BNY Mellon, a financial intermediary between the Argentine government and its bond investors, in June held onto a $539 million interest payment owed to bondholders on the orders of a U.S. court.
The U.S. District Court in New York had ruled that Argentina could not pay creditors who accepted discounted restructured bonds under U.S. legislation unless it also paid the holdout U.S. investment funds that rejected bond swaps in 2005 and 2010.
The frozen coupon payment tipped Latin America's No.3 economy into its second default in little over a decade. The Argentine government argued it had met its debt obligations and urged holders of exchange debt to pursue BNY Mellon for payment.
A lawsuit filed in London by four hedge funds said that BNY Mellon's actions "have been consistently designed to protect its own interests."
If the lawsuit - filed at London's High Court by hedge funds Knighthead Master Fund, RGY Investments LLC, George Soros's Quantum Partners and Hayman Capital Master Fund - is successful it may put pressure on U.S. District Judge Thomas Griesa, who has presided over Argentina's drawn-out debt battle with the holdouts, to exempt bonds that fall under jurisdictions outside the United States.
The plaintiffs, who hold Argentine debt amounting to 1.3 billion euros, argue their euro-denominated bonds fall under English legislation and therefore should not be swept up in Griesa's rulings.
Griesa has ruled the bonds should because interest payments made on them pass through New York and therefore fall under his jurisdiction.
A MOVE TO RESUME INTEREST PAYMENTS
On Tuesday, BNY Mellon said the lawsuit filed against it was "without merit."
"We continue to follow the current court order to hold onto the money," a spokesman for BNY Mellon told Reuters.
Argentina's Congress is due on Wednesday to discuss a law that would replace BNY Mellon as intermediary for payments on foreign law bonds with state-controlled bank Banco Nacion, as part of a new debt restructuring plan.
The central bank "has revoked BNY's authorization for representation in Argentina," Cabinet Chief Jorge Capitanich said in his daily briefing. The authorization applied specifically to two BNY Mellon officials.
If Argentina's draft legislation is enacted and executed, it would allow it to skirt Griesa's court orders and resume interest payments on an estimated $29 billion in restructured bonds.
The debt crisis has taken a toll on Argentine assets and the peso, which sank to a record low of 14.20 per dollar on the black market on Tuesday despite the central bank's lifting interest rates in an apparent bid to ease pressure on the currency.
A central bank source, speaking on condition of anonymity, said that revoking BNY Mellon's authorization would not prevent it from transferring the frozen $539 million to bondholders if it decided to fulfill the payment.
(Additional reporting by Sarah Marsh in Buenos Aires and Nishant Kumar in London; Writing by Richard Lough; Editing by Tom Brown and Leslie Adler)
By Jorge A. Otaola and Nate Raymond