Lloyds Bank PLC v. Republic of Ecuador

In 1985 and 1986, the Central Bank of Ecuador (Central Bank) restructured and consolidated certain of the foreign debt of the Republic of Ecuador (Ecuador) (defendant) via a consolidation agreement with the foreign creditors. The consolidation agreement permitted the creditors to convert certain debt (consolidation-agreement debt) into new obligations on favorable terms, leading to the development of a secondary market for the consolidation-agreement debt. Whether the assignor or the assignee of consolidation-agreement debt would receive interest payments relating to the converted debt was left for the assignors and assignees to decide between themselves. The consolidation agreement stated that conversion would extinguish the principal previously owed on the corresponding debt, but it did not expressly address the possible extinguishment of interest. Ecuador remained current on the consolidation-agreement debt until March 1987. In May 1994, under the auspices of a plan announced by the United States secretary of the Treasury to restabilize the international financial system (the Brady Plan), Ecuador restructured its foreign debt (the 1994 financing plan). Among other things, the 1994 financing plan included a past-due interest bond exchange agreement (PDI bond agreement), which permitted holders of Ecuadorian debt to receive past-due interest bonds (PDI bonds) in exchange for the cancellation of Ecuador’s original obligations. Lloyds Bank PLC (Lloyds) (plaintiff) was the closing agent under the PDI bond agreement. In that capacity, Lloyds was charged with overseeing a reconciliation process to determine how much past-due interest each acquiror of PDI bonds was entitled to receive. In February 1995, Ecuador adopted a new policy for addressing past-due interest on converted consolidation-agreement debt, pursuant to which conversion creditors could collect past-due interest only if they could prove that they expressly reserved their right to receive such interest at the time of conversion. Numerous creditors who owned PDI bonds tracing from converted consolidation-agreement bonds (collectively, creditors) (plaintiffs) disagreed with Ecuador’s policy. After Ecuador failed to persuade the creditors to renounce their interest claims, Lloyds commenced an interpleader action by depositing approximately $9.8 million in a fund with the court. The creditors moved for summary judgment against Ecuador, claiming that they were entitled to the $9.8 million. Ecuador also moved for summary judgment against the creditors, arguing that Ecuadorian law governed conversions of the consolidation-agreement debt because the conversion agreements were distinct from the consolidation agreement and involved Ecuadorian parties, were negotiated in Ecuador, and were prepared and executed in Ecuador. Ecuador further argued that under Ecuadorian law, the conversions were novations that extinguished the creditors’ interest rights absent express reservations to the contrary by the creditors. Finally, Ecuador contended that the Brady Plan justified its reliance on the 1994 financing policy to reject the creditors’ interest claims. The creditors responded that New York law governed the conversions of consolidation-agreement debt and that the conversions were not novations under New York law.