No. 13-990

IN THE

Supreme Court of the United States

REPUBLIC OF ARGENTINA,Petitioner,

—v.—

NML CAPITAL, LTD., ET AL.,Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATESCOURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF FOR THE REPUBLIC OF FRANCE AS

AMICUS CURIAE IN SUPPORT OF THE REPUBLIC OF

ARGENTINA’S PETITION FOR A WRIT OF CERTIORARI

d

Counsel for Amicus Curiae

March 24, 2014

DIANA BILLIK

ALLEN & OVERY LLP52 Avenue Hoche 75379 Paris Cedex 08France

ANDREW RHYS DAVIES

(Counsel of Record)MICHAEL F. WESTFAL

ALLEN & OVERY LLP1221 Avenue of the AmericasNew York, New York 10020(212) 610-6300andrew.rhys.davies@allenovery.com

TABLE OF CONTENTS

PAGE

TABLE OF AUTHORITIES....................................... ii

INTEREST OF THE AMICUS CURIAE................... 1

SUMMARY OF THE ARGUMENT............................ 4

ARGUMENT................................................................ 6

I. THE RATABLE PAYMENT INJUNCTIONAFFIRMED BY THE COURT OF APPEALSUPSETS WELL-SETTLED MARKETUNDERSTANDING................................................... 6

II. THE DECISION OF THE COURT OF APPEALSTHREATENS WIDER PUBLIC AND PRIVATEINTERESTS............................................................. 10

A. The Court Of Appeals’ Decision Will HaveA Global Impact............................................... 11

B. The Court Of Appeals’ Decision JeopardizesThe Ability Of Sovereign Debtors To AchieveOrderly And Negotiated RestructuringsOf Their External Debt...................................14

C. The Court Of Appeals’ Decision AlsoThreatens Sovereign Lending, ParticularlyDevelopment Aid In The Form Of LoansTo Developing Countries.................................19

D. Contrary To The Court Of Appeals’ View,Collective Action Clauses Do Not ResolveThe Problems Created By Its Ruling............. 21

CONCLUSION.......................................................... 24

i

TABLE OF AUTHORITIES

CASES PAGE

Export-Import Bank of the Republic of China v.Grenada, No. 13 Civ. 1450 (HB), 2013 WL4414875 (S.D.N.Y. Aug. 19, 2013) ........................18

NML Capital, Ltd., v. Republic of Argentina,699 F.3d 246 (2d Cir. 2012) ...........................passim

NML Capital, Ltd. v. Republic of Argentina,727 F.3d 230 (2d Cir. 2013).......................12, 13, 22

RULES

Sup. Ct. R. 37.2............................................................ 1

Sup. Ct. R. 37.6............................................................ 1

OTHER AUTHORITIES

Georges Affaki, Du Sens des mots et du bon sens:de la bonne interprétation de la clause paripassu [Of the meaning of words: of the properinterpretation of the pari passu clause],Mélanges Le Tourneau, Dalloz (2008) ...................8

Georges Affaki & Jean Stoufflet, Chronique deDroit Bancaire International, 101 Banque etdroit 81 (2005) .........................................................8

Michael Bradley & Mitu Gulati, Collective ActionClauses for the Eurozone, Review of Finance(2013) .....................................................................12

Brief of the United States of America as AmicusCuriae in Support of Reversal¸ NML Capital,(2d Cir. 2012) (No. 12-105)......................................7

ii

Jean-Pierre Buyle & Martine Delierneux, Contratsde crédit internationaux: clauses “pari passu” etégalité des créanciers [International credit agree-ments: pari passu clauses and equal treatmentof creditors] under Arrêt de la cour d’appel deBruxelles du 19 mars 2004, T.B.H.-R.D.C. 99(2006) .......................................................................9

Udaibir S. Das et al., Sovereign Debt Restructurings1950-2010: Literature Survey, Data, and StylizedFacts, International Monetary Fund WorkingPaper No. 12/203 (August 2012)...................passim

Financial Markets Law Committee, Analysis of therole, use and meaning of pari passu clauses insovereign loan obligations as a matter of Englishlaw (Mar. 1, 2005) ...................................................8

Anna Gelpern, Peterson Institute for InternationalEconomics, Sovereign Damage Control, PolicyBrief Number PB13-12 (2013)..............................21

G. Mitu Gulati & Kenneth N. Klee, SovereignPiracy, 56 Bus. Law. 635 (2001) ...................passim

International Monetary Fund, Eligibility ToUse The Fund’s Facilities For ConcessionalFinancing (Mar. 15, 2013) ....................................19

International Monetary Fund, Sovereign DebtRestructuring–Recent Developments andImplications for the Fund’s Legal and PolicyFramework (Apr. 26, 2013) ...........................passim

Joint Response Brief of Plaintiffs-Appellees NMLCapital, Ltd. and Olifant Fund, Ltd., NMLCapital (2d Cir. 2013) (No.12-105) .......................23

iii

Christoph Keller, Umschuldung von Staatsanleihenunter Berücksichtigung der Problematik einerAggregation aller Anleihegläubiger[Restructuring of sovereign bonds in particularin light of aggregation clauses affecting allbondholders], Die Reform des Schuldverschrei-bungsrechts [The reform of the German debtsecurities law] (2004) ..............................................9

Mauro Megliani, Debitori sovrani e obbligazionistisovrani, [Sovereign debt and sovereign bond-holders], 02 Diritto commerciale internazionale259 (2010) ................................................................9

