Like the rest of us, the U.S. Congress cannot wait until the Second Circuit argument on pari passu, now scheduled for June 20th. Unlike the rest of us, the U.S. Congress can do something about it — and it is.
This Thursday, the House Financial Services Committee is holding hearings on how the Obama Administration is mean to investors, with the U.S. brief in the pari passu litigation as one of three case studies, apparently on par with the mortgage settlement and the auto bailout. Adam and Stephen are both testifying, along with David Skeel and Ted Olson, who happens to represent the creditors in the Argentina litigation (lawyers for Argentina are not on the program).
While people might differ on the merits of all three cases, sticking the pari passu filling in the bankruptcy sandwich strikes me as rather loopy, not least because the U.S. brief this time is a carbon copy of the Bush Administration brief in 2004 on the same issue. (Meanwhile, the Obama Administration slapped trade sanctions on Argentina for ignoring investor arbitration awards.) Maybe they were going for the consumer-corporate-sovereign bankruptcy tour d'horizon effect, but the result is a mashup of apples, oranges, and green lizards.
On the merits, if they do spend any time on Argentina, I expect a replay of the flat-wrong argument that Collective Action Clauses somehow make the pari passu issue go away. The fact that Greece promptly paid its holdouts despite having the most favorable CACs ever is a case in point. I also worry about the hearings getting diverted into the totally intederminate and therefore massively manipulative debate about the meaning of pari passu. The crux of the controversy is not whether Argentina breached a covenant, but rather, whether pari passu can be the basis for a worldwide injunction. This is just too weedy to get straight in a hearing of this sort.
Then again, if anyone really cared about investors in foreign sovereign debt, they would be talking about sovereign immunity and sovereign bankruptcy, not pari passu. As these things go, we are more likely to double down on the crazy of the pari passu clause with a pari passu statute. Now that's a party I would not miss.
Comments
5 responses to “Edge of Reason: Paripassupalooza on Capitol Hill”
Anna,
Completely agree with you on the weirdness of viewing the pari passu saga as an example of the Obama administration’s meanness to investors. But I’m not sure it’s true that the controversy is “not whether Argentina breached a covenant, but rather, whether pari passu can be the basis for a worldwide injunction.” I don’t think the meaning of pari passu can be so easily separated from the appropriateness of the injunction. In Elliott’s wildest dreams, the clause means something like: “We promise not to pay any other unsecured (and unofficial) bondholder without making a pro rata payment to you.” If that’s really what the clause means, then the injunction doesn’t seem so crazy. In ordinary contract cases, after all, specific performance is an appropriate remedy when money damages can’t be collected by execution, and that’s pretty clearly the case here. Given Argentina’s refusal to pay, then an order requiring it to honor its promise and to pay Elliott – er, EML, I mean – to the same extent it pays other bondholders doesn’t seem all that unreasonable. Of course, if that’s NOT what the pari passu clause means, then it looks like the injunction is little more than an end run around the fact that these assets are immune from execution under the FSIA. Anyway, my point isn’t that Elliott – did I say that again? I meant EML – is right; it’s just that the validity of the injunction depends, in a very real way, on what the pari passu clause means. (To put all my cards on the table, I have no clue what PP means, and I don’t think anyone else does either. But if most market participants think Elliott is wrong – and they do – then that’s a pretty good reason to reject its interpretation.)
Anyway, the parties’ briefs are sadly lacking in substantive discussion of this point. Instead, they simply argue over whether the district court’s order should be seen as an execution, and thus contrary to the FSIA, or as an injunction, and thus hunky-dory. Seems to me the better question is whether an injunction of this sort triggers the foreign policy concerns that underlie the FSIA’s general policy that assets of foreign sovereigns are immune from execution. And on that question: If the sovereign has already promised that it won’t ever do exactly what Argentina is now doing, then those foreign policy concerns seem fairly remote. But here, where the pari passu clause is at best ambiguous, then I would hope the Second Circuit would give the DOJ’s amicus brief some real deference.
Mark
Mark – all great points, and you are right that the meaning of pari passu does matter — ultimately. But from what I gather reading the briefs, this case is not about execution v injunction. Elliott does not have a judgment to execute, because getting a judgment would have triggered the merger doctrine, which would have killed their ability to use their contract clauses (notably pari passu). You do not get both the judgment and the contract. I believe that is what Elliott is trying to change by statute in the New York state legislature. On the other hand, the very reasoning that should get you an injunction in a private contract case would block it in an FSIA case. Creditorscannot get paid because FSIA blocks them. An injunction in this case would be just an end-run around FSIA, non?
You’re right that it’s an (ahem) clever way to try to get around the fact that, if these claims were reduced to a money judgment, there would be no non-immune assets to satisfy it. (That’s why I read Argentina to be arguing that the specific performance order is functionally equivalent to an execution and should be treated accordingly.) But my point is that, under Elliott’s interpretation, Argentina is breaching the PP clause by paying other bondholders without paying Elliott. (As I noted, I don’t think this is what the PP clause means, but we’re ignoring that…) And IF the contract contains such a promise, there seems to me a decent argument that specific performance is an appropriate remedy – and not at all akin to an order of execution.
To see the difference, imagine that Elliott had obtained a money judgment and, after being unable to find non-immune assets, convinced the court to issue an “injunction” ordering Argentina to transfer certain assets to Elliott. That would be an injunction in name only, and clearly forbidden by the FSIA. But an injunction that says, in effect, “honor contract term X,” is quite different. The creditor isn’t trying to get both the judgment and the contract in that case. It’s entitled to seek (though not always to receive) specific performance when money damages would be inadequate. And although the breach of the PP clause could in theory be recompensed by money damages, that remedy is clearly not adequate here.
Even under Elliott’s interpretation, by the way, I think it’s a close case. That’s because the US might have legitimate interests in avoiding the kind of foreign-relations kerfuffle that might accompany an injunction, even when issued against a flagrant promise breaker. But I don’t think we can get there by simply calling this an end run around the FSIA. It isn’t an end run if the PP clause means what Elliott says it means.
Why should pari passu, whatever it means, it be treated any differently than any other covenant? A breach of a covenant to provide financials results in a default and monetary judgment, not specific performance.
Indeed, part of the pari passu origin story has it as a type of negative pledge clause, and specific performance argument has never flown for negative pledge clauses. Indeed, it’s been over 80 years since a breach of a negative pledge clause even produced an equitable lien.
Congressional hearings being diverted from meaningful issues to drivel that the moronic DC press corps(e) can “understand” and make noise over for the folks back home to hear about? Pshaw, thou dost jest, my good sir!