Declares certain contracts to which a debt evading foreign state is a party to be void as against public policy.
TITLE OF BILL: An act to amend the general obligations law, in relation to certain provisions of contracts and debt or equity securities of debt evading foreign states and state-owned corporations of debt evading foreign states to be void as against public policy
PURPOSE OF BILL: This bill will amend the general obligations law by prohibiting certain foreign states, their agencies or instrumentalities, and their state-owned corporations, against whom final judgments of at least $100 million have remained unpaid for two years (collectively "debt evading foreign states"), from amending their debt or equity securities, or contracts governing them (collectively "obligations") by revoking, amending, changing or eliminating (collectively "amendment") provisions in such obligations which in any way relate to a holder's enforcement rights under such obligations, as void as against public policy and unenforceable against any holder that has not affirmatively agreed to such amendment, when the passage of the amendment is by reason of the votes of holders of such obligations who will no longer be holders upon passes of the amendment. As a result of this bill, holders of such obligations, most of which were issued in New York, governed by New York law, and which contain waivers of immunity and consents to suit in New York, will not be stripped of their ability to enforce their rights under such obligations, including enforcing judgments rendered against debt evading foreign states, based upon the vote of holders of such obligations who by reason the passage of such amendment will no longer remain holders. This bill will prevent debt evading foreign states from using exit consents to escape their obligations, including judgments, with respect to non-participants in debt exchanges. For the avoidance of doubt, this bill also provides that all of the commitments and duties of debt avoiding foreign states and enforcement rights of holders of the debt and equity securities of debt evading foreign states shall survive the entry of final judgment against any such debt evading foreign state and shall not be merged into any such final judgment.
SUMMARY OF PROVISIONS: Section 1 defines the circumstances under which a foreign state and its agencies, instrumentalities and state-owned corporations become debt evading foreign states. It then provides that any attempt by such debt evading foreign states to impair the enforcement rights of holders of its obligations shall be void and unenforceable as against any holder who did not affirmatively vote in favor of the amendment revoking such enforcement right, when the amendment passes by reason of the votes of holders of obligations who will no longer be holders after passage of the amendment. Section 1 also ensures that the duties and commitments of debt evading foreign states and the enforcement rights of holders of its debt or equity securities shall survive the entry of final judgment against any such debt evading foreign state and shall
not be merged in any such final judgment. Section 2 provides that the act will take effect immediately.
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 citizens and other individuals through New York's 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. 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 to refuse to pay judgments rendered against them. Because of the difficulties associated with enforcing judgments against foreign sovereigns, 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 can be offset against 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 25-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. Argentina has repudiated these debts while claiming, in a recent filing with the Securities and Exchange Commission, to have a debt-to-gross domestic product ratio of 49.1 % less than the ratios of Canada, the United Kingdom, France, Germany, and a variety of other European countries - and a budget surplus in each year from 2004 to 2008.
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 prevent debt evading foreign states such as Argentina, which is presently preparing an offer to exchange certain of its defaulted debt for new debt of lesser value, from including in the debt exchange provisions a requirement that those holders exchanging their debt vote to extinguish the enforcement rights of holders who do not participate in the exchange but seek to enforce their rights, including judgment enforcement rights, in the courts.
LEGISLATIVE HISTORY: New bill.
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS: At present, at least one debt evading foreign state, the Republic of Argentina, is contemplating a securities offering that is likely to include sales or offers for the sale of securities in New York. Argentina has filed a registration statement with the Securities and Exchange Commission relating to the offer and sale of securities having an aggregate principal amount of up to$15 billion. If Argentina is prevented from extinguishing the right of holders who do not participate in the exchange to enforce their rights and judgments against Argentina, 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.
