Thursday, May 27, 2010

Second Circuit: Partial Win for Argentina in Defaulted Bonds Case

Both Argentina and eight classes of bondholders can claim partial victory in a Second Circuit decision today.  Argentina had challenged the district court's class certifications and damages computations.  As the appellate court put it, "We agree with the second contention but not the first."

Argentina defaulted on "roughly $80 to $100 billion of sovereign debt," following an economic crisis there in the 1990s.  Bondholders sued in federal district court in New York, obtaining class certifications and damages.

On appeal, Argentina specifically challenged the certifications due to conflicts of interest, since the lead attorneys represent all eight classes (and some non-class individuals), who are in competition for recovery.  The Second Circuit found these potential conflicts relevant to damages, but not a barrier to certification.  Argentina also argued that the only common issue (liability for default) is a non-issue, since the default is admitted.  Citing its prior case law, though, the panel found that an issue can be both resolved and relevant to commonality.  Likewise, contrary to Argentina's assertions, the Second Circuit found that possible individual damages determinations do not prevent certification and individual actions would not be superior to the classes, as all members have a present interest in locating assets that might be used to satisfy Argentina's debts.  Finally, the panel rejected Argentina's contention that determining the class compositions in this case would be unmanageable.

However, the panel agreed with Argentina that the district court erred in "entering aggregate class-wide judgments [of more than $2.2 billon] based on [admittedly inflated] estimates of Argentina's liability."  The district court justified its not being overly persnickety, because recovery from Argentina (a foreign sovereign with immunity) is unlikely.  Similarly, on the deferred issue of conflicts of interest, the district court reasoned that the unlikely recovery from Argentina makes for unlikely conflicts.

In contrast, the Second Circuit required more than a guesstimate: On remand, the district court must "consider alternative approaches that will set damages awards that more closely reflect the losses class members experienced" and "continue to be alert" to conflicts in the damages review.

Further coverage of the decision from Bloomberg is here.