Dr. Otto Palandt & Dr. Christian Grünberg,Bürgerliches Gesetzbuch (German Civil Code) §275, Note 3 (69th ed. 2010).....................................9

Dr. Christoph G. Paulus, Jüngste Entwicklungen imResolvenzrecht [Recent developments in the law ofresolvency], Wertpapiermitteilungen 489 (2013) .....9

Prof. Dr. Otto Sandrock, Griechenland und Zypernin der Finanzkrise: die Rechtsstellung ihrerprivaten Finanzinvestoren, Recht derInternationalen Wirtschaft 16 (2014) ....................9

Julian Schumacher et al., Sovereign Defaults inCourt: The Rise of Creditor Litigation 1976-2010(2013) .....................................................................16

Alexander Szodruch, Staateninsolvenz und privateGläubiger [State insolvency and private investors],Rechtsprobleme des Private Sector Involvementbei staatlichen Finanzkrisen im 21. Jahrhundert181 (2008) ................................................................9

Trésor Direction Générale, Encours des créances dela France sur les États étrangers au 31 décembre2011........................................................................20

iv

Horatia Muir Watt, Private International LawBeyond the Schism, 2(3) Transnational LegalTheory 347 (2011)..................................................17

W.M.C. Weidemaier, Sovereign debt after NML v.Argentina, 8(2) Capital Mkts. L. J. 123 (2013)........8

W.M.C. Weidemaier & Anna Gelpern, Injunctions inSovereign Debt Litigation (draft dated Nov. 15,2013) ......................................................................13

Philip R. Wood, Law and Practice of InternationalFinance 186 (1980)..................................................9

Philip R. Wood, Pari Passu Clauses—What Do TheyMean? Butterworths J. Int’l Banking and Fin. L.371 (2003) ................................................................8

Philip R. Wood QC (Hon), Sovereign insolvency: thebankruptcy ladder of priorities and the paripassu clause, Tijdschrift voor Financieel Recht,Nr. 3 maart 2012 ...................................................14

The World Bank, International Debt Statistics 2013(2013) ...............................................................12, 13

The World Bank,World Development IndicatorsData (2013)............................................................19

Alain Zenner & I. Peeters, L’opposabilité desgaranties conventionnelles permettant d’échapperau concours, [The enforceability of contractualguarantees to avoid competition among creditors],J.T. 865 (2004) ...................................................9, 10

Jeromin Zettelmeyer et al., The Greek DebtExchange: An Autopsy (Sept. 11, 2012)................23

v

INTEREST OF THE AMICUS CURIAE1

As an active and prominent participant in thefinancial community, the Republic of France has asubstantial interest in issues surrounding inter-national financial stability and global sovereignlending markets.

The Court of Appeals held that the Republic ofArgentina’s decision to pay only holders of theexchange bonds it issued but not holders of its oldbonds (among which are the plaintiffs) constituteda breach of the pari passu clause contained in theRepublic’s 1994 Fiscal Agency Agreement (the“FAA”). Based on that holding, the Court ofAppeals affirmed the issuance of an injunctionpursuant to which whenever Argentina pays anyamount due under the terms of the exchangebonds, it must concurrently, or in advance, make a“ratable payment” to the plaintiffs in respect ofthe old bonds. In France’s view, the Court ofAppeals’ ruling is based on an erroneous under-standing of the meaning of the pari passu clause,and contradicts the well-settled mainstream mar-ket understanding that a pari passu clause doesnot covenant that all payments will be made by aborrower ratably with the borrower’s other unsub-ordinated debts, but rather provides protectionagainst legal subordination of claims only.

1 Pursuant to Rules 37.2 and 37.6, counsel of recordfor all parties received timely notice of amicus curiae’sintention to file this brief. Amicus curiae files this brief withthe written consent of all parties, and copies of the parties’ con-sent letters have been filed. Amicus and its counsel statethat none of the parties to this case nor their counselauthored this brief in whole or in part, and that no personother than amicus or its counsel made a monetary contributionintended to fund the preparation or submission of this brief.

In upholding the injunction, the Court ofAppeals rendered a decision threatening interna-tional financial stability in various respects:

First, the pari passu clause is a market-stan-dard clause that is used in virtually all sovereignbonds, a large proportion of which are governedby the laws of the State of New York. The injunc-tion that the Court of Appeals affirmed to enforceits interpretation of the pari passu clause doesnot conform with the well-settled expectations ofthe sovereign debt markets, and accordinglythreatens substantial uncertainty and harm inthose markets.

Second, France wishes to draw the Court’sattention to the adverse consequences that theCourt of Appeals’ decision will have on the abilityof sovereign debtors to engage in orderly andnegotiated debt restructuring to prevent defaultwhen the sovereign’s debt has been deemed unsus-tainable. The decision grants a veto right to hold-out creditors over both a sovereign’s voluntaryrestructuring and future payments on restruc-tured obligations. France has extensive experiencein sovereign debt-related issues through its partic-ipation in the Paris Club, an informal group ofsovereign creditors that deals with the restructur-ing of official—i.e., intergovernmental—debt.2

2

2 The Paris Club is comprised of nineteen permanentmember states, which, in addition to the United Statesand France, include Australia, Austria, Belgium, Canada,Denmark, Finland, Germany, Ireland, Italy, Japan, TheNetherlands, Norway, The Russian Federation, Spain,Sweden, Switzerland, and the United Kingdom. Other officialsector creditors may also actively participate in Paris Clubnegotiations, subject to the agreement of permanent mem-bers and of the sovereign debtor. The International Monetary

Although it does not speak here on behalf of theParis Club, France, as a long-standing and activemember, has participated in the development andapplication of the Paris Club’s principles guidingorderly sovereign restructurings since 1956.3

Third, France has a practical concern with theeffects of enforcing a pari passu clause as thoughit were a ratable payment clause—effectively pre-venting other creditors and their financial inter-mediaries from recovering due claims. Franceholds significant exposure to sovereign borrowers,particularly to developing countries, as part of itsofficial development aid. The Court of Appeals’interpretation of the pari passu clause and itsaffirmance of the injunctive remedy crafted toenforce that interpretation will have a deleteriouseffect on the ability of borrower nations to honortheir financial commitments to internationallenders, including France.

