The opinion of the court was delivered by: SWEET
Elliott Associates, L.P. ("Elliott") brought these actions to recover monies due and owing on foreign debt instruments it acquired by way of assignment in the secondary capital markets. Defendants The Republic of Peru ("Peru") and Banco de la Nacion ("Banco") (collectively, the "Peru Defendants") concede the validity of the debt but deny that Elliott is a valid holder. They contend that the assignments, by two third-party banks, are void because Elliott committed "champerty" in purchasing the debt in violation of Section 489 of the New York Judiciary Law. Banco additionally contends that it cannot be liable on the debt assigned to Elliott, even if the assignments are valid, due to an internal 1994 Peruvian law which purported to transfer Banco's foreign debt obligations to Peru, thus allegedly relieving Banco of any liability.
Upon the trial before the Court and all the prior proceedings and the findings of fact and conclusions of law which follow, judgment will be entered in favor of the Peru Defendants.
Elliott is a Delaware limited partnership authorized to do business in the State of New York with its principal place of business in New York, New York.
Banco is a foreign financial institution organized under the laws of Peru with its principal place of business in Lima, Peru.
Peru is a foreign state as defined in 28 U.S.C. § 1603(a).
The prior proceedings in this controversy are set forth in the previous opinions of this Court, familiarity with which is assumed. See Elliott Assocs., L.P. v. Republic of Peru, 176 F.R.D. 93 (S.D.N.Y. 1997); Elliott Assocs., L.P. v. Republic of Peru, 1997 U.S. Dist. LEXIS 11185, 96 Civ. 7916, 1997 WL 436493 (S.D.N.Y. Aug. 1, 1997); Elliott Assocs., L.P. v. Republic of Peru, 961 F. Supp. 83 (S.D.N.Y. 1997); Elliott Assocs., L.P. v. Republic of Peru, 948 F. Supp. 1203 (S.D.N.Y. 1996). Elliott commenced these actions on October 18, 1996 in the Supreme Court of the State of New York, County of New York, seeking money judgments based upon allegations of Banco's default under certain written loan agreements and Peru's default under a written guaranty securing certain loan agreements. Peru and Banco removed these actions to this Court on October 21, 1996. The Court denied Elliott's motion for an order of attachment on December 12, 1996 and for summary judgment on April 28, 1997. Some fourteen Orders and Opinions were entered relating to discovery and scheduling. A bench trial was held beginning on March 19, 1998, and ending on March 25, 1998. Post-trial submissions were received, and closing arguments were heard on May 26, 1998, at which time the action was considered fully submitted.
I. Elliott's Purchase of Peruvian Debt
Elliott purchased, in a series of five trades from January 31, 1996, to March 1, 1996, all right, title and interest, from Swiss Bank Corporation ("SBC") and ING Bank, N.V. ("ING"), $ 20,682,699.04 in principal amount, together with all accrued and unpaid interest, of the working capital obligations
of Banco de la Nacion and Banco Popular del Peru under certain letter agreements (the "Letter Agreements"). The Letter Agreements were guaranteed by Peru in a written Guaranty on May 31, 1983 (the "Guaranty"). Elliott paid SBC and ING a combined total of $ 11,431,202.08.
The trades were as follows: (1) On January 31 1996, $ 5,000,000 in principal amount was traded for $ 2,589,500.00 by SBC; (2) on February 6, 1996, $ 2,000,000 in principal amount was traded for $ 1,090,000 by ING; (3) on February 14, 1996, $ 5,000,000 in principal amount was traded for $ 3,250,000 by SBC; (4) on February 14, 1996, $ 5,000,000 in principal amount was traded for $ 2,589,500 by SBC; and (5) on March 1, 1996, $ 3,682,679.55 in principal amount was traded for $ 1,907,259.83 by SBC.
Elliott closed its assignment agreement with ING on March 29, 1996, and provided a fully executed copy of the agreement to ING until April 15, 1996. Elliott closed its SBC purchases on April 19, 1996, and provided a fully executed copy of the assignment agreement to SBC on May 1, 1996.
The Letter Agreements and the Guaranty, both of which are governed by New York law, are valid outstanding obligations of Banco and Peru. The Letter Agreements and the Guaranty entitle the holder to, among other things, repayment of all principal, plus interest as provided in the Letter Agreements. The Letter Agreements and the Guaranty also entitle the holder to recover attorneys' fees, costs and disbursements incurred to enforce the Letter Agreements and the Guaranty.
