Allied Bank revisited?


Last Friday was the filing deadline set by (a rather irked) Judge Griesa for Argentina and interested third parties in that country's long-running battle with NML and other restructuring holdouts. NML's reply brief is due today, but it has already made clear that it wants to be paid in full (roughly $1.4 billion) and that it expects the district court's injunction to bind a lot of third parties, including the trustee for the exchange bondholders. The genius of NML's strategy is that it has found a way to enforce its claims without having to find and seize Argentine assets. (Not that it's afraid to seize an asset or two.) If the strategy works and can be used in other cases, it will have major policy implications.

Readers familiar with the sovereign debt markets may remember the Allied Bank litigation - a trilogy of opinions that launched the modern era of holdout litigation. The parallels between the Allied Bank case and this one are striking, right down to the identity of the district judge.

Allied Bank also involved litigation by holdouts, although the holdout there was a member of a commercial bank syndicate that filed suit in 1982 after Costa Rica suspended payments on its external debt. A primary question was whether the lawsuit was barred by the act of state doctrine, which prevents courts from hearing certain lawsuits that might interfere with foreign policy matters. Judge Griesa initially sided with Costa Rica and a panel of the Second Circuit affirmed. The decisions sent shock waves through the New York financial community, which feared the consequences for New York financial markets if US courts effectively declared sovereign debts unenforceable. The Second Circuit agreed to rehear the case and, persuaded by a US government amicus brief, it changed its mind. The appeals court sent the case back to Judge Griesa with instructions to enter judgment for the plaintiff.

Allied Bank let the holdout genie out of the bottle, but it really wasn't much of a genie. In a sense, the decision's significance was symbolic. New York courts signaled that they viewed sovereign debts as legally enforceable. But holdouts still had to chase sovereign assets around the globe if they actually wanted to get paid. And there was little evidence that the holdout litigation could threaten the viability of a sovereign's restructuring.

On the surface, there are striking parallels between Allied Bank and NML v. Argentina. Litigation by holdouts; the same district judge; a Second Circuit affirmance that has sent the financial community into a tizzy; a pending petition for rehearing; etc. The major difference is that in Allied Bank, the US government and most market participants supported the holdout. Here, the US government and most of the relevant third parties support Argentina - a pretty remarkable show of support for a country that has become one of the world's more brazen defaulters.  All of which highlights the rather large gap between (1) saying that sovereign debts are enforceable and (2) deciding just how to enforce them. On the first question, pretty much everyone agrees. On the second, not so much.