senate Bill S3767B

Amended

Relates to contracts governing debt obligations of foreign states

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Bill Status


  • Introduced
  • In Committee
  • On Floor Calendar
    • Passed Senate
    • Passed Assembly
  • Delivered to Governor
  • Signed/Vetoed by Governor
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actions

  • 03 / Mar / 2011
    • REFERRED TO JUDICIARY
  • 13 / May / 2011
    • AMEND (T) AND RECOMMIT TO JUDICIARY
  • 13 / May / 2011
    • PRINT NUMBER 3767A
  • 18 / May / 2011
    • AMEND AND RECOMMIT TO JUDICIARY
  • 18 / May / 2011
    • PRINT NUMBER 3767B
  • 01 / Jun / 2011
    • REPORTED AND COMMITTED TO FINANCE
  • 14 / Jun / 2011
    • AMEND AND RECOMMIT TO FINANCE
  • 14 / Jun / 2011
    • PRINT NUMBER 3767C
  • 21 / Jun / 2011
    • COMMITTEE DISCHARGED AND COMMITTED TO RULES
  • 21 / Jun / 2011
    • ORDERED TO THIRD READING CAL.1462
  • 21 / Jun / 2011
    • PASSED SENATE
  • 21 / Jun / 2011
    • DELIVERED TO ASSEMBLY
  • 21 / Jun / 2011
    • REFERRED TO WAYS AND MEANS
  • 04 / Jan / 2012
    • DIED IN ASSEMBLY
  • 04 / Jan / 2012
    • RETURNED TO SENATE
  • 04 / Jan / 2012
    • REFERRED TO JUDICIARY

Summary

Relates to contracts governing debt obligations of foreign states.

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Bill Details

Versions:
S3767
S3767A
S3767B
S3767C
Legislative Cycle:
2011-2012
Current Committee:
Senate Judiciary
Law Section:
General Obligations Law
Laws Affected:
Add §5-336, Gen Ob L
Versions Introduced in 2011-2012 Legislative Cycle:
A7967A

Sponsor Memo

BILL NUMBER:S3767B

TITLE OF BILL:
An act
to amend the
general obligations law, in relation to certain provisions of contracts
governing debt obligations of foreign states

PURPOSE OF BILL:
This bill, as a matter of public policy of the state, will amend the
general obligations law with respect to certain provisions in
contracts governing the debt obligations of foreign states as defined
in Section 1603 of the Foreign Sovereign Immunities Act, 28 U.S.C.
1603. It does so by providing that the provisions of a contract
governing a debt obligation of a foreign state, which impose duties
or obligations on the foreign state which are not directly addressed
in a final judgment in favor of the holder of the debt obligation
against the foreign state, shall survive the entry of such final
judgment and shall not be merged into any such final judgment.

Under existing principles of New York common law, the merger doctrine
is not applied in a rigid manner that defeats a party's equitable
rights. As long recognized by the New York Court of Appeals, the
merger doctrine "will not be carried any further than the ends of
justice require" and "a judgment does not change the essential nature
and real foundation of the cause of action." Jay's Stores, Inc. v.
Ann Lewis Shops. Inc., 204 N.E.2d 638, 642 (N.Y. 1965) (internal
quotations marks and cites omitted). Professor David D. Siegel has
interpreted New York common law as providing that "[i]f there is
anything about the underlying claim that offers the plaintiff some
advantage, it should retain its identity and peer right through the
judgment to make itself felt. ... New York subscribes to the healthy
view that the merger doctrine will not be allowed to undermine
benefits inhering in the claim merely because it has gone to
judgment. ... Indeed, when a claim has been fully litigated, courts
should be sensitive to see to it that the judgment is a reward rather
than a deprivation." David D. Siegel, New York Practice § 450 at 725
(3d. ed. 1999).

Despite these longstanding principles, New York case law does not
precisely define the boundaries of the merger doctrine. This bill
does so with respect to foreign states by codifying the above
principles of New York common law to clarify that provisions of any
contract governing the debt obligations of a foreign state that
benefit the creditors of the foreign state by imposing duties or
obligations not directly addressed in a final judgment in favor of
the holder of the debt obligation against the foreign state, shall
survive the entry of, and not be merged into, such final judgment. As
a result of this bill, courts adjudicating enforcement actions by
holders of foreign state debt obligations will be assured of the
survival of provisions that aid in enforcement.

Contracts governing the debt obligations of foreign sovereigns
typically contain a wide range of covenants for the benefit of
lenders, are governed by New York law, and contain waivers of
immunity and consents to suit in New York. In the context of creditor
actions against a foreign state in particular, it is important to
provide clarity that, under long-established principles of New York
common law, covenants that aid creditors in a post judgment
enforcement context are not merged into final judgments, but survive
the entry of judgment.

