Relates to contracts governing debt obligations of foreign states

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 be 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.