Opinion
04 Civ. 7643 (HB).
October 12, 2004
OPINION ORDER
On September 27, 2004, Plaintiff, Greylock Global Opportunity Master Fund Ltd., and Greylock Global Distressed Debt Master Fund Ltd. (collectively, "Greylock"), made an application for a temporary restraining order and preliminary injunction enjoining the Province of Mendoza ("Province") from consummating an allegedly unlawful Exchange Offer and Consent Solicitation relating to bonds issued by Province. At the oral argument on October 8, 2004, I granted a temporary restraining order to October 14, 2004. For the reasons set forth below, a further temporary restraining order is denied and a pretrial conference is scheduled for Monday, October 18, 2004 at 10.00 a.m.
I. BACKGROUND
The Existing Bonds are governed by an indenture dated September 4, 1997, among the Province, as issuer, the Bank of New York, as trustee, paying agent and transfer agent, and Kredietbank S.A. Luxembourgeoise and the Bank of New York S.A., each as paying agent and transfer agent ("Indenture"). Both the Indenture and Bond Terms are governed by and construed in accordance with New York law.
On July 30, 2004, Province announced the Exchange Offer and Consent Solicitation, which provided for the exchange of Province's $250 million of 10% bonds due in 2007 ("Existing Bonds") for new amortizing bonds ("Exchanged Bonds") due on September 4, 2018 with an annual interest rate of 5½% ("Exchange Offer"). The stated purpose of the Exchange Offer was to enhance the likelihood of repayment of the principal by replacing a one time, "bullet payment," in 2007, with amortizing payments over time.
Greylock is the beneficial holder of Existing Bonds with a principal value of approximately $2.5 million. Greylock has not consented to any amendment of the Indenture and has not tendered any of its Bonds for exchange.
To facilitate the Exchange Offer, holders of Existing Bonds were required to consent to several amendment provisions, which modified the Indenture and the Bond Terms ("Consent Solicitation"). The disputed provision is an amendment modifying Province's waiver of sovereign immunity to attachment and execution in Section 9.7(d) of the Indenture and paragraph 17(d) of the Terms and Conditions of the Existing Bonds ("Sovereign Immunity Amendment" or "Amendment"). The Waiver of Immunities (with proposed Amendment underlined) requires that:
To the extent that the Province has or hereafter may acquire or have attributed to it any immunity (sovereign or otherwise) under any law from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its revenues, assets or property, the Province hereby irrevocably waives such immunity in respect of its obligation under [this Indenture/the Bonds] to the fullest extent it is permitted to do so under applicable law provided, however, that nothing in this [Section 9.7(d)/Paragraph(d)] shall constitute, or be deemed to constitute, an explicit or implicit waiver of immunity from attachment prior to judgment, attachment in aid of execution or execution with respect to any amount paid by the Province of indebtedness (whether principal, interest, redemption or otherwise) issued, or amended as to payment terms, on or after May 31, 2004. Without limiting the generality of the foregoing, the Province agrees that the waivers set forth in this [Section 9.7(d)/paragraph 17(d)] shall be to the fullest extent permitted under the Foreign Sovereign Immunities Act of 1976 of the United States and is intended to be irrevocable for the purposes of such Act.
(Decl. Elwood, Exhibit B at 57-58).
The Exchange Offer and Consent Solicitation require the majority of the aggregate principal amount of the Existing Bonds outstanding to become effective and, if approved, bind the holder of Existing bonds regardless of consent for the proposed amendments.
On September 27, 2004, Greylock obtained an ex parte temporary restraining order preventing the consummation of Province's Exchange Offer, now scheduled for October 15, 2004. Greylock claims that the Sovereign Immunity Amendment violated the Indenture provision protecting the rights of bondholders to "receive payment of" principal and interest, and "to institute suit for the enforcement of any such payment" from impairment without their consent. Oral arguments on the temporary restraining order, which would prevent the consummation of the Exchange Offer pending the declaratory judgment action, were held on October 8, 2004.
II. DISCUSSION
A preliminary injunction is "an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion." Mazurek v. Armstrong, 520 U.S. 968, 972 (1997). Pursuant to Federal Rules of Civil Procedure 65, to justify a preliminary injunction, "the moving party must demonstrate: (1) irreparable harm; and (2) either (a) a likelihood of success on the merits, or (b) sufficiently serious questions going to the merits to make them fair ground for litigation and a balance of hardships tipping decidedly in favor of the movant." Federated Strategic Income Fund v. Mechala Group Jamaica Ltd., No. 99 CIV 10517, 1999 WL 993648 at *5 (S.D.N.Y., Nov. 2, 1999) (Baer, J.).
