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Tea Leaves Two Ways (Pari Passu Prognosticating)

posted by Anna Gelpern

Black smoke ... White smoke? ... Argentina wins! ... Nope, black smoke ... Can you stand the suspense? ... the whiplash? One day, Second Circuit judges slap down Argentina. Two days later, they are opening bilateral restructuring negotiations with Argentina on the ratable payment formula. Then Taiwan attacks Grenada, wielding pari passu (latest here)... Then NML subpoenas Vatican bank statements (just kidding) ...

Two basic scenarios for what happens next have crystallized in the pari passu litigation. The first is simple and boring: the judges know Argentina has no viable payment formula, but are careful to give it all the process it needs to self-destruct. The second is complex and fascinating: the judges realize belatedly that they made a giant mistake in October, and are now willing to impose a bankruptcy-style equitable payment formula to contain the fallout.

My natural inclination is to go with the simple and boring scenario; however, the last time I picked that door with the same three judges, I was totally wrong. On this scientific evidence, I am evenly split between "this means nothing" and "this could be big."

This means nothing. This prediction would have Judge Griesa's November 21 orders upheld in full. It hinges on the gap between Argentina's domestic political imperative of treating holdouts no better than participating creditors, and the court's apparent insistence that old debts be brought "current" before Argentina resumes debt service on any schedule. Add to it the courts' natural resistance to rewriting contracts outside bankruptcy, the absence of authoritative benchmarks for any such rewriting, and the assumption, based on oral arguments, that the trustee is done-for. Literally coming current would give NML much of what it wants, since most of the claim in this case is past-due interest. It would be politically untenable for Argentina. The time-honored way to bridge such gaps is with accounting tricks and financial engineering, but this particular gap may be more of a loaves-and-fishes proposition. It is just too big. And NML will not take it lying down. Therefore, my baseline is that Argentina proposes something along the lines of its 2010 exchange, coming "current" with super-long duration par bonds, deeply discounted and quickly rejected, followed by promised default and more litigation.

This could be big. Same facts, radically different assumptions about the court's disposition. Circuit court judges are not in the business of issuing orders for laughs--if they thought there were no answer that Argentina could give and they could accept, they would not have asked the question. They know everyone is watching (even though they said they did not care), they are eager to be unanimous and avoid dissents on the still-pending en banc petition, they picture floods of amici begging for Supreme Court review, they might even see poor Grenada and imagine dozens like it coming down the pike ... and they wish they had taken the easy way out with sovereign immunity last fall. Assuming again that the judges are inflexible about the trustee, they would be more disposed to play accounting games and impose a ratable payment formula on Argentina, which would be promptly challenged by NML (unless they too are desperate to settle, which I doubt given the broader implications for their business model). The underlying debt is not discharged, of course, with NML free to look for Argentina's ships, airplanes, oil tankers, and central bank funds around the world. 

One question here is whether the court's refusal to entertain competing proposals from parties other than Argentina in its March 1 order is temporary. For example, if Argentina proposed a formula that passed the straight-face test, would the court then ask NML, and maybe others--or everyone with a plausible pari passu claim and counter-claim--for their input? You can see how it can get really messy, really fast. Worse yet, after doing the work of a bankruptcy court with no help from the District Court and no tools but general equity, the Second Circuit would face the prospect of more enforcement litigation on this very debt, between these same parties, plus in other cases where the parties would like the courts to broker their debt deal.

Then what? Either way, Argentina will have something to say on March 29. It seems implausible considering the consequences of any decision that this panel would turn around and rule before the next bond payment is due on March 31. Four weeks seems like the default time unit, though it could be more (if they ask for more briefs) or less (if the go the easy way). Presumably by the time they rule, these judges would have a pretty good idea of what will happen en banc; that decision would come down shortly after the panel's. But then there is still the quesiton of a stay pending inevitable appeals to the Supreme Court, and a possible revival of the escrow account idea raised by one judge during the February 27 hearing

I would not go with the escrow because it complicates the sovereign immunity argument (moving sovereign property to New York) and might help fortify the long-shot takings argument advanced by David Boies, but stranger things have happened in this case. As for the stay, it would seem courteous for this panel to extend it pending the Supreme Court's decision whether to take the case. Then again, if these judges are truly fed up with Argentina and know the full circuit has their backs, they might lift the stay. The Supreme Court can put the stay back on, but the presumption seems to be that lower courts handle such things (see Rule 23 here). The decision is made by a single Justice "allotted" the Second Circuit-- here Justice Ginsburg.

And then there are all the workaround mysteries--will Bank of New York resign? Will Argentina try to swap the Exchange Bonds for new ones payable in Buenos Aires? Will it try to prepay? Can it settle with NML without paying more to the Exchange Bondholders? My general sense of these questions is that no matter what Argentina does, it will end up in court--and I am waiting to think about it until I know who is suing whom for what.

All this to say that even the most straightforward outcome in this case is not so straightforward. It sure would help to have that chimney on Manhattan. 


I'm waiting for sovereigns to start including clauses waiving the creditors' class action rights and mandating arbitration in the sovereign's territory.

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