This content is from: Local Insights

United States

The debt crisis of the 1980s may be over, but the litigation arising from the various sovereign defaults is not. The holding of a recent case, Pravin Banker Associates v Banco Popular Del Peru, 1997 WL 134390 (2nd Cir NY), may have serious repercussions for rescheduling sovereign debt.

Mellon Bank had extended US$14 million of short-term working capital loans to Banco Popular, a bank owned by the Peruvian government. In 1984, Banco Popular defaulted on its external debt obligations. Since 1990, a committee of Peru's creditors, headed by Citibank, has been negotiating with the government of Peru in an attempt to reschedule the debt. The Bank Advisory Committee agreed to stay all lawsuits pending resolution of the restructuring negotiations.

In 1990, Mellon sold US$9 million of its Peruvian debt to Pravin Banker Associates at a discount. When Pravin was not paid by Banco Popular, it brought suit against Banco Popular and the government of Peru which had guaranteed the debt. The US District Court for the Southern District of New York granted summary judgment in favour of Pravin. After a number of temporary stays of the District Court's judgment, the US Circuit Court for the Second Circuit took up this important case.

Peru and Banco Popular argued before the Second Circuit that the District Court erred in failing to extend international comity to Peru's negotiations with the Bank Advisory Committee. The Second Circuit recognized the principle of international comity and implicitly agreed it could be extended to international negotiations with a foreign country, not just to foreign judicial proceedings. However, the court noted that: "courts will not extend comity to foreign proceedings when doing so would be contrary to the policies or prejudicial to the interests of the United States."

Here, the Second Circuit found that to stay the Peruvian debt negotiations would be contrary to the US policy of "ensuring the enforceability of valid debts under principles of contract law". Peru was clearly in default, and the debt negotiations were not sufficient to deny Pravin its day in court. Further, the court noted that creditor participation in debt negotiations should be on a strictly voluntary basis. Accordingly, the Second Circuit affirmed the District Court's ruling that Pravin's claim should be recognized notwithstanding international comity considerations.

The Second Circuit's ruling in Pravin should make it easier for dissenting creditors to bring suit against sovereign debtors despite the sovereign's participation in debt rescheduling talks.

There was a second aspect to this case that will be of interest to lenders and borrowers. A letter agreement between the government of Peru and Mellon provided: "We [Mellon] may assign all or any part of our interest in this letter agreement to any financial institution." The government of Peru asserted that Pravin was not a financial institution and therefore the assignment was invalid. The Second Circuit held that under New York law, only express limitations on assignability are enforceable. The language of the letter agreement only permitted assignments to financial institutions. It did not expressly limit assignments to these entities. Thus the assignment to Pravin was valid whether or not it is a financial institution. Clauses which purport to limit the right to assign must be carefully drawn.

Robert S Rendell

© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.

Instant access to all of our content. Membership Options | 30 Day Trial