Of the total $ 20,682,699.04 in principal obligations Elliott acquired, Banco is the Obligor of $ 7,000,000 in principal. Banco Popular is the Obligor for the remaining $ 13,682,699.04 in principal. Peru, however, guaranteed to repay the entire amount.
Banco and Peru have not paid any of the outstanding amounts due and owing under the Letter Agreements or the Guaranty. Banco and Peru are therefore in default of their obligations under those instruments.
II. Elliott's Intent And Purpose In Purchasing The Peruvian Debt Was To Bring An Action
Elliott purchased the Peruvian debt with the intent and purpose to sue. This purpose and intent can be determined from Elliott's investment strategy, the resumes of the individuals assembled for the Peruvian debt project, Elliott's delay in closing the Peruvian debt trades until after litigation risks were clarified by the Second Circuit in the Pravin Banker matter, the absence of credibility to Elliott's alternatives, and Elliott's conduct subsequent to the purchases.
A. Elliott's Emerging Market Debt Advisors Were Experienced In Purchasing Sovereign Debt And Suing Upon It
Elliott set up an investment team for the purchase of emerging market debt, consisting principally of Jay Newman ("Newman"), Andrew Kurtz ("Kurtz"), a senior analyst and portfolio manager at Elliott, Paul Singer ("Singer"), Elliott's founder and chief executive, and Ralph Dellacamera ("Dellacamera"), Elliott's head trader. Additionally, the team retained Michael Straus as outside counsel.
Prior to its first meeting with Newman, Elliott had never invested in emerging market debt. Elliott is an investment fund which, at the time the sovereign debt team was assembled, specialized in the purchase of distressed assets which it believed the market had undervalued. These included debtor-companies in bankruptcy, companies recently emergent from bankruptcy, or companies which had yet to enter formal bankruptcy.
Singer, Kurtz and Dellacamera had no experience in emerging market debt. Elliott therefore relied on Newman's expertise and recommendations in purchasing emerging market debt.
Jay Newman, who had formerly practiced law, entered the sovereign debt investment area in 1983 during the Latin American debt crisis when he began working for Lehman Brothers. In 1987 or 1988, Newman became Lehman Brothers' managing director for Third World debt, responsible for developing Lehman Brothers' trading and investment business in that area.
In 1989, Newman joined Dillon Reed, where he continued trading and brokering emerging market debt and managed a third world debt investment fund. One year later, he moved to Morgan Stanley, again to work on emerging market debt investments.
In 1993, Newman left Morgan Stanley to establish The Percheron Fund, an offshore investment fund that focused on emerging market debt. Newman managed the Percheron Fund until 1995. Also in 1993, Newman solicited investors for Water Street Bank & Trust Limited ("Water Street"), another offshore fund that invested in emerging market debt. At approximately the same time, Newman introduced Water Street's investors to Michael Straus, who he had first met in 1992 or 1993, when Straus was representing Banque de Gestion Privee-SIB in its sovereign debt lawsuit against the Republic of Paraguay. Newman knew of Straus because of his work as trial counsel to clients involved in sovereign debt lawsuits, as Straus has been involved in at least thirteen other debt lawsuits against sovereigns in the United States.
Straus assisted Newman in the solicitation of investors for Water Street and later became trial counsel to Water Street for its sovereign debt lawsuits.
Newman and Straus advised Water Street on its purchases of the sovereign debt of Poland, Ecuador, Ivory Coast, Panama, and Congo. Water Street thereafter filed lawsuits against each of those sovereigns seeking full payment of the debt purchased by Water Street. Straus served as trial counsel to Water Street for each of those lawsuits. Neither Newman nor Straus, however, made the ultimate decisions for Water Street regarding whether to purchase emerging market debt, or whether to sue the sovereign governments to collect. In May 1995, the Water Street investors decided to liquidate the fund, and Newman "assisted extensively in [the] liquidation of Water Street."
