683 Capital Partners, LP v. The Republic of Argentina

Background

The order addresses coordinated lawsuits brought by Aurelius Capital Master, Ltd.; Novoriver S.A.; ACP Master, Ltd.; 683 Capital Partners, LP; and Adona LLC, Egoz I LLC, Egoz II LLC, Mastergen, LLC, Erythrina, LLC, AP 2016 1, LLC, AP 2014 3A, LLC, AP 2014 2, LLC, and WASO Holding Corporation. The plaintiffs hold GDP-linked debt securities issued by the Republic of Argentina. The securities required additional payments if Argentina’s economic performance exceeded specified thresholds.

The dispute concerns the 2013 reference year. The securities used GDP data published by Argentina’s Instituto Nacional de Estadística y Censos, or INDEC. In 2014, INDEC changed the base year for its GDP calculations from 1993 to 2004 and stopped publishing full-year 2013 actual real GDP in constant 1993 prices. That missing figure was needed to calculate an adjustment to the securities’ base-case GDP figures and determine whether a payment was due.

In an earlier round of the case, the court dismissed Aurelius’s claims because the securities did not allow bondholders to substitute the EMAE Index for the specified GDP data. The court allowed amendment. In the amended complaints, the plaintiffs alleged different theories: that Argentina used unadjusted GDP figures without obtaining the consent required to change the payment method, and that Argentina acted in bad faith by causing INDEC not to publish the 2013 data needed to calculate the payment.

Arguments on the Motion

Argentina moved to dismiss all of the amended complaints under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. Argentina argued that the securities’ binding-effect provision gave the Ministry of Economy authority to make the payment calculation and that the securities did not require Argentina to make INDEC publish GDP data. Argentina also argued that the plaintiffs’ allegations of concealment and manipulation were fraud-based and therefore had to satisfy the more demanding pleading standard in Rule 9(b).

The plaintiffs argued that the securities’ modification provision required the consent of 75 percent of the affected security holders before changing the method for calculating payments. They also alleged that Argentina knew a payment would be due if the adjustment were applied and caused INDEC to stop publishing the required data to avoid paying bondholders.

Court’s Analysis

The court held that the plaintiffs adequately pleaded a claim based on the securities’ modification provision. The securities required the adjustment fraction when calculating the relevant GDP figures. The modification provision specifically covered changes to the method of calculating payment amounts and required written action or a vote by the affected security holders. The court concluded that Argentina’s alleged use of unadjusted figures changed the payment-calculation method and therefore required the specified bondholder consent. The plaintiffs adequately alleged that Argentina did not obtain that consent.

The court rejected Argentina’s argument that the binding-effect provision gave it unrestricted authority over the calculation. The court read that general provision together with the more specific modification provision and concluded that the general provision did not authorize Argentina to disregard the adjustment fraction or substitute other GDP figures when the required data was unavailable.

The court separately rejected the plaintiffs’ argument that the securities expressly or impliedly required Argentina to compel INDEC to publish the missing GDP data. The securities did not expressly impose that obligation, and the court declined to add such a term to the contract. The court stated, however, that the plaintiffs could still proceed on their claim that Argentina breached the implied covenant of good faith and fair dealing. That covenant is a duty recognized in New York contract law requiring parties not to undermine the other party’s contractual benefits.

The plaintiffs alleged that Argentina knew the adjusted figures would show that a payment was due, caused INDEC not to publish the necessary 2013 data, and thereby sought to deprive the plaintiffs of that payment. Taking those allegations as true at the motion-to-dismiss stage, the court found them sufficient to state a plausible claim for breach of the implied covenant.

The court also held that Rule 9(b)’s heightened pleading standard did not apply. The plaintiffs’ claims did not allege that Argentina made fraudulent statements to induce them to enter the securities exchange. Instead, the claims alleged that Argentina later acted in bad faith to avoid a payment. The court therefore evaluated the complaints under the ordinary pleading standard in Rule 8.

Disposition

Judge Loretta A. Preska denied Argentina’s motion to dismiss the amended complaints. The court allowed both the express contract claims concerning the modification provision and the implied-covenant claims to proceed. The parties were directed to confer and propose a schedule for discovery by April 16, 2021. The order did not decide whether the plaintiffs ultimately were entitled to payment or whether their allegations would be proven.