A. Irreparable Harm
Pursuant to Federal Rule of Civil Procedure 65, a threshold showing of "irreparable harm" must be demonstrated, regardless of the strength of the movant's case on the merits. See, e.g., Reuters Ltd. v. United Press Int'l, Inc., 903 F.2d 904, 907 (2d Cir. 1990) ("a showing of probable irreparable harm is the single most important prerequisite for the issuance of a preliminary injunction"). Hence, "[i]rreparable harm must be shown by the moving party to be imminent, not remote or speculative, and the alleged injury must be one incapable of being fully remedied by monetary damages." Reuters, 903 F.2d at 907. Mere possibility of irreparable harm is not enough. See Rodriguez v. DeBuono, 175 F.3d 227, 234 (2d Cir. 1999) (per curiam). To establish irreparable harm, a party must sufficiently demonstrate that "there is a continuing harm which cannot be adequately redressed by final relief on the merits" and for which "money damages cannot provide adequate compensation." Kamerling v. Massanari, 295 F.3d 206, 214 (2d. Cir. 2002). See JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 79 (2d Cir. 1990) ("likelihood sets, of course, a higher standard than possibility.")
In my view, Greylock is not sufficiently harmed by the Sovereign Immunity Amendment to satisfy the irreparable harm prong of preliminary injunctive relief. In fact, Greylock's attorneys admitted as much when, in a September 17, 2004 letter to Province's attorneys, they stated "the sovereign immunity amendment would neither bind, nor be enforceable against, any of the non-consenting bondholders." (Decl. Bausili, Oct. 4, 2004, Ex. 4 at 3).
First, while the Exchanged Bonds would be insulated from possible attachment from the holders of Existing Bonds, the Exchanged Bonds would not be secured by payments on the debt. Instead, the proposed Amendment seemingly modifies the existing waiver of sovereign immunity with respect to one particular type of property — amounts paid by the Province on debt issued, or amended as to payment terms, on or after May 31, 2004. Absent the Amendment, such payments would not exist at all.
The lawsuit is different from a case of mine relied upon by Greylock, Federated Strategic Income Fund v. Mechala Group Jamaica Ltd. 99 Civ. 10517, 1999 WL 993648 (S.D.N.Y. Nov. 2, 1999). In Federated, the Exchange Offer and Consent Solicitation would have permitted the defendant to divest itself of virtually all it assets and would have eliminated all of the guarantees of its subsidiaries for its debt, leaving the plaintiff without a source to recover. Id., 1999 WL 993648, at *6-*7. As a result, "[p]laintiff's inability to recover any monetary damages due to defendant's threatened insolvency justifies a finding of irreparable harm." Id. at *7. Here, Greylock is not prevented from recovering damages. An argument may be made that the Exchange Offer, in fact, increases the assets available for attachment, to the benefit of existing bondholders.
Second, and another difference between the case at bar and Federated, is the availability to Greylock of a remedy at law. While in Federated there was a "substantial chance upon final resolution of the action the parties will be unable to return to the positions they previously occupied," Id. at *10, Greylock is free to attach any property of the Province now in existence that could be attached prior to the Amendment. Greylock can still sue Province, attach all of the Province's property that is not covered by the Sovereign Immunity Amendment (e.g., the payments made by bondholders on the new debt) and, later, challenge the Amendment's validity. Greylock may pursue its attachment remedy as if the Exchange Offer had never occurred, and resolve the issue of enforceability either through its claim for a declaratory judgment in the instant case or in an actual attachment of property subject to the Amendment.
B. Likelihood of Success on the Merits
To satisfy the substantial likelihood of success on the merits standard, the movant must establish "that their cause is considerably more likely to succeed than fail." United States v. Thorn, 317 F.3d 107, 117 (2d. Cir. 2003). Here, the issue is whether the Sovereign Immunity Amendment impermissibly impairs Greylock's rights under Section 4.6 or is such impairment permitted pursuant to Sections 7.2 and 7.3? It is well settled that, under New York law, courts will refuse, wherever possible, to interpret a contractual term in such a way as to nullify other provisions. New York Marine General Ins. Co. v. Tradeline, 266 F.3d 112 (2d Cir. 2001). Accordingly, would Province or Greylock's interpretation of the relevant sections of the Indenture render other sections meaningless?
Section 4.6: Unconditional Right of Bondholders to Receive Principal and Interest: Notwithstanding any other provision of this Indenture, each Bondholder shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest on (including Additional Amounts) its Bond on the stated maturity expressed in such Bond and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Bondholder.
