Citibank Can't Hand Over $2.3B In Argentine Bond Payments

Cara Salvatore
March 12, 2015

Law360, New York (March 12, 2015, 5:49 PM ET) -- A New York court has blocked Citibank NA from passing on Argentina's intended payments on a $2.3 billion basket of bonds, saying a 2012 injunction barring the payments applies to the bank because its role makes it a participant in the process.

Argentina wishes to make the payments, but a 2012 ruling by U.S. District Judge Thomas Griesa blocks it from doing so without also making payments on bonds whose hedge fund owners are locked in a legal struggle with the country. The situation has meant that Judge Griesa has had to move frequently to prevent Argentina's attempts to make payments to its favored creditors.

Citigroup has now become involved in the legal proceedings because, it says, its status in Argentina is jeopardized if it cannot act as a conduit for the dollar-denominated, Argentine-law bond payments. And Judge Griesa ruled Thursday, in response to Citigroup's motion to vacate his July 28 order preventing it from processing payments on the bonds, that the 2012 injunction applies to it."The injunction lists a number of entities that are participants, such as trustees, depositaries, clearing systems, settlement agents, transfer agents, et cetera. This list is illustrative, not exclusive," Judge Griesa said. "As the court made clear in paragraph two of the injunction, a participant in the payment process is any entity that participates with or assists the republic in fulfilling its exchange-bond obligations."In response, one of the plaintiff hedge funds, NML Capital Ltd., called for Argentina to change its stance.

"Argentina should discontinue its defiance of courts and negotiate a resolution to this dispute," a spokesman for NML said in a statement.

Exchange bonds are a subset of the total outstanding Argentine bonds. Then within exchange bonds there are some subject to Argentine law and some not. Among the Argentine-law bonds, some are denominated in dollars and some in pesos.

"Citi will pursue all legal measures available to comply both with this decision and Argentine legislation. In that regard, Citi will appeal the court's decision and has already requested the suspension of the injunction pending such appeal," a spokeswoman for Citi said by email.Earlier this month, Judge Griesa had deferred a ruling on whether to block Citibank from making the payments.

Karen Wagner, a lawyer for Citibank, said at the time the bank would face "great danger" if it was forced to comply with the injunction. Citibank could lose its banking license in Argentina and its employees could face criminal sanctions, she said.

An attorney for Argentina also urged the judge to allow Citibank to service the debt, reasoning that the bonds at issue were offered exclusively in Argentina and therefore fell outside the scope of the injunction.

But Edward Friedman, an attorney for plaintiff-investors including Aurelius Capital Master Ltd., said at the time that the bonds had actually been offered in several other countries, including the U.S., Germany, Denmark and Italy. Friedman also noted that the injunction barred all "participants" in the bond payment process from aiding and abetting any violation of the injunction, including making payments on the bonds.

The plaintiffs bought Argentine sovereign debt at a discount after the country defaulted on $100 billion in bonds in 2001. The funds refused to swap them out in exchanges in 2005 and 2010, instead suing in the U.S. for full repayment.

Judge Griesa has said that Argentina can't pay bondholders that agreed to debt restructurings unless it also makes a ratable payment to the "holdout" hedge funds. The Second Circuit upheld that finding, and the U.S. Supreme Court declined to take up Argentina's appeal.

Separately, holders of euro-denominated bonds are also trying to access their owed payments.

Citibank is represented by Davis Polk & Wardwell LLP.

Argentina is represented by Cleary Gottlieb Steen & Hamilton LLP.

The Aurelius plaintiffs are represented by Friedman Kaplan Seiler & Adelman LLP. NML Capital is represented by Gibson Dunn.

The case is NML Capital v. the Republic of Argentina, case number 1:08-cv-06978, in the U.S. District Court for the Southern District of New York.

--Additional reporting by Pete Brush and Stewart Bishop. Editing by Brian Baresch.