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