France strongly supports the fair treatment ofcreditors by borrowers and it does not intervene insupport of Argentina’s repayment decisions.Moreover, France considers that Argentina shouldnormalize its relations with all of its creditors,both public and private. Nonetheless, because theCourt of Appeals’ decision threatens wider societaland economic harm, France supports Argentina’spetition for a writ of certiorari.

3

Fund (“IMF”) and the World Bank are represented at theParis Club’s monthly meetings and attend negotiations asobservers.

3 Since 1956, the Paris Club has reached 429 agreementswith 90 sovereign debtors for a total amount of more than $570billion of restructured sovereign debt. See Club de Paris,http://www.clubdeparis.org (last visited March 24, 2014) (everywebsite cited in this brief was last visited on March 24, 2014).

SUMMARY OF THE ARGUMENT

In its petition, Argentina posits that the Courtof Appeals’ decision raises issues that are of criti-cal importance to sovereigns and their creditors,including to creditors that hold restructuredsovereign debt. See Petition for Writ of Certiorariat 18, 32-36. This brief is respectfully submitted toexplain why France believes that position to becorrect, and to outline for this Court the harmfulimpact that the Court of Appeals’ decision couldhave on sovereign debt markets.

The Court of Appeals’ decision is based on anerroneous interpretation of a market-standardclause that appears in virtually all sovereignbonds. In misinterpreting the pari passu clause asentitling any creditor to a ratable payment when-ever any other creditor is paid, the Court ofAppeals disregarded a well-established marketunderstanding that the clause merely providesprotection against legal subordination of claims.

If upheld, the injunctive remedy affirmed bythe Court of Appeals on the basis of this ill-founded interpretation threatens significantglobal harm to various public and private inter-ests. It also would disrupt the established practiceof orderly sovereign debt restructurings, in whichFrance has acquired extensive experience as anactive participant in the Paris Club. In particular,the injunctive remedy threatens to upset the com-plex balance of interests between sovereigndebtors and their creditors, sovereign lenders,bank lenders and bondholders that is generallyachieved in a voluntary and orderly restructuringprocess.

4

This balance is disturbed by the powerfulincentive that the injunctive remedy provides forhold-out creditors to forgo participation in volun-tary restructuring and instead to enforce full pay-ment of their debt against an already distressedsovereign debtor. The Court of Appeals’ decisionwill inevitably lead to an increase in the numberof hold-out creditors, including so-called “vulturefunds,” that will seek to leverage the Court ofAppeals’ decision in future restructurings. Othercreditors, including sovereign and private sectorlenders that would have otherwise participated ina restructuring may choose not to as long as anypayment on the restructured debt could be condi-tioned on a ratable payment to the hold-out credi-tors. Consequently, such lenders may also be lesswilling to extend loans to sovereign debtors in thefirst place.

Finally, although the Court of Appeals believedthat the threat posed by the injunctive remedywould no longer be relevant in light of collectiveaction clauses that are increasingly included insovereign bond issuances, France respectfully sub-mits that such clauses cannot and will not in factobviate the significant harms outlined above.

5

ARGUMENT

I. THE RATABLE PAYMENT INJUNCTIONAFFIRMED BY THE COURT OF APPEALSUPSETS WELL-SETTLED MARKETUNDERSTANDING

The pari passu clause appears in virtually allsovereign bonds. The form of the clause includedin Argentina’s defaulted bonds follows one of themarket-standard variants. In relevant part, thepari passu clause provides that:

The Securities will constitute . . . direct,unconditional, unsecured and unsubordi-nated obligations of the Republic and shallat all times rank pari passu and withoutany preference amongst themselves. Thepayment obligations of the Republic underthe Securities shall at all times rank atleast equally with all its other present andfuture unsecured and unsubordinatedExternal Indebtedness.

App. 198 (FAA at 2).

The clause does not have the unequivocal andstraightforward meaning assigned to it by theCourt of Appeals, that any payment to a givencreditor should be made conditional upon equiva-lent, pro rata payments made to other creditorsirrespective of their status or participation in pre-vious agreements. The Court of Appeals’ analysisignored the well-settled market understandingthat pari passu clauses are not ratable paymentclauses. See G. Mitu Gulati & Kenneth N. Klee,Sovereign Piracy , 56 Bus. Law. 635, 637, 640(2001) (interpretation of the pari passu clause inthe sovereign context is subject to disagreement

6

but there is a well-established, “clear” interpreta-tion that is not one of a ratable payments clause).

