is currently due to it under its contract. Thus, because English chancery courts traditionally had power to issue injunctions and order specific performance when no effective remedy was available at law, and given that the plaintiffs had, in the Court’s view, no adequate remedy at law because Argentina had made clear its intention to defy any money judgment issued by the Court (including passing the Lock Law), the Court was found empowered to afford equitable relief and direct the timing of that relief. Here, that timing required that it occur before or when Argentina next pays the Exchange Bondholders.

The Court further stated that the express terms of the FAA, as negotiated and agreed to by Argentina, the amount currently due on the FAA Bonds, as a consequence of its default, is the outstanding principal and accrued interest. The amended injunctions are not deemed unfair to bondholders who accepted the exchange between 2005 and 2010 because before accepting the exchange offers they were expressly warned by Argentina in the accompanying prospectus that there could be “no assurance” that litigation over the FAA Bonds would not “interfere with payments” under the Exchange Bonds.

Separately, the court disagreed that the amended injunctions’ application to financial system participants would violate the U.C.C.’s protections for intermediary banks because the district court had issued injunctions against no one except Argentina. Every injunction issued by a district court automatically forbids others—who are not directly enjoined but who act “in active concert or participation” with an enjoined party—from assisting in a violation of the injunction. In addition, payment system participants, ostensibly concerned about being sued for obeying the injunctions, apparently enjoy the protection of exculpatory clauses in their contracts.

Finally, Argentina warned that it may not be able to pay or that paying will cause problems in the Argentine economy, which could affect the global economy. The Court, however, stated that this was speculation, and that Argentina made no real argument that, to avoid defaulting on its other debt, it could not afford to service the defaulted debt, and failed to present the district court with any record evidence to support its assertions.