STATE OF NEW YORK ________________________________________________________________________ 2530 2011-2012 Regular Sessions IN SENATE January 25, 2011 ___________Introduced by Sen. GIANARIS -- read twice and ordered printed, and when printed to be committed to the Committee on Judiciary AN ACT to amend the general obligations law, in relation to certain provisions of contracts and debt or equity securities of debt evading foreign states and state-owned corporations of debt evading foreign states to be void as against public policy 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 5-337 to read as follows: S 5-337. CERTAIN AMENDMENTS OF CONTRACTS ENTERED INTO BY DEBT EVADING FOREIGN STATES AND BY STATE OWNED CORPORATIONS OF DEBT EVADING FOREIGN STATES VOID AS AGAINST PUBLIC POLICY. (A) AN AMENDMENT OF A CONTRACT TO WHICH A DEBT EVADING FOREIGN STATE, AN AGENCY OR INSTRUMENTALITY OF A DEBT EVADING FOREIGN STATE, OR A STATE-OWNED CORPORATION OF A DEBT EVAD- ING FOREIGN STATE IS A PARTY, INCLUDING A CONTRACT GOVERNING DEBT OBLI- GATIONS OF OR EQUITY SECURITIES ISSUED BY A FOREIGN STATE, ADOPTED BY A VOTE OF THE PARTIES TO, OR THE RECORD OR BENEFICIAL HOLDERS OF THE OBLI- GATION IN CONNECTION WITH A TRANSACTION WITH THE FOREIGN STATE AS A RESULT OF WHICH THE HOLDERS VOTING IN FAVOR OF SUCH AMENDMENT WILL NO LONGER BE HOLDERS, AND WHICH PURPORTS TO REVOKE, AMEND, CHANGE OR ELIMI- NATE A PROVISION WHICH RELATES IN ANY WAY TO A HOLDER'S ENFORCEMENT RIGHTS UNDER SUCH OBLIGATION, INCLUDING BUT NOT LIMITED TO AN AMENDMENT THAT RELATES TO A PROVISION WHEREBY THE FOREIGN STATE: (I) WAIVES THE IMMUNITY OF SUCH FOREIGN STATE WITH RESPECT TO ACTIONS OR PROCEEDINGS, INCLUDING ACTIONS OR PROCEEDINGS TO ENFORCE ANY FINAL JUDGMENT ENTERED AGAINST SUCH FOREIGN STATE, BROUGHT BY ANY HOLDER BASED UPON OR WITH RESPECT TO SUCH OBLIGATION; OR (II) DESIGNATES THE COURTS OR JURISDICTION TO WHICH THE FOREIGN STATE WILL SUBMIT FOR PURPOSES OF SUIT, OR FOR ACTIONS OR PROCEEDINGS TO ENFORCE ANY FINAL JUDGMENT; OREXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD05797-01-1 S. 2530 2
(III) 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 (IV) ELIMINATES ANY OBLIGATION OF 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 JURISDIC- TION; OR (V) 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 (VI) COMMITS THAT ITS 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, SHALL BE VOID AS AGAINST PUBLIC POLICY AND UNENFORCEABLE AGAINST ANY HOLDER THAT HAS NOT AFFIRMATIVELY AGREED TO SUCH AMENDMENT, REGARDLESS OF THE PERCENTAGE OF HOLDERS OF SUCH OBLI- GATION VOTING FOR SUCH AMENDMENT. (B) ANY PROVISION OF A CONTRACT TO WHICH A FOREIGN STATE IS A PARTY, INCLUDING A CONTRACT GOVERNING THE OBLIGATIONS OF SUCH FOREIGN STATE, WHICH RELATES IN ANY WAY TO A HOLDER'S ENFORCEMENT