Indeed, France respectfully submits that partic-ular attention should be paid to the longstandingand well-established practices of public and privateactors in the sovereign bond markets with respectto the interpretation of the clause, which is quitedifferent from that articulated by the Court ofAppeals. The market understanding of a pari passuclause—most of which are drafted as a variant ofthe clause appearing in Argentina’s defaultedbonds—is that it is a legal ranking covenant,intended to ensure that the borrower’s obligationswill rank equally in right of payment among eachother, within a particular series of bonds, and withall of the sovereign borrower’s other unsubordi-nated external indebtedness. See Brief of theUnited States of America as Amicus Curiae inSupport of Reversal at 5, 13-17, NML Capital, Ltd.,v. Rep. of Argentina, 699 F.3d 246 (2d Cir. 2012)(No. 12-105), ECF No. 238 (The district court’sinterpretation of the pari passu clause “deviate[d]from decades of settled market expectations.”). Theinternational capital markets and the major partic-ipants in those markets, including France, do notinterpret the pari passu clause as a covenant thatwould condition certain creditors’ receipt of pay-ments to which they are entitled on the debtor’swillingness and ability to pay other creditors.

Consistent with this well-settled understand-ing of the meaning of the clause, sovereigns havehistorically restructured their debt through volun-tary, contract-based approaches, without any sug-gestion that, after entering into a comprehensiverestructuring with their creditors, the pari passu

7

clause would prohibit them from paying participat-ing creditors unless they made ratable payments tohold-outs.4 Through its extensive participation insovereign bond markets, and the periodic restruc-turings historically inherent in that market,France can attest that this standard process ofsovereign debt restructuring has never beenunderstood as a violation of the pari passu clause.

Beyond New York and English law,5 this inter-pretation of the pari passu clause is supported bynumerous commentators in the civil law jurisdic-tions of Europe. French legal authorities insistthat a contrary interpretation of the pari passuclause, such as that espoused by the Court ofAppeals is both “difficult to admit” and “lackingsupport as much as from the practice of financialcredits as from doctrinal thoughts.”6 Likewise,German and Italian legal doctrine sides with the

8

4 See W.M.C. Weidemaier, Sovereign debt after NML vArgentina, 8(2) Capital Mkts. L. J. 123, 127 (2013); Gulati &Klee, Sovereign Piracy, at 637.

5 Philip R. Wood, Pari Passu Clauses—What Do TheyMean?, Butterworths J. Int’l Banking and Fin. L. 371(2003). See also Financial Markets Law Committee, Analy-sis of the role, use and meaning of pari passu clauses insovereign loan obligations as a matter of English law(March 1, 2005) at 22, available at http://www.fmlc.org/Pages/papers.aspx (“[A]s a matter of English law theranking interpretation is the proper interpretation of thepari passu clause in sovereign debt obligations.”); Weide-maier, Sovereign debt after NML v Argentina, at 126-27.

6 Georges Affaki, Du Sens des mots et du bon sens: dela bonne interprétation de la clause pari passu [Of themeaning of words: of the proper interpretation of the paripassu clause], Mélanges Le Tourneau, Dalloz 2008, at 1-24(the quotation is a translation from French); see also GeorgesAffaki & Jean Stoufflet, Chronique de Droit BancaireInternational, 101 Banque et droit 81-90 (2005).

interpretation of the sovereign pari passu clauseas a legal ranking clause.7 When a Belgian courterred in interpreting the pari passu clause in thesame manner as the Court of Appeals, the Belgianlegislature clarified the position in accordancewith Belgian legal doctrine and market under-standing.8 In light of these considerations, one

9

7 For German doctrine, see Prof. Dr. Otto Sandrock,Griechenland und Zypern in der Finanzkrise: dieRechtsstellung ihrer privaten Finanzinvestoren, Recht derInternationalen Wirtschaft 16-33 (2014); Alexander Szo-druch, Staateninsolvenz und private Gläubiger [Stateinsolvency and private investors], Rechtsprobleme des Pri-vate Sector Involvement bei staatlichen Finanzkrisen im21. Jahrhundert 181-88 (2008); Dr. Christoph G. Paulus,Jüngste Entwicklungen im Resolvenzrecht [Recent devel-opments in the law of resolvency], Wertpapiermitteilungen489 (2013); Christoph Keller, Umschuldung von Staatsan-leihen unter Berücksichtigung der Problematik einerAggregation aller Anleihegläubiger [Restructuring ofsovereign bonds in particular in light of aggregationclauses affecting all bondholders], Die Reform des Schuld-verschreibungsrechts [The reform of the German debtsecurities law] 161-162 (2004); Dr. Otto Palandt & Dr.Christian Grünberg, Bürgerliches Gesetzbuch (GermanCivil Code) § 275, Note 3 (69th ed. 2010); Szodruch,Staateninsolvenz und private Gläubiger at 183-85 (citingamong others Philip R. Wood, Law and Practice of Interna-tional Finance 186 (1980)); for Italy, see Mauro Megliani,Debitori sovrani e obbligazionisti sovrani [Sovereign debtand sovereign bondholders], 02 Diritto commerciale inter-nazionale 259 (2010).

8 See note from Jean-Pierre Buyle & MartineDelierneux, Contrats de crédit internationaux: clauses “paripassu” et égalité des créanciers [International creditagreements: pari passu clauses and equal treatment ofcreditors] under Arrêt de la cour d’appel de Bruxelles du 19mars 2004, T.B.H.-R.D.C. 99-105 (2006); Alain Zenner &I. Peeters, L’opposabilité des garanties conventionnellespermettant d’échapper au concours [The enforceability of

must wonder why a rational sovereign debtorwould willingly introduce ex ante a pari passuclause into its sovereign contracts if, as in theCourt of Appeals’ interpretation, it so significantlyconstrained the way it services its debt, especiallyin a distress situation. See Gulati & Klee,Sovereign Piracy, at 642 (if read as a ratable pay-ment obligation, the pari passu clause gives poten-tial hold-outs significant leverage, a power thatsovereigns are not likely to have bargained to giveaway ex ante).

