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Aurelius Capital Master, Ltd. v. Republic of Argentina

United States District Court, S.D. New York

January 7, 2020

THE REPUBLIC OF ARGENTINA, Defendant. Reference Year Base Case GDP (in Millions of constant 1993 Person) Reference Year Base Case GDP (in Millions of constant 1993 Person)

          OPINION & ORDER


         Before the Court is Defendant Republic of Argentina's ("Defendant" or "the Republic"} motion to dismiss Plaintiff Aurelius Capital Master, Ltd.'s ("Plaintiff" or "Aurelius") breach of contract suit related to various U.S. dollar tied, GDP-linked securities issued by the Republic in 2005 and 2010. Specifically, Aurelius's complaint alleges that the Republic failed to make approximately $61 million in payments as required by the terms of the relevant securities. At the center of the dispute is a Byzantine mathematical calculation set forth in the documents governing the securities that determines whether the Republic's payment obligations for a given year are triggered. The parties fundamentally disagree as to how the core machinery of that equation is meant to function under the terms of the securities' controlling documents.

         Stripped down to the studs, this is a dispute about contractual interpretation. This, of course, is "a question of law . . . suitable for disposition on a motion to dismiss." Medtech Prods. Inc. v. Ranir, LLC, 596 F.Supp.2d 778, 807 (S.D.N.Y. 2008)(citations omitted). Here, the Republic has argued that this case may be dismissed as a matter of law because (1) the Republic's calculations relevant to determining its payment obligations are "binding" upon Aurelius absent proof of bad faith, willful misconduct, or manifest error and (2) data relied upon by Aurelius in arguing that the payment obligation was triggered is different from the data prescribed by the terms of the securities' governing documents.

         This Court "may dismiss a breach of contract claim only if the terms of the contract are unambiguous." Orchard Hill Master Fund Ltd. V. SBA Commc'ns Corp., 830 F.3d 152, 156 (2d Cir. 2016). Here, the relevant contractual terms clearly and plainly indicate that the calculations material to Aurelius's breach of contract claim must rely on enumerated economic metrics produced by the Argentinian government. Aurelius, however, has rested its claim on data not contemplated by the plain terms of the relevant contract and has argued for an interpretation of that contract that allows use of alternate statistics. Aurelius could have bargained for a contract that required the use of the specific metrics "or the closest equivalent," "or the stated successor," but it did not. Thus, Aurelius is stuck with the enumerated metrics and, accordingly, the Republic of Argentina's motion to dismiss is GRANTED. However, that dismissal is without prejudice, and Plaintiff will be granted leave to amend its complaint.


         The facts below are drawn from Aurelius's complaint and, where necessary, from the parties' briefing on the instant motion. (See Complaint ("Compl."), dated January 14, 2019 [dkt. no. 1]); (see also Republic's Memorandum of Law in Support of Motion to Dismiss ("MTD"), dated April 18, 2019 [dkt. no. 17]); (see also Aurelius's Memorandum of Law in Opposition to Motion to Dismiss ("Opp."), dated June 3, 2019 [dkt. no. 18]); (see also Republic's Reply to Aurelius Opposition ("Reply"), dated July 2, 2019 [dkt. no. 21]}. Of course, the Court must accept as true all factual allegations in the complaint and must draw all reasonable inferences in favor of Plaintiff. Marbi Corp. of New York v. Puhekker, 9 F.Supp.2d 425, 427 (S.D.N.Y. 1998).

         a. The Argentinian Debt Crisis

         The story of the Argentinian financial crisis is, to put it mildly, familiar to this Court. Between 1993 and 2001, the net interest payments on the Republic's sovereign debt increased sharply, rising from approximately $2.9 billion (1.2 percent of GDP) to $10.2 billion (3.8 percent of GDP). (MTD at 5). Due to the strain of its exploding debt load, the Republic announced a moratorium on its debt service payments in December 2001. See EM Ltd. v. Republic of Arg., 473 F.3d 463, 466 (2d Cir. 2007). That default spurred seemingly endless rounds of litigation relating to unpaid amounts on the distressed debt. (See MTD at 5).