Straus had become familiar with the elements of champerty. Allegations of champerty were charged against Straus' clients in Banque de Gestion Privee-SIB v. La Republica de Paraguay, 787 F. Supp. 53 (S.D.N.Y.); Water St. Bank & Trust Ltd. v. Republic of Congo, 94 Civ. 1894 (SS) (S.D.N.Y.); and Water St. Bank & Trust Ltd. v. Republic of Poland, 95 Civ. 0042 (LAP) (S.D.N.Y.). In addition, Straus was familiar with CIBC Bank and Trust Company (Cayman) Ltd. v. Banco Central Do Brasil, 886 F. Supp. 1105 (S.D.N.Y.), where the defendant raised champerty.
B. Elliott's Emerging Market Debt Investments
During the winding down of Water Street and Percheron, Newman "wanted to stay involved in the business of third world debt." Therefore, when he approached Elliott in August or September 1995, Newman "was looking basically for a relationship with an investment fund so that [he] could continue working in the area." By October 1995, Newman was retained as an advisor to Elliott and began to make recommendations on the purchase of emerging market debt in the secondary market.
According to Straus, in December 1995, Newman introduced him to Elliott for the purpose of retaining him for emerging market debt matters. Straus was retained by Elliott as counsel of record in this case and in Elliott's sovereign debt lawsuit against the Republic of Panama.
1. The Panamanian Debt Purchases
Newman first recommended that Elliott purchase the sovereign debt of the Republic of Panama, the same debt on which Water Street had brought suit.
At the time of Elliott's purchase of Panamanian debt, Panama was in the process of finalizing its debt restructuring. Newman and Singer were aware that Panama had announced the terms of its restructuring, and Newman advised Elliott as to the status of Panama's restructuring negotiations.
Elliott purchased $ 28,750,907.05 face value of Panamanian debt obligations for $ 17,579,685.56 through trades with SBC, ING, First National Bank of Chicago, and Citibank, NK, and Newman negotiated the assignment agreements.
Elliott declined to participate in Panama's restructuring, and in July 1996, brought suit against Panama seeking full payment on the debt it had purchased. Straus was trial counsel for Elliott in that lawsuit.
2. The Peruvian Debt Purchases
Newman next recommended that Elliott purchase Peruvian sovereign debt. According to Singer, Newman was "instrumental in recommending" Peruvian debt to Elliott, "and that's why we bought the debt."
Like Panama, Peru was in the process of finalizing its restructuring when Elliott purchased its debt. In March 1983, Peru determined that it had insufficient foreign exchange reserves to service its foreign debt, and entered negotiations with the Bank Advisory Committee for Peru ("BAC"), a committee consisting of representatives of Peru's major commercial creditors.
The negotiations yielded a series of refinancing agreements, including letter agreements dated March 7, 1983, and May 31, 1983 (collectively the "1983 Letter Agreements"), between Peruvian banks and state-owned companies and their foreign creditors, and guaranteed by the Government of Peru.
After further negotiations stalled in 1984, Peru imposed restrictions on payment of external debt. As a result, Peru fell into arrears on its debts to various multinational organizations, foreign nations, and foreign commercial lenders.
On March 10, 1989, United States Treasury Secretary Nicholas Brady revised United States policy on international debt. The new policy, known as the "Brady Plan," urged lenders, on a voluntary basis, to forgive some of the debt owed to them by less developed countries, restructure what debt remained outstanding, and continue to provide these countries with additional loans.
Beginning in March 1990, Peru's commercial lenders filed various lawsuits in five countries. On October 25, 1990, Peru signed an agreement with the BAC to stay the pending lawsuits in order to enter into negotiations to restructure Peru's sovereign debt. About one year later, in September 1991, Peru and the IMF entered into an agreement to restructure the Peruvian economy.
In 1993, Peru's sovereign debt was approximately $ 25 billion, which was owed to multinational institutions such as the IMF, the World Bank, and the Inter-American Development Bank; other countries; commercial banks; and suppliers.
In December 1994, all of the creditors who had sued Peru, with the exception of Pravin Banker Associates Ltd. ("Pravin Banker"), dismissed their lawsuits in consideration for Peru's November 1992 Tolling Declaration.
On October 27, 1995, Peru and the BAC publicly announced an agreement in principle for a debt restructuring plan designed in accordance with the Brady Plan. The agreement covered $ 4.4 billion face amount of debt, virtually all of the external commercial debt owed by Peru and Peruvian public and private-sector debtors, including the debt involved in these lawsuits. It was only after the agreement in principle was reached, in January 1996, that Elliott began to accumulate the debt at issue in this action.