The analysis of the Court of Appeals might pos-sibly have been justifiable if, instead of a paripassu clause, the Court had been considering amost favored debt clause requiring ratable pay-ments between creditors. Such clauses are notunknown to the financial markets, yet did notappear in the Argentinian bonds at issue in thiscase, and, indeed, are essentially absent frommost sovereign bond issuances.

II. THE DECISION OF THE COURT OFAPPEALS THREATENS WIDER PUBLICAND PRIVATE INTERESTS

As Argentina sets forth in its petition for cer-tiorari, this case raises systemically important

10

Contractual guarantees to avoid competition among credi-tors], J.T. 865-873 (2004). France disagrees with the viewexpressed by the Court of Appeals of Brussels in the ordergranted to Elliot Associates, L.P., in 2000 in connectionwith Peru’s debt restructuring. See Elliott Assocs., L.P.,General Docket No. 2000/QR/92 (Court of Appeals of Brus-sels, 8th Chamber, Sept. 26, 2000). In that order, theCourt did not reference market understanding of the paripassu clause—virtually identical to that at issue inArgentina’s bonds—in applying it as a ratable paymentsclause. Gulati & Klee, Sovereign Piracy, at 638.

issues that merit this Court’s review. Unlike per-haps any other error of contractual interpretation,the Court of Appeals’ error imperils a variety ofpublic and private interests, not least of which arethose of sovereign debtors and their creditors,including state lenders and their citizens. By pro-viding strong disincentives to creditors to partici-pate in orderly sovereign debt restructurings, theCourt of Appeals’ decision impedes the ability ofdistressed sovereign debtors to restructure theirdebt when necessary, threatening the stability ofthe sovereign debt markets themselves. Pet. at 1-3,6-8, 18, 31-36. In light of the Court of Appeals’apparent disregard of these issues, Francerespectfully submits this Brief to provide thisCourt its perspective on these grave concerns.

A. The Court Of Appeals’ Decision WillHave A Global Impact

This case is not only about the named plaintiffsand Argentina. To the contrary, the Court ofAppeals’ decision, if upheld, will have a globalimpact. New York law is so widely utilized inglobal finance that it is no exaggeration to charac-terize it as an international public utility. Itapplies in a large proportion of outstanding stock offoreign law-governed sovereign bonds, followed byEnglish law. For example, as of March 2009, out ofa total of $411 billion of emerging market sovereignbonds, New York law governed a total outstandingamount of $272 billion. See Udaibir S. Das et al.,Sovereign Debt Restructurings 1950-2010:Literature Survey, Data, and Stylized Facts ,International Monetary Fund Working Paper No.12/203 (August 2012) at 41, available at http://www.un.org/esa/ffd/ecosoc/debt/2013/IMF_wp12_203.pdf.

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Between 1990 and 2011, almost 500 sovereignbonds were issued under New York law by 55 dif-ferent countries. See Michael Bradley & MituGulati, Collective Action Clauses for the Eurozone,Review of Finance (2013), at 13-14.

As a result, the Court of Appeals’ decision willconstitute a precedent in numerous cases involv-ing alleged breaches of pari passu clauses andNew York law, possibly making it less appealing toissue sovereign bonds under New York law if theinterpretation of what used to be “mutually agree-able terms” faces ex post legal challenge. See NMLCapital, Ltd. v. Rep. of Argentina, 727 F.3d 230,248 (2d Cir. 2013).

The reach of the Court of Appeals’ decision is sowide that it may also impact creditors whosebonds are not governed by New York law. If, forexample, a sovereign borrower has bonds governedby New York law and also has bonds governed byanother foreign law, then, following the Court ofAppeals’ decision, a court could condition pay-ments of bonds governed by the foreign law uponthe making of ratable payments on the New Yorklaw-governed bonds. The rights of investors hold-ing bonds governed by a different law wouldthereby be affected by the injunctive remedyupheld by the Court of Appeals on the basis of aNew York law-governed contract to which suchinvestors are not a party.

This decision may also impact official bilateralloans contracted by a sovereign if it has a mix ofbond, bank and official bilateral borrowing—as domany sovereigns. See The World Bank, InternationalDebt Statistics 2013 (2013) at 24-29, available athttps://openknowledge.worldbank.org/bitstream

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/handle/10986/12226/NonAsciiFileName0.pdf? Themere existence of a New York law-governed bondamong a sovereign’s borrowing structure mayexpose payments under its loans to the Court ofAppeals’ injunctive remedy if the bonds include acommon pari passu clause that links the rankingof payments on loans and bonds within the scopeof the sovereign’s external indebtedness.

Further, the unique significance of the injunc-tive remedy approved by the Court of Appeals is itsexpress impact on private non-parties that form thebackbone of the international payments system.The injunction threatens a wide range of privateparties with contempt of court if they honor theirobligations, whether as agents, participants in thepayment chain or custodians. See NML Capital,727 F.3d at 243-45; App. 117 (NML Capital, Ltd.v. Rep. of Argentina, Case No. 08-civ-6978 (TPG),Amended February 23, 2012 Order, at 5-6 (S.D.N.Y.Nov. 21, 2012) (ECF No. 425)); see W. Mark C.Weidemaier & Anna Gelpern, Injunctions inSovereign Debt Litigation (draft dated Nov. 15,2013), available at http:/ /scholarship.law.georgetown.edu/facpub/1319 (discussing injunctionsas a remedy in sovereign debt litigation and theirimpact on third parties). Many of these entities areoutside the United States and certain of them aresystemically important entities, central to theglobal payment and securities clearing systems. Itis curious that in seeking to enforce payment rightsof a subset of creditors, the Court of Appeals wouldbe willing to risk settlement and payment finalityin the global payments and clearing systems, a sys-temic utility in the global financial system. In anera of global financial system fragility, this seems aheavy burden on a key utility.

