DAVID NEWFIELD – Since Argentina began the process of restructuring its debt on January 14, 2005, many complex and difficult legal issues involving the restructuring of sovereign debt have been debated and discussed. Possibly the most famous of these debates is the contested interpretation of the pari passu clause found in most sovereign debt contracts. On October 26, 2012, when the Second Circuit held in favor of the holdout investors, NML Capital, Argentina was effectively barred from repaying ninety-three percent of its creditors and eventually forced to default on its debt. In order to circumvent this incredible hardship, Argentina recently passed legislation to change the jurisdiction of its U.S. dollar-denominated bonds and thereby repay its creditors beyond the reach of the U.S. courts. This move led U.S. District Judge Thomas Griesa to hold Argentina in contempt of court and consequently to order various monetary sanctions. Incidentally, this was not the first time during the case at which Argentina threatened to disobey the Second Circuit’s order.
Functionally, it is unlikely that Argentinian assets in the U.S. will be seized, as such assets are protected under the federal Sovereign Immunities Act. In the Plaintiff’s Reply Memorandum in Further Support of their Motion to Hold The Republic in Civil Contempt and to Impose Sanctions, NML Capital argued that, despite the fact that the court may be unable to enforce its contempt order, there is no legally sufficient reason not to enter such an order. However, if such an order is unenforceable, what purpose does it serve, and is it effective?
Seemingly, the most apparent reason for holding a sovereign nation in contempt is the ensuing embarrassment. Being held in contempt by a foreign court is surely damaging to a nation’s sense of pride. Further, a contempt of court sanction reflects badly in the international investor community and may be severely damaging to the country’s economy. Reuters analyst Alison Frankel speculated that barring U.S. financial institutions from transacting with a certain recalcitrant nation may further augment these economic consequences.
Historically, contempt sanctions against sovereign nations have resulted in one of two outcomes. In 2011, the Democratic Republic of Congo was fined two million dollars for violating a court order regarding an arbitration dispute. The DRC later paid these fines after years of litigation. In contrast, in 2013, Russia was ordered to pay $50,000 per day for refusing to return cultural artifacts. Russia not only refused to pay the contempt sanctions, but also refused to participate in any further legal proceedings. Those particular contempt sanctions nearly resulted in a diplomatic crisis.
Argentina has not paid any fines yet, nor has it refused to further participate in legal proceedings. In all likelihood, Argentina will appeal the contempt sanctions. Such litigation may take years, as the case will almost certainly reach the Supreme Court. It will be years before we find out which of the two paths Argentina chooses.
