Who Rules The Bond Market?

July 31, 2014 at 9:40 am Leave a comment

There are some issues that represent such an important shift in the way the broader financial sector operates that they are important to know about even if they don’t impact credit unions directly. Besides, they are just interesting.

One of these developments comes in the form of news that Argentina is on the verge of defaulting on its government bonds. This is no run of the mill default as it could be precedent-setting by giving U.S. courts the upper hand in enforcing judgments against nations. Not only that, it underscores just how powerful those information subpoenas you receive are, provided they are valid.

There is a long history of foreign governments refusing to enforce judicial rulings by U.S. courts seeking to enforce money judgments. As far back as 1832 when Chief Justice John Marshall ruled that the federal government and not the states had authority to negotiate with tribes to purchase land owned by Indian tribes in Georgia  (Worcester v. Georgia (1832), President Jackson allegedly responded with his famous retort, Marshall made his ruling, now let him try to enforce it.

Similarly, when it comes to bonds issued by a foreign nation the conventional wisdom has been that there is only so much bondholders can do to redeem assets to pay off bond defaults. So when the Argentinian government defaulted on its bonds in the first years of this century, the vast majority of bondholders took the reduced payouts reasoning that it’s better to get half a loaf than no bread at all. However, a handful of bondholders held out for full payment.  With the aid of some of the best lawyering you are ever going to see, these holdouts have backed the Government of Argentina into a corner.

Typically, Argentina would pay the American bondholders who accepted the modified payouts independent of what it owes to the hold outs. However, Judge Gleason of the Federal Court for the Southern District of New York issued an order mandating that, as explained by the New York Law Journal,   “the next time the ‘exchange’ debt holders are paid by Argentina, and the country is expected to pay them $900 million, the country must pay one of the hold outs $1.3 billion, plus interest, or about $1.5 billion.”  Presumably, if Argentina chooses to ignore this order, the holdouts could attach any payouts to other bondholders.

In addition, the legal wrangling underscores just how powerful those third-party information subpoenas are. In a 2012 case before the Second Circuit, which has jurisdiction over New York credit unions, The holdouts argued that subpoenas against third-party banks holding assets in a foreign country are valid-even if the money sought is ultimately out of the creditors reach. Why does this matter? Because as the Court explained, “New York State’s post-judgment discovery procedures, made applicable to proceedings in aid of execution by Federal Rule 69(a)(1), have a similarly broad sweep. The New York Civil Practice Law and Rules provides that a “judgment creditor may compel disclosure of all matter relevant to the satisfaction of the judgment.” N.Y. C.P.L.R. § 5223; see David D. Siegel, New York Practice § 509 (5th ed. 2011) (describing § 5223 as “a broad criterion authorizing investigation through any person shown to have any light to shed on the subject of the judgment debtor’s [**6] assets or their whereabouts”).

But remember, an information subpoena under NY law is only valid if it is properly issued and that includes mandating that the creditor have a good faith reason for thinking that money may be stowed away in your accounts.

By the way, I would still bet that the issue will be resolved sometime today short of default, but no matter what happens the power of U.S. courts and creditor subpoenas have been given a big shot in the arm. Can you imagine if Europe had to negotiate with New York judges before restructuring Greek debt? This is the type of power we are talking about. As former Presidential Advisor James Carville once quipped, when he comes back to life he wants it to be as the bond market.

 

Entry filed under: Economy, Legal Watch, New York State. Tags: , , , .

5 Steps to Minimize Your Cyber-liability Mandate Relief Light

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 445 other followers

Archives