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In light of the reach that its decision will haveand the hundreds of billions of U.S. dollars atstake globally, the Court of Appeals did not cor-rectly address the public interest implications ofits decision, resulting in a ruling that may exacer-bate sovereign debt crises and in turn threateninternational financial stability.

B. The Court Of Appeals’ DecisionJeopardizes The Ability Of SovereignDebtors To Achieve Orderly And Nego-tiated Restructurings Of Their Exter-nal Debt

There is no international bankruptcy law toguide the restructuring of a distressed sovereign,as there is for a corporation. Sovereigns cannot beliquidated, their assets cannot be distributed tocreditors in accordance with a bankruptcy ladderof priorities, and restructuring terms cannot beenforced by a court or supranational regulatoryauthority.9 Absent any sovereign bankruptcyregime, voluntary contract-based mechanismshave evolved based on accepted practices amongparticipants. See Das et al. , at 12-30, for anoverview of the sovereign debt restructuring pro-cess. Broadly, these participants are sovereignlenders (primarily in the context of the ParisClub), bank lenders (often working through orga-nized creditor committees, and referred to as theLondon Club) and bondholders. Modern sovereignrestructuring depends on coordination, close dia-logue and fair negotiations among all creditorsand the sovereign debtor.

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9 Philip R. Wood QC (Hon), Sovereign insolvency: thebankruptcy ladder of priorities and the pari passu clause,Tijdschrift voor Financieel Recht, Nr. 3 maart 2012, at 60.

Sovereign debt restructurings remain a trau-matic undertaking for the debtor. They are gener-al ly used only as a last resort , given theirinherent economic and social costs. However,when deemed necessary, they should be carriedout quickly and efficiently in order to prevent suchcosts from escalating further and to restore debtsustainability. See International Monetary Fund,Sovereign Debt Restructuring–Recent Develop-ments and Implications for the Fund’s Legal andPolicy Framework (April 26, 2013) at 15-27, avail-able at http://www.imf.org/external/np/pp/eng/2013/042613.pdf (hereinafter, the “IMF Report”).

The voluntary contract-based mechanism avail-able to a debtor is complex and informed bydecades of historical development, its effectivenessdriven by a subtle balancing of interests. Thismechanism can be rendered ineffective by theslightest shift in incentives to participants.

The Court of Appeals’ remedy is a fundamentalshift in the incentives to bondholders not to partici-pate in a restructuring: if it stands, it will raise sig-nificant obstacles to good-faith negotiations andvoluntary sovereign debt restructurings preciselybecause it grants disproportionate power to a smallgroup of hold-out bondholders, to the detriment ofthe majority of bondholders, in the event of asovereign debt crisis. In this case, less than eightpercent of Argentina’s pre-2001 foreign bonds areheld by the plaintiffs, while approximately ninety-two percent of Argentina’s bondholders participatedin its two exchange offers. See NML Capital, Ltd., v.Rep. of Argentina, 699 F.3d 246, 253 (2d Cir. 2012).

Often, once a sovereign borrower is known tobe in financial difficulty, distressed debt investors

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purchase bonds from their original holders, eithershortly before or after the debt restructuringtakes place. In this case, the Court of Appealsnoted that plaintiffs had bought their defaultedbonds as recently as June 2010, i.e., almost nineyears after Argentina’s default. See id. at 251.

Some investors, known as “vulture funds,” pur-chase distressed sovereign debt obligations in thesecondary markets at deep discount to their facevalue with the intent of blocking voluntaryrestructuring of particular classes of debt obliga-tions and also blocking broader debt restructuringcarried out through cooperative processes as ameans of last resort to restore debt sustainabil-ity.10 They deliberately adopt a non-cooperativestance during the restructuring process by bring-ing enforcement actions or seeking out-of-courtsettlements on their claims.

The rights of the majority of creditors would bebetter protected by eliminating any kind of unfairleverage. Instead, hold-outs’ leverage is strength-ened by the Court of Appeals’ misinterpretation ofthe pari passu clause as imposing a “ratable pay-ment” obligation, where any payment to a restruc-tured creditor made in full (if on a single interestmaturity) calls for the full payment of acceleratedcapital and interest due to hold-outs.

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10 See generally Julian Schumacher et al., SovereignDefaults in Court: The Rise of Creditor Litigation 1976-2010 (2013) at 3, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2189997 (“Vulture” funds haveaccounted for nearly ninety percent of all cases insovereign debt litigation, and are “particularly likely toinitiate legal disputes against Highly Indebted PoorCountries (HIPCs). Of the twenty cases filed againstHIPCs, thirteen were filed by ‘vultures.’ ”).