This bill is not intended to and does not affect the parameters of the
merger doctrine as developed under the common law by the courts in
actions in which foreign states are not parties. Specifically, the
expresio unius
rule - the rule that that which is affirmative is negative of that
which is not affirmed - shall not apply to, or he invoked in, actions
in which foreign states are not parties as a result of the enactment
of this bill.

SUMMARY OF PROVISIONS:
Section 1 ensures as a matter of public policy that the contractual
duties and commitments of foreign states contained in contracts
pursuant to which the foreign state borrows money, other than those
duties and commitments addressed directly in a final judgment in favor
of a holder of such debt obligations against a foreign state, shall
survive the entry of final judgment against any such foreign state
and shall not be merged in any such final judgment.

Section 2 provides that the act will take effect immediately and shall
be applicable to all actions and proceedings pending on the effective
date.

JUSTIFICATION:
New York taxpayers have invested billions of dollars in debt issued by
foreign sovereigns. To facilitate the issuance of their debt to New
York investors through our capital markets, many foreign sovereigns
designate New York as the place of payment and the venue where the
foreign sovereign waives sovereign immunity and consents to
jurisdiction to be sued in the case of a default. As a result,
actions to enforce defaulted debt are frequently brought in state and
federal courts located in New York.

However, despite the fact that foreign sovereigns routinely tap the
capital market in New York, they are not subject to any bankruptcy
regime should they fail to pay their debts. There is no forum in
which the assets of a sovereign debtor are mandated to be made
available to satisfy its creditors in an orderly liquidation.
Although many foreign sovereigns pay their debts responsibly, some
foreign sovereigns that are capable of making payments to their
creditors instead choose to repudiate their debts and ignore
judgments rendered against them.
Because of the unique difficulties associated with enforcing judgments

against foreign sovereigns, and the absence of any available
bankruptcy mechanism, litigants who succeed in obtaining a judgment
are exposed to exceptional risk. For those reasons, New York should
remove any ambiguity and ensure that key contractual covenants
survive entry of judgment.

New York taxpayers suffer significant losses, and have little legal
recourse, when foreign sovereigns choose not to pay their debts. The
losses incurred by taxpayers significantly affect New York tax
revenue, not only because New York cannot tax interest and other
gains that are not paid, but also because investors' losses offset
other taxable gains.

The most egregious example of a foreign sovereign that is capable of
paying its debt, but that chooses not to, is the Republic of
Argentina. In 2001, Argentina defaulted on $81.2 billion of debt,
which is the largest sovereign debt default in history. Argentina
refused to negotiate with its bondholders until 2005, and then
offered the bondholders an exchange worth about 27-cents on the
dollar on a take-it-or-leave-it basis. Approximately 76 percent of
bondholders accepted the exchange offer, and Argentina repudiated the
remaining portion of its debt.
In 2010 Argentina made a new exchange offer, this time worth about
25-cents on the dollar on a take it or leave it basis, which
reportedly raised the percentage of bondholders that accepted one or
both of its exchange offers to about 92%. Argentina has repudiated
the remaining approximately $8 billion in defaulted debt, much of
which has been reduced to judgments against Argentina, despite
reporting that it holds over $54 billion in foreign reserves.

Dozens of lawsuits have been filed in the United States District Court
for the Southern District of New York as a result of the Argentine
debt default. The two largest creditors alone have claims and
judgments of over $3 billion. Judge Thomas P. Griesa, the most senior
judge in the Southern District, has repeatedly observed that
Argentina has never offered to pay the judgments rendered against it
and instead focused all of its efforts on protecting its assets from
creditors. In May 2009, Judge Griesa held that Argentina was in civil
contempt of
court for failing to comply with court orders and drew an adverse
inference that Argentina had removed assets from New York in
violation of court orders.

The economic impact of this debt repudiation has been substantial. The
direct net costs to New York holders of defaulted Argentine debt
currently total $902 million, including $452 million in capital
losses, $382 million in foregone interest payments, and $180 million
in foregone investment returns, less nearly $112 million in tax
benefits created by the losses or foregone income. From December 2001
to December 2008, the indirect costs of the Argentine debt default,
through lost tax revenue, total approximately $329 million.

This bill will help prevent foreign states such as Argentina from
evading the duties and obligations imposed on them in any contract
governing the defaulted debt of such foreign state. The bill stops a
defaulting foreign sovereign from arguing that all such duties and
obligations, other than those directly addressed in final judgments
against foreign states in favor of holders of their defaulted debt,
did not survive the entry of the judgments against it and merged into
such final judgments. It will assist New York investors in holding
defaulting foreign sovereigns accountable.

LEGISLATIVE HISTORY:
New bill.

FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
If states such as Argentina are prevented from potentially
extinguishing the contractual and judgment enforcement rights of
holders of its defaulted debt by reason of the so-called merger
doctrine, New York may collect substantial capital gains and avoid
the deduction from taxes of capital losses with respect to any
judgments that are satisfied by Argentina either by agreement or by
execution against its property.