RIGHTS UNDER ANY SUCH OBLIGATIONS, INCLUDING BUT NOT LIMITED TO THOSE SET FORTH IN SUBDIVISION (A) OF THIS SECTION, SHALL SURVIVE THE ENTRY OF FINAL JUDGMENT ON BEHALF OF ANY HOLDER AGAINST ANY SUCH FOREIGN STATE AND SHALL NOT BE MERGED INTO ANY SUCH FINAL JUDGMENT. (C) THE FOLLOWING TERMS AS USED IN THIS SECTION, SHALL HAVE THE FOLLOWING MEANING UNLESS A DIFFERENT MEANING CLEARLY APPEARS FROM THE CONTEXT: (I) "AGENCY OR INSTRUMENTALITY OF A FOREIGN STATE" SHALL MEAN ANY ENTITY: (A) WHICH IS A SEPARATE LEGAL PERSON, CORPORATE OR OTHERWISE; AND (B) WHICH IS AN ORGAN OF A FOREIGN STATE OR A PROVINCE, OR ANY POLI- TICAL SUBDIVISION THEREOF; OR A MAJORITY OF WHOSE SHARES OR ANY OTHER OWNERSHIP INTEREST IS OWNED BY A FOREIGN STATE OR A PROVINCE, OR ANY POLITICAL SUBDIVISION THEREOF; AND (C) WHICH IS NEITHER A CITIZEN OF A STATE OF THE UNITED STATES, NOR CREATED UNDER THE LAWS OF ANY THIRD COUNTRY. (II) "FINAL JUDGMENT" SHALL MEAN ANY JUDGMENT THAT IS NO LONGER ELIGI- BLE TO BE APPEALED TO ANY COURT. (III) "FOREIGN STATE" INCLUDES A PROVINCE OR POLITICAL SUBDIVISION OF A FOREIGN STATE. (IV) "DEBT EVADING FOREIGN STATE" SHALL MEAN: (A) ANY FOREIGN STATE THAT: (I) HAS ONE OR MORE FINAL JUDGMENTS ENTERED AGAINST IT BY ANY STATE OR FEDERAL COURT LOCATED IN THIS STATE, INCLUDING ANY FINAL JUDGMENT ORIGINALLY ISSUED IN A FOREIGN COURT THAT IS FILED OR REGISTERED IN THIS STATE, IN THE COMBINED AMOUNT OF WHICH JUDGMENTS EXCEEDS ONE MILLION DOLLARS; (II) FAILS TO SATISFY IN FULL ANY SUCH JUDGMENT FOR A PERIOD OF MORE THAN TWO YEARS AFTER THE JUDGMENT BECOMES A FINAL JUDGMENT, REGARDLESS OF WHETHER SUCH JUDGMENT BECAME A FINAL JUDGMENT BEFORE THE DATE OF THE EFFECTIVE DATE OF THIS SUBDIVISION; AND (III) IS NOT A FOREIGN STATE ELIGIBLE FOR: 1. FINANCING THROUGH THE INTERNATIONAL DEVELOPMENT ASSOCIATION, UNLESS SUCH STATE IS ELIGIBLE FOR FINANCING FROM THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT; ORS. 2530 3
2. DEBT RELIEF UNDER THE ENHANCED HIPC INITIATIVE, AS DEFINED IN SECTION 1625(E)(3) OF THE UNITED STATES INTERNATIONAL FINANCIAL INSTI- TUTIONS ACT, OR DEBT RELIEF UNDER THE MULTILATERAL DEBT RELIEF INITI- ATIVE OF THE INTERNATIONAL MONETARY FUND; AND (B) A PROVINCE OR POLITICAL SUBDIVISION OF A FOREIGN STATE REFERRED TO IN SUBPARAGRAPH (A) OF THIS PARAGRAPH. (V) "STATE-OWNED CORPORATION OF A DEBT EVADING FOREIGN STATE" SHALL MEAN ANY CORPORATION OR ENTITY, OTHER THAN A NATURAL PERSON: (A) THAT IS AN AGENCY OR INSTRUMENTALITY OF A FOREIGN STATE THAT IS A DEBT EVADING FOREIGN STATE; OR (B) THAT A MAJORITY OF THE SHARES OR OTHER OWNERSHIP INTEREST OF WHICH IS HELD, EITHER DIRECTLY OR INDIRECTLY, BY A DEBT EVADING FOREIGN STATE OR BY AN AGENCY OR INSTRUMENTALITY OF A FOREIGN STATE THAT IS A DEBT EVADING FOREIGN STATE. S 2. This act shall take effect immediately.