The Term Sheet for Peru's restructuring was negotiated between January and June 1996 and was issued on June 5, 1996. Creditors were required to present commitments to participate in the restructuring by July 31, 1996. Of the approximately 180 creditors eligible to take part in Peru's restructuring, only Elliott and Pravin Banker refused to participate.
On November 8, 1996, Peru and its creditors executed an Exchange Agreement implementing Peru's restructuring ("Brady Agreement"), which closed on March 7, 1997.
3. Elliott Intended To Bring An Action
a. From its inception in October 1995, Elliott's sovereign debt strategy focused on filing lawsuits
As concisely put by Elliott's president, Paul Singer: "Peru would either . . . pay us in full or be sued." Under the circumstances as they existed in January 1996, when Elliott began its assembly of Peruvian debt, the only credible way that Elliott could achieve its goal of full payment was by bringing an action.
Singer, Elliott's president, admitted that demanding full payment and suing Peru was one of Elliott's investment strategies at the time it purchased Peruvian debt, although he claimed this alternative was a last resort because of the typically poor investment return achieved through litigation, thus contradicting both Newman and Kurtz' testimony that filing suit or seeking full payment was not considered as a strategy.
b. Newman and Straus have a long history of suing sovereigns
Newman, upon whom Elliott relied in deciding to invest in the Peruvian debt, and Straus, with whom Elliott met in December 1995, before they began investing in the debt, are both experienced with the investment strategy of purchasing emerging market debt and suing thereon. Their involvement with Elliott is highly probative of Elliott's intent in purchasing the debt.
During Newman and Straus' association with Water Street, Water Street filed at least six debt lawsuits in this Court against sovereigns.
Straus also advised Water Street on its purchases of Ecuadorian, Panamanian, and Polish sovereign debt, and Water Street later filed lawsuits against each of those countries in London. In addition to being counsel of record to Elliott in this case, Straus has been involved as counsel in at least six other sovereign debt lawsuits against emerging market countries.
In December 1997, Straus' company, Red Mountain Finance, brought suit against the Congo after purchasing that country's discounted sovereign debt on the secondary market.
c. Elliott delayed closing its purchases of Peruvian debt until the Second Circuit had clarified the litigation risks
Elliott intentionally delayed the closing of the assignments until after April 12, 1996, when the Second Circuit denied Peru's request for an order to stay enforcement of a judgment without requiring the defendants to post a bond for the amount of the judgment, thereby clarifying Elliott's litigation risks. See Pravin Banker Associates Ltd. v. Banco Popular Del Peru, Order No. 96-7183 (2d Cir. Apr. 12, 1996).
1. The Elliott-SBC Assignment Agreement
The Elliott-SBC assignment agreement, covering four trades -- January 31, February 13 (two separate trades), and March 1, 1996 -- is dated April 19, 1996. Ricardo Leiva, the SBC employee responsible for closing these trades, testified that he expected that the trade would close within the industry-standard 21 calendar or 15 business days.
Leiva testified that SBC's normal practice was to complete assignments within 15 business days even when subsequent trades occurred with the same counterparty during that 15 day period. The new trades would normally be added to the transaction and all purchases would close within 15 business days.
Elliott, however, rejected the Emerging Markets Traders Association ("EMTA") standard assignment agreement,
and instead requested that SBC use the same assignment agreement used for Elliott's earlier purchase of Panamanian debt from SBC.
Leiva revised the earlier agreement to incorporate the terms of the Peruvian transaction and, on February 7, 1996, forwarded it to Elliott for execution.
Although Elliott had previously approved and executed the form of the assignment agreement in connection with its purchase of Panamanian debt, Elliott responded to SBC's draft on February 21, 1996 by requesting numerous changes and seeking additional documentation. Leiva testified that he was surprised at the level of changes to the assignment agreement proposed by Elliott.
On March 21, 1996, almost two months after its first trade with Elliott, SBC received additional revisions to the assignment agreement from Elliott, in which Elliott requested from SBC (a) a representation that the debt being purchased was still outstanding, (b) a representation that the Tolling Agreement and Guaranty were still in force, and (c) copies of the underlying loan agreements.