Section 7.2: Supplemental Indentures with Consent of Bondholders: With the Consent (evidenced as provided in Article Six) of the holders of not less than a majority of the aggregate principal amount of the Bonds, at the time Outstanding, the Province and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto for the purpose of adding any provision to or changing in any manner or eliminating any of the provisions of this indenture, such Bond or of any supplemental indenture or of modifying in any manner the rights of the holders of such Bonds; provided that no such supplemental indenture, without the consent of each holder of Bonds at the time outstanding, shall (a) change the stated maturity of the principal of or interest on any such Bond; (b) reduce the principal amount of or interest on any such bond or Change the obligation of the Province to pay Additional Amounts; (c) change the currency of payment of principal or interest (including Additional Amounts) on any such bond; or (d) reduce the percentage of aggregate principal amount of Bonds Outstanding necessary to modify or amend this Indenture or the provisions of the Bonds or reduce the quorum requirements or the percentages of votes required for the adoption of any action at a Bondholders meeting.
Upon the request of the Province, accompanied by a copy of the supplemental indenture and upon the filing with the Trustee of evidence of the consent of Bondholders and other documents, if any, required by Section 6.1, the Trustee shall join with the Province in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture.
It shall not be necessary for the consent of the Bondholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof.
Promptly after the execution by the Province and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Province shall publish a notice thereof in Authorized Newspapers pursuant to paragraph 13 of the Terms, setting forth in general terms the substance of such supplemental indenture. Any failure of the Province to publish such notice, or any defect therein, shall not, however, in any way, impair or affect the validity of any such supplemental indenture.
Section 7.3: Effect of Supplemental Indenture:
Upon the execution of any supplemental indenture pursuant to the provision hereof, this Indenture and the Bonds affected thereby shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Province and the holders of such Bonds shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes.
The Indenture can plausibly be read both ways. However, I tend to agree with Province's interpretation argued by the movant as the "narrow" interpretation. The problem for the movant as I see it, is that its argument ignores Section 7.2 and 7.3 of the Indenture and reads Section 4.6 as a separate savings provision. Such a reading may render Sections 7.2 and 7.3 of the Indenture superfluous. It is unlikely, at least in my experience, that a contract would list four exceptions in one section of a contract and provide for a fifth, narrowly tailored exception, elsewhere in the contract. Accordingly, the likelihood of success on the merits prong is unsatisfied.
C. Balance of Hardships the Public Interest
To establish that the balance of hardships tips in their favor, the plaintiffs must demonstrate that the harm they would suffer absent the relief sought is substantially greater than the harm the defendants would suffer if the injunction were granted. Seabrook v. City of New York, No. 99 Civ. 9134, 1999 WL 694265 at *3 (S.D.N.Y., Sept. 7, 1999) (Baer, J.). In addition, "[w]henever a request for a preliminary injunction implicates public interests, a court should balance such interests in deciding whether a plaintiff's threatened irreparable injury and probability of success on the merits warrants injunctive relief. Otherwise a claim that appears meritorious at a preliminary stage but is ultimately determined to be unsuccessful will have precipitated court action that might needlessly have injured the public interest." Brody v. Village of Port Chester, 261 F.3d 288, 290 (2d. Cir. 2001).
In December 2001, the Republic of Argentina suffered one of the worst economic crises in its history, stemming in part from capital flight and currency devaluation. Province is one of Argentina's 23 provinces and has its own fiscal power and can issue its own debt. (CIA World Factbook, available at http://www.cia.gov/cia/publications/factbook/geos/ar.html#Econ, last visited Oct. 12, 2004). The Argentine Peso was pegged to the dollar until January 2002, when it was floated in February. ( Id). Following the flotation of the Peso, the exchange rate plunged and inflation picked up rapidly. Only recently has the economy begun to stabilize, albeit below the 2001 level. ( Id)
Considering the limited harm facing Greylock and concern that Greylock may not succeed on the merits, the balance of hardships tips in Province's favor. Province was gravely affected by the economic crisis. Province's current revenue base makes it nearly impossible for it to make the principal payment of $450 million due on the Existing Bonds in 2007. To date, holders of substantially more than 50% of the outstanding principal of the Existing Bonds have accepted the Exchange Offer. The Exchange Offer does not involve a reduction in the principal amount of any holder's bonds, but replaces the $250 million one-time payment with a longer maturity bond that pays off the principal over time.
III. CONCLUSION
For all of the foregoing reasons, a further temporary restraining order is denied as of this date, and a pretrial scheduling conference is set for Monday, October 18, 2004 at 10.00 a.m. in my Chambers.
IT IS SO ORDERED.