         In 2005 and 2010, the Republic launched voluntary debt exchanges whereby owners of the country's defaulted debt could exchange their non-performing bonds for new securities. (See Compl. ¶ 2); (see also MTD at 5). Because the new bonds issued in the debt exchanges represented a "steep haircut" from the face value of the bonds tendered by participants, (see Compl. ¶ 2), the Republic coupled the new bonds with GDP-linked securities that provided for contingent additional payments to bondholders-made yearly through 2035-based on the performance of the Republic's economy. (Id.).[1] In essence, participants in the 2005 and 2010 exchanges "bought in" to the Argentinian economy; they "provided Argentina many billions of dollars in debt relief in return for [] participation in the ensuing growth of Argentina's economy." Id.

         b. The Global Security

         Holders of the GDP-Linked Securities do not automatically receive a cut of the Republic's economic output. Instead, whether the Republic's payment obligations are (or are not) triggered in a given year is determined by a labyrinthine set of definitions and equations set forth in the securities' governing documents. The governing documents for the GDP-Linked Securities include: (i) the June 5, 2005 Trust Indenture (see Compl. Ex. A); (ii) the 2005 Form of Registered Security (the "2005 Global Security") (see Compl. Ex. B); (iii) the April 30, 2010 First Supplemental Indenture (see Compl. Ex. C); and (iv) the 2010 Form of Registered Security (the "2010 Global Security") (see Compl. Ex. D).[2]

         Some table setting is in order. At the most basic level, the Global Security lays out methods for determining whether a payment is due "in respect of Argentina's economic performance in any given year," which the GDP-Linked Securities refer to as a "Reference Year." (Compl. ¶ 4). However, the deadline for the Republic to make payment for a given Reference Year is delayed by one year. (Global Security § 1(e) at R-4) (defining "Payment Date" as "for any Reference Year, the 15th of December of the calendar year following such Reference Year."). So, a payment for Reference Year 2013 would come due on December 15, 2014, a payment for Reference Year 2014 would come due on December 15, 2015, and so on.

         The Global Security lays out two tests for determining whether a payment is due for a given Reference Year. First, the Security requires that the "Payment Amount" for the relevant Reference Year must be positive. The Payment Amount is determined by comparing various GDP figures for the Reference Year to determine "Excess GDP," which is then subject to certain further adjustments to arrive at the Payment Amount figure. (See Compl. ¶ 17). The parties do not dispute that the Payment Amount for 2013 was positive, and so the Court will not saddle readers of this opinion with the technical details of its calculation.

         The critical theater in this dispute is the second test. That test includes three subtests whereby a Payment Amount is only due for a given year if (i) Actual Real GDP exceeds Base Case GDP for the relevant Reference Year (the "GDP Subtest"); (ii) Actual Real GDP Growth exceeds Base Case GDP Growth for the Reference Year (the "GDP Growth Subtest"); and (iii) the total payments made to date under the GDP-Linked Securities and the Payment Amount do not exceed a contractually-defined "Payment Cap." (Compl. ¶ 18). Only the GDP Subtest and the GDP Growth Subtest are at issue in this case. Explanations of the relevant terms follow.

         The various calculations required to assess the Republic's economic performance against the GDP Subtest and the GDP Growth Subtest rely on multiple metrics. Most important among these metrics, at least for purposes of the present dispute, is the Republic's Actual Real Gross Domestic Product ("Actual Real GDP"). Actual Real GDP is a price-adjusted measure of the Republic's total economic output that "uses a set of 'constant' prices-prices from a 'base' year-to control for inflation in order to achieve comparability across different periods." (MTD at 11). Under the terms of the Global Security, that "base year," referred to by the Security as a "Year of Base Prices," is 1993. Importantly, the Global Security only allows Actual Real GDP figures that are calculated and published by the Republic's Instituto Nacional de Estadistica y Censos ("INDEC")--the Argentinian government agency officially responsible for publishing the country's economic data-to be used in the relevant calculations. (See Global Security § 1(e) at R-2 (Defining Actual Real GDP as "for any Reference Year, the gross domestic product of Argentina for such Reference Year measured in constant prices for the Year of Base Prices, as published by INDEC.") (Emphasis added)).

         Similarly, the GDP Subtest requires that the Republic's actual economic output exceed a "Base Case GDP." Base Case GDP functions as a contractually-defined benchmark against which the Republic's economic performance for a Reference Year can be measured. Base Case GDP is specifically listed for every Reference Year in a chart in the ...

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