Prior to the Court of Appeals’ decision, the lever-age of hold-out creditors over sovereigns’ restruc-turing efforts had indeed been limited. IMF Reportat 31. However, the Court of Appeals has grantedhold-out creditors a powerful means of extractingfull payment on the non-restructured debt of theborrower. Hold-out creditors thus have the leverageof seeking the injunctive remedy affirmed by theCourt of Appeals and thereby blocking paymentsdue to other creditors who voluntarily took part inthe restructuring, to the detriment of the interestsof the sovereign debtor and of those other creditors.Id . ; see also Horatia Muir Watt, PrivateInternational Law Beyond the Schism , 2(3)Transnational Legal Theory 347-427 (2011) (dis-cussing the disruptive effect on sovereign fundingof a private international law framework thatempowers vulture fund hold-out creditors to seekenforcement against debtor states on the basis oferroneous interpretations of pari passu clauses asratable payment clauses, without political account-ability); Das et al., at 50 (describing vulture funds).

The legal enforcement advantages conferred tocreditors who refuse any restructuring effort, nomatter how small their holding of un-restructureddebt, are potentially enormous. The Court ofAppeals ’ empowerment of hold-out creditorsthrough injunctive relief, if upheld, will representa strong disincentive to any future sovereign debtrestructurings: it will have a chilling effect oncreditors’ willingness to grant concessions in orderto faci l i tate voluntary and negotiated debtrestructurings as a means of last resort.11 Privatecreditors in particular, who otherwise would be

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11 The injunctive remedy upheld by the Court ofAppeals has already been relied upon by plaintiffs in

prepared to accede to a restructuring, may thus bediscouraged from participating if they believe thathold-out creditors may block payments on thedebtors’ restructured obligations and thereforerefrain from participating in the restructuring.

Finally, it is also worth recalling that the ParisClub, as a pivotal actor in orderly sovereign debtcrisis resolution, provides each sovereign creditorparticipating in a restructuring with guidelinesthat form the basis of subsequent legally bindingbilateral agreements. Notably, Paris Club agreedminutes include a “comparability of treatment”clause, which aims specifically to ensure balancedtreatment of the sovereign’s debt and fair burden-sharing among all external creditors—sovereignlenders, bank lenders and bondholders. As a gen-eral rule, the principle of comparability of treat-ment incorporated in the Paris Club agreedminutes is a crucial touchstone for catalyzing theeffective coordination of private creditors andthereby enabling effect ive, fair and orderlyrestructurings that will allow the sovereign toattain its objective of debt sustainability and meetpayment obligations to all its cooperating credi-tors. Furthermore, as a matter of equality of treat-ment, this clause is designed to ensure that claimsof official creditors (and ultimately of taxpayers inthe lender countries; for example, U.S. or Frenchtaxpayers) are not subordinated to those of other,private-sector creditors. Crucially, it facilitatesfair burden-sharing among sovereign creditors.

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other pending cases. See, e.g., Export-Import Bank of theRepublic of China v. Grenada, No. 13 Civ. 1450 (HB), 2013WL 4414875, at *1-3 (S.D.N.Y. Aug. 19, 2013) (denyingGrenada’s motion to dismiss lender ’s action for injunctiverelief based on breach of pari passu clause).

If private creditors are incentivized not to par-ticipate in sovereign debt restructuring, bilat-eral off ic ial creditors—and, therefore, theirtaxpayers—will bear an outsized share of theresulting debt relief burden. As a result, sovereignlenders will be less willing to grant debt relief,resulting in adverse consequences on broader offi-cial sector participation in aiding low-incomecountries in economic distress.

C. The Court Of Appeals’ Decision AlsoThreatens Sovereign Lending, Partic-ularly Development Aid In The FormOf Loans To Developing Countries

Although private funding, notably in the form ofbonds, is a growing source of financing forsovereigns, financing by sovereigns remains a largecomponent of international financial flows, and is ofparticular relevance for the most vulnerable coun-tries, notably for the 72 countries eligible to use theconcessional financing window of the IMF.12 Indeed,while private funding for the most vulnerable coun-tries amounted to less than 10% of the total exter-nal public and publicly-guaranteed debt stock ofthese countries as of 2011, bilateral sovereign loansaccounted for close to 40%. In addition, sovereignbilateral disbursements represent a steady share ofnew external financing for these countries, at morethan 35% of total disbursements in 2011.13

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12 See International Monetary Fund, Eligibility To UseThe Fund’s Facilities For Concessional Financing (March15, 2013), available at https://www.imf.org/external/np/pp/eng/2013/031813a.pdf.

13 Percentages calculated based on World Bank, WorldDevelopment Indicators Data, available at http://data.worldbank.org/data-catalog/world-development-indicators.

France is a major participant in this fundingmarket and ranks among the largest lenders tolow-income countries. As of December 31, 2011,France had a total exposure of EUR 7 billion( including outstanding principal , overdueamounts, and penalty interest but excluding guar-antees not called) to the 72 countries eligible touse the IMF’s concessional financing window. Asof the same date, France’s total exposure to morethan 100 sovereign debtors amounted to EUR 36billion. See Trésor Direction Générale, Encours descréances de la France sur les États étrangers au 31décembre 2011, available at https://www.tresor.economie.gouv.fr/5597_Encours-des-créances-de- la-France-sur- les-Etats-etrangers-au-31-decembre-2011. These lending decisions are madeon the assumption that loans will be repaid by theborrower. In line with customary banking practice,France assesses the probability of default and lossgiven default in connection with these loans.Expectations relating to any restructuring thatmight arise in the future are based on an assumedorderly sovereign debt restructuring, in the con-text of an appropriate international forum, includ-ing the Paris Club, just as expectations relating toa private borrower would be assessed in light ofcorporate bankruptcy law.