EFFECTIVE DATE:
This act shall take effect immediately and shall be applicable to all
actions and proceedings pending on the effective date.

view bill text
                    S T A T E   O F   N E W   Y O R K
________________________________________________________________________

                                 3767--B

                       2011-2012 Regular Sessions

                            I N  S E N A T E

                              March 3, 2011
                               ___________

Introduced  by  Sen. BONACIC -- read twice and ordered printed, and when
  printed to be committed to the Committee  on  Judiciary  --  committee
  discharged, bill amended, ordered reprinted as amended and recommitted
  to  said  committee  --  committee  discharged,  bill amended, ordered
  reprinted as amended and recommitted to said committee

AN ACT to amend the general obligations  law,  in  relation  to  certain
  provisions of contracts governing debt obligations of foreign states

  THE  PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM-
BLY, DO ENACT AS FOLLOWS:

  Section 1.  The general obligations law is amended  by  adding  a  new
section 5-336 to read as follows:
  S 5-336. SURVIVAL OF ENTRY OF FINAL JUDGMENT AND NON-MERGER INTO FINAL
JUDGMENT  OF  PROVISIONS  OF  CONTRACTS  GOVERNING DEBT OBLIGATIONS OF A
FOREIGN STATE.
  1. AS A MATTER OF PUBLIC POLICY, THE PROVISIONS OF A CONTRACT  GOVERN-
ING A DEBT OBLIGATION OF A FOREIGN STATE, AS DEFINED IN 28 UNITED STATES
CODE  SECTION  1603, THAT ARE NOT DIRECTLY ADDRESSED IN A FINAL JUDGMENT
IN FAVOR OF THE HOLDER OF THE DEBT OBLIGATION AGAINST THE FOREIGN STATE,
SHALL SURVIVE THE ENTRY OF SUCH FINAL JUDGMENT AND SHALL NOT  BE  MERGED
INTO SUCH FINAL JUDGMENT. SUCH PROVISIONS INCLUDE BUT ARE NOT LIMITED TO
A PROVISION THAT:
  (A) WAIVES THE IMMUNITY OF SUCH FOREIGN STATE IN RESPECT OF ACTIONS OR
PROCEEDINGS, INCLUDING ACTIONS OR PROCEEDINGS TO ENFORCE ANY FINAL JUDG-
MENT  ENTERED  AGAINST  SUCH  FOREIGN STATE, BROUGHT BY ANY HOLDER BASED
UPON OR WITH RESPECT TO SUCH OBLIGATION; OR
  (B) DESIGNATES THE COURTS OR JURISDICTION TO WHICH THE  FOREIGN  STATE
HAS  SUBMITTED  FOR  PURPOSES  OF SUIT, OR FOR ACTIONS OR PROCEEDINGS TO
ENFORCE ANY FINAL JUDGMENT; OR
  (C) DESIGNATES THE CHOICE OF LAW SET FORTH IN ANY  SUCH  CONTRACT  FOR
PURPOSES OF DETERMINING THE RIGHTS AND DUTIES OF THE PARTIES TO ANY SUCH
CONTRACT; OR

 EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                      [ ] is old law to be omitted.
                                                           LBD09939-03-1

S. 3767--B                          2

  (D)  OBLIGATES  THE FOREIGN STATE TO APPOINT AND MAINTAIN AN AGENT FOR
SERVICE OF PROCESS IN THE JURISDICTION TO WHICH THE  FOREIGN  STATE  HAS
SUBMITTED OR IN WHICH IT IS SUBJECT TO JURISDICTION; OR
  (E) COMMITS NOT TO CREATE OR PERMIT TO SUBSIST ANY LIEN, PLEDGE, MORT-
GAGE,  SECURITY  INTEREST, DEED OF TRUST, CHARGE OR OTHER ENCUMBRANCE OR
PREFERENTIAL ARRANGEMENT WHICH HAS THE PRACTICAL EFFECT OF  CONSTITUTING
A SECURITY INTEREST; OR
  (F)  COMMITS  THAT THE FOREIGN STATE'S DUTY TO MAKE PAYMENT WILL RANK,
AND PAYMENT WILL BE MADE, PARI PASSU, OR  AT  LEAST  EQUALLY,  WITH  ANY
OTHER PRESENT OR FUTURE PAYMENT OBLIGATION OF SUCH FOREIGN STATE.
  2. FOR PURPOSES OF THIS SECTION, "FINAL JUDGMENT" SHALL MEAN ANY JUDG-
MENT THAT IS NO LONGER ELIGIBLE TO BE APPEALED TO ANY COURT.
  S 2. This act shall take effect immediately and shall be applicable to
all unsatisfied judgments against a foreign state.

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