Elliott's lawyer informed SBC on March 21, 1996 that Elliott would not agree to a provision in the purchase of Peruvian debt requiring Elliott's consent to Peru's January 1994 privatization program, and sent additional changes to the assignment agreement on March 22, 1996.
On April 4, 1996, SBC sent Elliott a document labeled "final draft of assignment agreement," and enclosed copies of original letter agreements with Chase and Crocker Banks, some of the documentation demanded by Elliott.
On April 12, 1996, Mr. Leiva reported to Sarah Fels of the SBC legal department that a number of substantial issues were still outstanding in connection with the Elliott transaction.
ING Bank received hard copies of the assignment agreement executed by an authorized representative of Elliott, Singer, on April 15, 1996, three days after the Second Circuit's decision in Pravin Banker, and approximately two and a half months after the trade date.
Shortly thereafter, on April 19, 1996, Elliott's purchase of Peruvian debt from SBC closed, although Newman did not forward to SBC executed hard copies of the assignment agreement for the Peru debt until May 1, 1996.
The SBC trades closed two months and nineteen days after the date of the first trade. Considering the standard practice of closing within 15 business days of a second trade, the assignments customarily would have closed by March 22, 1996. Rather, they closed approximately four weeks later.
Leiva estimated that the Elliott-SBC trade took longer to close than any of the approximately 300 sovereign debt trades he has been involved with during his three and a half years as a closer at SBC. Leiva also testified that he has never experienced the same level of problems in the sale of working capital debt as he encountered on the Elliott-SBC transaction.
2. The ING Assignment Agreement
On February 9, 1996, ING sent to Elliott a proposed assignment agreement, which was based on the assignment agreement previously executed by Elliott for its purchase of Panamanian debt from ING. Because that agreement had been acceptable to Elliott for its purchase of Panamanian debt, ING's closer for the transaction, Margaret Forehand, testified that she anticipated that it would be acceptable for Elliott's purchase of Peruvian debt.
Elliott responded to ING's draft assignment agreement on February 21, 1996, by sending to ING comments and changes to the proposed agreement. Before calling Newman and being told that Elliott's comments had been sent, Forehand had heard nothing for a week after forwarding the draft assignment agreement.
On March 1, 1996, Forehand forwarded a revised version of the ING assignment agreement incorporating Elliott's changes with a few slight modifications, which she expected that the transaction would be finalized at that time.
Elliott responded to ING's March 1, 1996, facsimile by requesting additional changes and insisting that ING provide the last date on which interest had been paid on the debt. Forehand testified that it was not customary in the market for a purchaser to require a last payment date.
ING's legal department drafted a letter sent to Elliott stating that the transaction had to close by a specific date or the deal would be canceled. In addition, the letter stated that Elliott had "unreasonably delayed settlement of the transaction and asked for certain provisions relating to the assignment of the assets that are not reflective of customary market practice and to which we cannot agree or comply." After being confronted with ING's ultimatum, Newman telephoned Forehand and said Elliott would close the ING transaction on March 29, 1996.
On March 28, 1996, Newman sent by facsimile executed signature pages of the assignment agreement to ING. They were signed by Dellacamera, purportedly on behalf of Elliott. However, Dellacamera was not authorized to bind Elliott to the ING assignment agreement. In general, he had no authority to sign contracts on behalf of Elliott. Dellacamera was only authorized if Singer had executed a specific written authorization. No written authorization was executed for Dellacamera with respect to the ING agreement. Elliott admitted that it sent the signed agreement only after being threatened by ING with cancellation of the transaction. The following day, March 29, 1996, Elliott wired ING its payment.
Forehand testified she knew of no reason why the transaction with Elliott could not have closed within the standard 21 calendar day period. In fact, because Elliott failed to close promptly, ING imposed financial penalties on Elliott. Forehand testified that she has handled hundreds of sovereign debt transactions for ING, and that the level of changes to the ING agreement requested by Elliott was not customary.
3. Elliott Failed To Explain Any Alternative Reason For The Delays
Even though Newman was responsible for negotiating the assignment agreement with SBC on behalf of Elliott, he testified at his deposition that he did not know why the transaction took from January 31, 1996 to April 19, 1996 to close. At trial, however, Newman proffered a list of purported reasons for the delay. First, Newman blamed SBC, claiming there was "a lot of back and forth . . . over their representation" as to the amount of accrued interest, a "language ...