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Updated: The procedure of litigating pari passu?

posted by Mark Weidemaier

Lots of activity in the pari passu litigation: The lawyers for the exchange bondholders have been working overtime, filing an emergency motion to stay Judge Griesa's injunction (just granted here!) and asking the Second Circuit to let them intervene in the appeal. And there has been some great analysis of the injunction and its implications for exchange bondholders (by Joseph Cotterill at FT Alphaville), discussion of the consequences for future restructurings (by Felix Salmon), and consideration of Argentina's suggestion that it might be willing to re-open the exchange offer for holdouts (by Vladimir Werning).

In this post, I want to explore the pari passu litigation from a different angle - one that focuses on a question of procedure raised by the Second Circuit's interpretation of the clause. Here's the question: Let's assume that the pari passu clause entitles creditor A to receive a ratable share of any payment made to creditors with whom creditor A ranks equally: creditors B, C, D, etc. Creditor A sues borrower to enforce this right. Who else should participate in the lawsuit? And can the lawsuit really be structured in a way that will be fair to everyone affected by it? (The exchange bondholders raised these questions in their brief, but the district judge didn't address them.)

I hope civil procedure buffs can weigh in on this, but shouldn't other creditors have a seat at the litigation table? In US federal courts, third parties must be joined as litigants if they have an interest in the subject matter of a lawsuit and if the lawsuit may "as a practical matter impair" their ability to protect the interest. As always, there are exceptions, but the starting premise is that such third parties must be joined. Recall that the Second Circuit interpreted the clause as a promise not to pay exchange bondholders without paying holdouts. Perhaps Argentina can afford to pay everyone, but its potential willingness to default rather than pay NML etc. arguably amounts to a "practical impairment" of exchange bondholders' interests. Plus, the logic of the Second Circuit's interpretation would require a country to make ratable payments even if it couldn't afford to pay everyone in full. So it's easy to imagine a situation where a suit to enforce the pari passu obligation would effectively take money from a creditor's pocket.

If it is necessary to join other creditors - in this case, holders of restructured debt - how might that work? A defendant class action, in which one or more exchange bondholders is appointed to represent all the others on the question of the meaning of the pari passu clause? Perhaps, but such a process would be kind of ironic, given the increasing reluctance of courts to certify plaintiff class actions under US law. Indeed, it might prove impossible to join all relevant parties. In such cases, the rules allow (but do not require) courts to proceed with the lawsuit, but this would result in a process that significantly impacts the rights of people who are not effectively represented. Many pari passu aficionados won't need another reason to question the court's interpretation. But if you are keeping score, this seems like another. Given the clause's inherent ambiguity, why choose an interpretation that is so difficult to enforce in a collectively fair manner?

UPDATED to include a link to the stay order.

Comments

Once you've entered the realms of restructuring, I suggest the holders of debt will tend to divide between the legally inert - who are happy to receive whatever on the basis that something is better than nothing, and the legally vociferous - those who shout loudest get most. Failed issuers probably hope for a fairly inert and passive crowd of debt holders.

Could you please explain where you see ambiguity in the Court of Appeals explication of the Pari Passu Clause in this specific bond issue when the Court distinguishes between the sentence which prohibits legal subordination ( Agentina as a bond issuer) and payment subordination (Argentina as a bond payor)which seems to be grounded in the clause itself.

The court's explication of the clause isn't ambiguous; it's all too clear what the court thinks the clause means. The clause itself is ambiguous. Although it appears in virtually all sovereign bonds (at least those issued under foreign law), there has never been any consensus about what the clause means. Perhaps the 2d Circuit's interpretation - if it sticks - will remove the ambiguity. But it will do so by assigning the clause a meaning that very few every thought it had.

At least the Argentina Exchanged Bond, governed by NY Law, skip the Clause you say is virtually everywhere.

The draftsmen for the Exchanged Bonds probably did not agree with you. The Pari Passu Clause incorporated in those 24 billion left out the sentence refering to the equal payment obligation and inserted just the legal ranking obligation, presumably they knew that this clause would be less demanding on the borrower. So I conclude that they knew and understood the meaning of the clause in the old bonds of Argentina.

(Non-lawyer comment follows) The other creditors are only affected as a consequence of the decision of the 2nd Court. So it is only after it is decided in Elliott's favour that the exchanged bond holders have any right to join, not in that decision itself. The fact that another creditor is due pro rata does not of itself diminish me as a bond holder: all my fellow bond holders in my tranche have always been pro rata. My interest is impaired by Argentina's inability / unwillingness to pay its creditors, not by the identity of my pro rata debtors.

Mark, your answer to my comment, in which I pointed to the fact that the specific clause in the unexchanged bonds of Argentina dealing with ranking
contains two sentences which are straightforward and were - as you concede- explicated in an unambiguous way by the court, states "The clause itself is ambiguous".
This answer hypostatize a subject which does not exiszt as such. I know and own Brady Bonds of Argentina under German law, CHF Bonds of Argentina under Swiss law, CHF Greece Bonds under Swiss law and all these bonds have different presciptions in regards to equal treatment. To create a construct " The Pari Passu Clause" and talk about it as if such thing exists and assign attributes like "ambiguity" to it is Platonism.

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