Forty-nine minutes of contempt (Argentina edition)

The briefs have been filed in NML v. Argentina (a complete set here), and the Second Circuit has revised the hearing schedule, expanding the time for oral argument on February 27 to a total of 49 minutes. The new schedule grants some time to Bank of New York Mellon and the exchange bondholders (7 minutes each) and gives NML a bit of extra time to compensate. This is a positive development, no matter how you think the case should come out. The most challenging legal issue relates to the scope of the district court's injunction, especially to whether BoNY, as trustee under the exchange bonds, can be held in contempt if it passes funds along to the exchange bondholders. If oral argument means anything, the extra argument time should held the court better address these questions.

BoNY's potential exposure to contempt sanctions comes down to what it means to be "in active concert and participation" with a party who willfully violates a court order. BoNY's argument, in a nutshell, is that it can't be held in contempt unless its purpose is to help Argentina evade the injunction. Just transferring funds, BoNY says, doesn't satisfy that standard, because it would simply be carrying out contractual duties incurred before the injunction. (Readers interested in more detail might want to check out Shearman and Sterling's summary of the arguments here.)

Initially, I thought BoNY clearly had the better of the argument on this question, but I'm increasingly uncertain.

The exchange bonds are structured to keep funds away from holdouts like NML. That's why the bonds rely on a trustee in the first place. When funds reach the trustee, they belong to the exchange bondholders and are no longer Argentine assets capable of being seized by creditors. Even if BoNY's legal argument is correct, isn't the very purpose of the trust indenture to stiff holdouts? And if that's so, why should it matter that the trust indenture pre-dates the injunction? If Cleary Gottlieb had a duty to advise Argentina under some pre-injunction contract (it doesn't, so far as I know), no one thinks it could help Argentina violate the court's order without risking contempt. So why is BoNY different?

I'm no expert on the law of contempt (or related matters, like UCC Article 4A, which governs funds transfers) and would welcome feedback from more informed readers. But this is one aspect of NML v. Argentina that has significant implications outside the sovereign debt context. As I have noted in other posts and articles, I'm not a big fan of the court's interpretation of the pari passu clause. Once you accept that interpretation, however, the case gets quite a bit harder. Under US law, courts do have the power to issue an injunction against a foreign sovereign. And while courts have little power to sanction a sovereign for non-compliance, they certainly can enforce the injunction against many third parties. So where to draw the line? The Second Circuit could still punt on these questions by revisiting the meaning of pari passu or the propriety of the injunction, but it has given no sign of such an interest. So if you see a bunch of puzzled-looking sovereign debt lawyers wandering the New York streets on February 27, it may be because they have just taken a 49-minute crash course in the law of contempt.