(The opinions expressed here are those of Alison Frankel, a columnist for Reuters.)
By Alison Frankel
NEW YORK (Reuters) - Argentina’s contempt for the U.S. court system is not even debatable. Argentine officials have openly jeered at court orders enjoining them from making payments to bondholders who participated in Argentine sovereign debt restructurings without also paying more than $1.5 billion to hedge funds that hold defaulted bonds.
Argentina has run newspaper ads vowing not to capitulate, has attempted to bring an action against the United States at the International Court of Justice in The Hague and, most recently, pushed through legislation authorizing its government to replace BNY Mellon with a state-controlled bank in Buenos Aires as the exchange bond trustee, after BNY Mellon made clear that it would not process payments for fear of violating the U.S. injunctions.
Contempt, as it’s ordinarily defined, practically drips from the words of Argentine politicians when they talk about U.S. District Judge Thomas Griesa of Manhattan, who has presided over their standoff with the holdout hedge funds for nearly a decade.
Those funds, led by NML Capital and Aurelius Capital, asked Griesa on Wednesday to make Argentina’s contempt official. They filed a motion to hold the government in contempt and impose sanctions on it. Griesa has scheduled a hearing Monday on the motion.
This isn’t the first time that the funds have proposed a contempt finding after the U.S. Supreme Court refused in June to review the injunctions requiring Argentina to pay them.
So far, Griesa has delivered plenty of stern warnings to Argentina, via its lawyers at Cleary Gottlieb Steen & Hamilton, but hasn’t held the government in contempt, presumably in the hopes that court-ordered mediation would produce a settlement.
The hedge funds’ new motion argues that Griesa’s admonitions haven’t worked. Argentina has only cemented its defiance with the new legislation and followup newspaper ads billed as legal notices of its demand for BNY Mellon’s resignation as exchange bond trustee.
Sooner or later, unless Argentina changes course, Griesa is going to have to find that the country has violated court orders. Otherwise, he’ll be conceding that the federal court system must bow to the stubbornness of a foreign sovereign - even one that has voluntarily submitted to the jurisdiction of U.S. judges.
THE LIMITS OF U.S. COURTS As I’ve said before, Argentina’s intransigence has already exposed limits on the power of U.S. courts. The questions now for Griesa are whether he can impose sanctions on Argentina, and whether those sanctions can change Argentina’s behavior.
I‘m pretty sure the answer to the first question is yes. Argentina - and possibly the U.S. State Department - will argue otherwise, but there’s strong precedent that federal courts have the authority to impose sanctions on a foreign sovereign that violates their orders.
The Supreme Court’s latest discussion of the Foreign Sovereign Immunities Act - a ruling last June in a different case involving NML and Argentina, as it happens - strengthens arguments that the law doesn’t shield foreign sovereigns from sanctions.
The justices said that FSIA only protects foreign sovereigns from having their U.S. assets seized to satisfy a judgment against them and from submitting to the jurisdiction of U.S. courts.
The second protection is irrelevant in the Argentine bond litigation because Argentina granted jurisdiction; it has, of course, benefited mightily from the FSIA’s protection of its assets.
Under the Supreme Court’s holding, because FSIA doesn’t address contempt sanctions, it doesn’t shield foreign sovereigns from them.
THIRD PARTIES So let’s assume Griesa has the authority to find Argentina in contempt and to impose sanctions. What can those sanctions accomplish? The hedge funds’ brief proposes a daily fine of $50,000 and asks that Griesa order Argentina to pay some of their legal fees.
But even the hedge funds acknowledge that Argentina - which has a long history of thumbing its nose at U.S. judgments in litigation against the holdout hedge funds - isn’t going to pay those fines. If Griesa only issues monetary sanctions, he risks underscoring the federal courts’ ineffectuality over foreign sovereigns.
The hedge funds know that - which is why, in a footnote, they suggest that if Argentina ignores a court-ordered fine, Griesa “can then impose additional sanctions - including non-monetary sanctions.”
That could be the most important sentence in the brief.
Remember: The hedge funds were able to force Argentina into default because they persuaded Griesa, the 2nd U.S. Circuit Court of Appeals and the Supreme Court that the courts had the authority to block third parties - such as bond trustees BNY Mellon and Citigroup - from processing Argentina’s payments to exchange bondholders.
Institutions with operations in the United States don’t have Argentina’s foreign sovereign immunity, so they are much more reluctant to defy U.S. court orders.
If the hedge funds can convince Griesa to implicate third parties subject to U.S. jurisdiction in non-monetary penalties against Argentina, sanctions could be a real lever for Argentina’s debtors.
Argentina still depends to some extent on the U.S. financial system. What if, for instance, Griesa held that Argentina cannot process dollar transactions through U.S. banks? Or that its Central Bank cannot do business with the Federal Reserve? Argentina’s refusal to pay the hedge funds has withstood the country’s isolation from the market for sovereign debt. Can it withstand exile from U.S. finance?
This is all incredibly speculative, of course. There’s very little precedent on monetary sanctions against foreign sovereigns, and, as far as I can tell, no precedent at all on non-monetary sanctions. Even if the hedge funds sell Griesa on a punishment that will actually impact Argentina, Argentina will appeal all the way to the Supreme Court - which means years of litigation.
My guess is that the hedge funds’ lawyers are hoping to float potential sanctions that will scare Argentina into settlement talks. It’s a dim hope, but at least it’s something.
Reporting by Alison Frankel. Editing by Alexia Garamfalvi.