The injunctive remedy upheld by the Court ofAppeals, if it stands, will increase significantlythe risk of default on bilateral sovereign loansextended by sovereign lenders. For France, as wellas other sovereign lenders, the effects of the Courtof Appeals’ decision could therefore have a majorimpact on its policy of development aid in the formof loans. The heightened risk of default on bilat-eral sovereign loans extended by France, as a

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result of impediments to orderly sovereignrestructuring, would adversely affect the externalfinancing of sovereign borrowers, and of low-income countries in particular. Indeed, the combi-nation of a heightened risk of default with a lowerprobability of repayment could lead to a reductionin international capital flows and eventually to anincrease in the cost for borrowers of external loansdriven by a higher cost of risk. See Anna Gelpern,Peterson Institute for International Economics,Sovereign Damage Control, Policy Brief NumberPB13-12, at 12 (2013) (“Until the standards areclear, creditors may attach the same litigation riskpremium to both, lending the good apple too littleand the bad apple too much.”).

D. Contrary To The Court Of Appeals’View, Collective Action Clauses DoNot Resolve The Problems CreatedBy Its Ruling

The Court of Appeals mistakenly determinedthat collective action clauses “effectively eliminatethe possibility of ‘hold-out’ litigation,” and that,therefore, the deleterious effects of its decision—thus implicitly acknowledged by the Court itself—would not impact future sovereign restructuringsbecause most sovereign bonds now contain suchclauses. See NML Capital, 699 F.3d at 264. To thecontrary, the Court of Appeals’ decision actuallyempowers hold-out creditors to threaten orderlysovereign debt restructurings, notwithstandingthe prevalence of collective action clauses in inter-national bond issues.

Collective action clauses allow a defined major-ity of holders of a bond series to bind other holdersof that series to a restructuring of that series.

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However, these clauses affect only that one seriesof bonds, and each series involved in the restruc-turing will need to be amended individually in thesame way.

The Court of Appeals was incorrect to surmisethat the problem of hold-out creditors is resolvedby collective action clauses, and that, in thisrespect, “it is highly unlikely that in the futuresovereigns will find themselves in Argentina’spredicament.” Id.; see also NML Capital, 727 F.3dat 247-48.

First, collective action clauses are not univer-sal in sovereign bonds. Even if the clauses wereuniversal in recently issued bonds, older classes ofbonds would still exist without the benefits ofsuch clause. This stock of bonds will remain out-standing for many years.

Second, most collective action clauses in exist-ing bonds or under discussion by market partici-pants do not have aggregation features that wouldallow super-majorities to fully bind all bondhold-ers across different series of bonds. In essence,aggregation provisions allow the aggregation ofcreditor claims across all bonds issued by asovereign for voting purposes. Depending on theexact drafting of the provision, a defined majorityof holders can thereby bind all holders of bondsissued by a sovereign and not just one series. Evenif aggregation clauses were present in a large pro-portion of the stock of outstanding sovereignbonds—which is not the case—many of themwould still allow series to be excluded from therestructuring based on legitimate concerns aboutprotection of minority rights. Hold-out creditorscan therefore—if undeterred—buy up blocking

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minorities on small issues in order to stall the resolu-tion of a defined class of instruments, and cause seri-ous problems. IMF Report at 28; see JerominZettelmeyer et al., The Greek Debt Exchange: AnAutopsy (September 11, 2012) at 26, 33-34, availableat http://scholarship.law.duke.edu/faculty_scholarship/2660/; Das et al., at 45 (noting the cases of Dominicain 2004 and Argentina in 2005).

The largest-ever sovereign debt restructuring,of Greek public debt in 2012, has been cited byrespondents as an example where hold-out credi-tors did not have a detrimental effect on voluntaryrestructuring.14 This is not accurate, as free-rider,hold-out creditors actually blocked the restructur-ing of certain classes of Greece’s external debt. Ofthirty-six bonds governed by foreign (English) lawcontaining collective action clauses that were eli-gible to participate in the debt exchange, only sev-enteen bonds were able to be successful lyrestructured using collective action clauses. IMFReport at 28. Hold-out creditors prevented theoperation of the collective action clauses in theremaining bonds, amounting to approximatelyEUR 6.5 billion in un-restructured claims, orthirty percent of the total value of bonds governedby foreign law. Id.

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14 See Joint Response Brief of Plaintiffs-AppelleesNML Capital, Ltd. and Olifant Fund, Ltd. at 39, NML Capi-tal, Ltd. v. Rep. of Argentina, 727 F.3d 230 (2d Cir. 2013) (No.12-105), ECF No. 821. But see Zettelmeyer et al., at 26 (dis-cussing the limitations of using bond-by-bond collectiveaction clauses, as well as the importance of having a stock ofdebt governed by domestic law, which can unilaterally beused to change the terms of such bonds).

CONCLUSION

The injunctive remedy affirmed by the Court ofAppeals constitutes a strong disincentive for bond-holders to participate in restructuring, if the creditoris holding a New York law-governed bond and canseek full repayment with the aid of an injunction,and the Court of Appeals was incorrect in its viewthat collective action clauses solve the problem.For the foregoing reasons, the petition for a writ ofcertiorari should be granted and the Court ofAppeals’ decision should be reversed.

Respectfully submitted,

ANDREW RHYS DAVIES(Counsel of Record)MICHAEL F. WESTFALALLEN & OVERY LLP1221 Avenue of the AmericasNew York, New York 10020Telephone: (212) 610-6300Facsimile: (212) 610-6399andrew.rhys.davies@allenovery.com

DIANA BILLIKALLEN & OVERY LLP52 Avenue HocheCS9000575379 Paris Cedex 08France

Attorneys for Amicus Curiae

March 24, 2014

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