The Awesome Pari Passu Hearing
The Second Circuit argument in NML v. Argentina was awesome--I was at the edge of my seat the whole time. My takeaway after the hearing is that even though Argentina got the brunt of the yelling, it would be relatively straightforward for the court to rule in its favor (after yelling some more). In contrast, ruling in favor of the creditors would require the court to make some pretty hard new law, and overcome big policy challenges. This does not add up to a projection for Argentina--I think some or all of the judges would love to rule against it if they possibly could--but methinks it would be harder after today than before.
Recall the issue is whether the District Court properly granted an injunction directing Argentina not to pay its restructured debt unless it also pays the plaintiff holdout creditors pro rata. In this case, pro rata would mean that the restructured debt gets 30 or so cents on the dollar (their new contract), while the holdout debt gets 100 cents (the old contract). At the heart of the case is the meaning of the pari passu clause in sovereign debt contracts, and whether the clause (whatever it means) could serve as a basis for an injunction against a foreign sovereign.
1. On the meaning of pari passu, there was a huge amount of going around in circles. Argentina maintained that refusing to pay its debt year after year and enacting a "Lock Law" that blocked the government from settling with the holdouts did not amount to subordination. Someone behind me giggled when Argentina's counsel insisted that laws, statements, and SEC filings all saying that holdouts get zero while everyone else gets paid in full did not subordinate the holdouts. The U.S. Government was no help, arguing that selective nonpayment did not breach pari passu, but then demurring on the Lock Law. And Judge Raggi had a neat theory of prolonged nonpayment as constructive subordination (six months is nonpayment, six years subordination ... six hundred and sixty six apostasy?). At the end of the day, even as there was zero doubt that Argentina had done the plaintiffs wrong, the pari passu clause was about as murky as at the start. Even so, if NML wins, it will be on the meaning of pari passu and the Lock Law, with a nod to equitable discretion.
2. There were lots of hard questions about injunctive relief. Again, Judge Raggi put it crisply: under the District Court ruling, Argentina had the choice of paying no one, paying everyone in full, or paying everyone pro rata. Strictly speaking none of this involves seizure of immune sovereign stuff. However, even the nonpayment option looks a lot like a restraint on Argentina's money in Argentina. The conversation somehow kept coming back to the fact that under the injunction, Argentina could spend its money as it pleased--it could buy drugs, alcohol, and cigarettes--but could not pay its restructured debt without paying NML pro rata. This would make for a funny sort of partial asset immunity, unless the court adopted the plaintiffs' theory that the injunction only operated on Argentina's person ("Don't do it!"), not its money. Here the U.S. did help Argentina, reinforcing the point that the Foreign Sovereign Immunities Act did not provide for sliding scale immunities.
In the end, both sides engaged in form-substance arbitrage--Argentina with nonpayment/subordination, and NML with injunction/attachment.
3. The judges clearly struggled with the prospect of affirming a feckless injunction that would be ignored just like so many other judgments and orders issued against Argentina. NML's counsel made a startling statement--twice--that if the injunction were to stand, NML would use it to block U.S. financial institutions from "aiding and abetting" Argentina servicing its restructured bonds. Now we know that this is all about finding a non-immune target--and the judges face the prospect of New York's financial industry traipsing through their courtroom protesting aiding and abetting charges. (Counsel also said that Argentina might feel bad about ignoring the injunction or being in contempt of court--not sure anyone bought it. He might have mentioned the recent U.S. trade sanctions for ignoring ICSID rulings.) Previewing the next battle, Argentina was pressed about the status of the bond trustee--and got to say that the the trustee was the agent of the bondholders, not Argentina. Sometimes it helps to get picked on.
4. NML's counsel probably convinced the court that going unpaid while others get paid was an irreparable injury distinct from simply going unpaid. Argentina argued that the sole contractual remedy for breaching pari passu was acceleration. Assuming Argentina does not pay the accelerated amounts (as it has not), this yields one consolidated and reparable injury, nonpayment of money. Although NML generally did well here, this line of argument highlighted the fact that it has not reduced its claim to a judgment, precisely to take advantage of the covenant that would have been merged into a money judgment. That seemed to cause some unease on the bench, with few answers from NML. On the other hand, Argentina raised a few eyebrows insisting that an utterly uncollectable money judgment was "reparable" -- presumably by adding some uncollectable interest.
5. Then there were the puzzling ones, from the size and import of Argentina's central bank reserves "salted away in Switzerland," (was that BIS???), to the magical effect of collective action clauses (I hear they cure the common cold). ... the intractable ones, like the precise universe of remaining claims against Argentina, including past due interest ... and the subliminal tug-of-war over what to call restructured debt (NML referred to "exchange bondholders," presumably to stress voluntary participation, while Argentina and some judges said "discount bondholders," perhaps recalling the haircuts they had suffered). Both Argentina and, weirdly, NML, talked down investors who bought debt at a discount (Argentina was talking about NML, NML about the exchange participants).
Bottom Line: To rule for Argentina, the court would have to profess outrage at its many sins, and express regret about the state of sovereign immunity. To rule for NML, the court would have to decide the meaning of the pari passu clause (at least as it applies to the Lock Law), decide that failure to pay pari passu was an irreparable injury distinct from failure to pay, decide that telling Argentina how to spend its Treasury funds did not amount to restraining immune property in Buenos Aires, and get comfortable with hearing a slew of aiding and abetting cases against New York banks--all this before getting to the U.S. Government contention that creating a pari passu remedy would give holdouts a veto and disrupt sovereign restructurings the world over (that last one depends on the court's reading of the Lock Law). It is plausible--and would be incredibly interesting and important--but seems hard.
Real Bottom Line: Sovereign immunity without bankruptcy makes for incredibly uncomfortable law. And everyone should learn Latin.