## Facts

- In 1994, the Republic of Argentina issued sovereign bonds under a Fiscal Agency Agreement (FAA) governed by New York law (the “FAA bonds”).
- The FAA’s issuing documents provided that the FAA bonds were “unsecured” and “unsubordinated” obligations of Argentina and contained an equal-treatment (pari passu) clause stating that Argentina’s payment obligations on the FAA bonds would rank at least equally with Argentina’s other present and future unsecured, unsubordinated external indebtedness.
- In 2001, Argentina defaulted on the FAA bonds as part of a broader sovereign debt default.
- After the default, Argentina offered exchanges (including in 2005 and 2010) under which holders could swap defaulted FAA bonds for restructured “Exchange Bonds” on reduced terms.
- Argentina stated in the exchange materials that FAA bonds not tendered could remain in default permanently and that Argentina did not intend to resume payment on bonds held by nonparticipants (the “holdouts”).
- Approximately 91% of FAA bondholders accepted the exchange offers; NML Capital, Ltd. and other holdouts did not.
- Argentina made payments on the Exchange Bonds while continuing to pay nothing on the original FAA bonds held by the holdouts.
- Holdout creditors obtained money judgments in the Southern District of New York but were unable to obtain payment from Argentina and sought equitable relief to enforce the equal-treatment promise.
- The district court (S.D.N.Y.) entered injunctions barring Argentina from making or causing payments on the Exchange Bonds unless it made “ratable” payments to the holdouts on their FAA bonds, and it issued related directions aimed at payment-chain participants to ensure compliance.
- Argentina appealed, arguing (among other things) that the injunctions misread the pari passu clause and violated the Foreign Sovereign Immunities Act (FSIA).

## Issues

1. Whether Argentina’s payment of the Exchange Bonds while refusing to pay the FAA bonds violated the FAA’s equal-treatment (pari passu) clause.
2. Whether the district court abused its discretion by granting injunctions requiring “ratable payment” to holdout FAA bondholders whenever Argentina paid Exchange Bondholders.
3. Whether the injunctions were barred by the FSIA as impermissible restraints on sovereign property or otherwise prohibited relief against a foreign state.
4. Whether the injunctions could reach third parties involved in processing Argentina’s Exchange Bond payments when those parties had notice and acted in concert with Argentina.

## Decision

- The Second Circuit held that Argentina’s conduct—continuing to make scheduled payments on the Exchange Bonds while refusing to satisfy payment obligations to the FAA bondholders—breached the FAA’s pari passu clause.
- The court affirmed the district court’s use of equitable relief, concluding that money judgments had proven ineffective given Argentina’s refusal to pay and that the injunctions were an appropriate remedy to prevent ongoing unequal treatment.
- The court rejected Argentina’s FSIA objections, reasoning that the injunctions operated in personam by regulating Argentina’s conduct and did not attach, arrest, or execute upon identified sovereign property.
- The court held that the injunctions could bind nonparties with notice who acted in active concert or participation with Argentina in carrying out prohibited payment conduct, consistent with Federal Rule of Civil Procedure 65(d).
- The court remanded only for limited clarification of the “ratable payment” formula and implementation mechanics, while otherwise leaving the injunctions in place.

## Legal Principles

- A pari passu (equal-treatment) clause in a sovereign bond contract can be violated by a course of conduct that, in practice, favors one class of external bondholders for payment while maintaining a deliberate policy of nonpayment to another class whose obligations are promised equal rank.
- When a judgment debtor persistently refuses to satisfy money judgments and legal remedies are ineffective, a federal court may grant equitable relief to prevent continuing contractual violations, including injunctions conditioning a debtor’s ability to pay one set of creditors on making concurrent payments required by contract to another set.
- The FSIA limits attachment and execution against a foreign state’s property, but it does not categorically forbid in personam injunctions that regulate a sovereign’s conduct without seizing or restraining specific property.
- Under Rule 65(d), an injunction may bind nonparties who have notice and act in active concert or participation with an enjoined party, including intermediaries that facilitate the enjoined payment conduct.

## Conclusion

In *NML Capital, Ltd. v. Republic of Argentina*, the Second Circuit held that Argentina violated the FAA bonds’ equal-treatment clause by paying its restructured Exchange Bonds while refusing to pay holdout FAA bondholders, and it upheld injunctions barring Exchange Bond payments unless Argentina made ratable payments to the holdouts; the court ruled the relief was a permissible in personam remedy not barred by the FSIA and remanded only to clarify the payment formula and mechanics.


NML Capital, Ltd. v. Republic of Argentina, 727 F.3d 230 (2013)