Pay Dick, Ditch Harry: More on 'Ratable Payment' and Its Implications

Creditors owed identical amounts under identical defaulted Argentine bonds, including identical pari passu clauses, could get very different recoveries under the plaintiffs' theory of ratable payment--unless all such creditors are corralled into a mandatory class action that divvies up Argentina's surplus among them under equitable supervision of the courts.

Unequal recovery under identical instruments could happen if, for example, Argentina ran out of money after paying the first wave of pari passu litigants. The result seems out of whack with the original "Tom, Dick, and Harry" theory of the pari passu clause in sovereign debt instruments, as famously articulated by Professor Lowenfeld beginning in 1997 (this version 2000):

Suppose, for example, the total debt is $50,000 and the borrower has only $30,000 available. Tom lent $20,000 and Dick and Harry lent $15,000 each. The borrower must pay three fifths of the amount owed to each one -- i.e., $12,000 to Tom, and $9,000 each to Dick and Harry. Of course the reamaining sums would remain as obligations of the  borrower. But if the borrwer proposed to pay Tom $20,000 in full satisfaction, Dick $10,000 and Harry nothing, a court could and should issue an injunction at the behest of Harry. The injunction would run in the first instance against the borrower, but I  believe ... to Tom and Dick as well.

Contrast the plaintiffs' interpretation (fuller quote in a previous post):

If holders of other defaulted indebtedness later bring equal treatment claims of their own, Argentina will have ample opportunity both to litigate the merits ... and to make a showing of financial need, based on circumstances then prevailing, for the district court to consider in shaping a remedy. [Emphasis added]

In other words, if Harry does not sue along with Dick, the borrower can later claim "financial need" from paying Dick as a defense to paying Harry.

Fear not, Harry: back in 2002, Buchheit and Gulati proposed mandatory class actions under the Federal Rules of Civil Procedure, to help nice, slow, or sleepy plaintiffs just like you. Where the sovereign has a "limited fund" (eg, scarce foreign exchange) available for distribution to all creditors, FRCP Rule 23(b)(1) would permit certifying a class if ...

... adjudication with respect to individual members of the class [Dick] ... would as a practical matter be dispositive of the interests of the other members not parties to the adjudications [Harry] or substantially impair or impede their ability to protect their interests ...

The class action solution also finds support with David Skeel here. In the Buchheit-Gulati view, mandatory class actions in sovereign debt would be the natural heirs of equity receiverships, used to reorganize railroads under judicial supervision before bankruptcy laws were amended in the 1930s.

The alternative -- following from the Lowenfeld interpretation -- would appear to give Harry a cause of action against Tom and Dick. Then Sally would sue Harry to get her ratable piece of the pie, then Sue, then Fred, and so on.

Comments

[Mark Weidemaier]

Great post, Anna. One interesting quirk to add about class actions: If memory serves, the Buchheit/Gulati and Skeel proposals take for granted that class members will want a money judgment and therefore focus on Fed. R. Civ. P. 23(b)(1)(B), the so-called "limited fund" provision allowing class certification where early claimants could deplete the defendant's available assets. Limited fund class actions aren't easily certified, although creditors of a financially-distressed sovereign would have a stronger argument than the putative class members in the classic limited fund cases familiar to civil procedure scholars (who had unliquidated tort claims). But if we take the 2d Circuit's interpretation of the pari passu clause at face value, it seems as if a class should be easy to certify under 23(b)(2). That provision allows for mandatory class certification when a defendant "has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief ... is appropriate respecting the class as a whole." If all class members benefit from similar pari passu clauses, and if the sovereign is stiffing all of them by paying restructuring participants, the rule clearly seems to authorize class treatment for the purpose of awarding injunctive relief. That would pretty much be the nuclear option for holdouts.

To be clear, I doubt this will happen. But it does seem to follow logically from the 2d Circuit's opinion. If a plaintiff framed a class action in the manner I'm suggesting, I'm not sure there would be a principled basis for denying certification (with or without a limited fund).

[mt]

Argentina does not have scarce foreign exchange except by dint of choices it has made. For example, they imposed a steep export tax to keep goods in the country to defeat the inflation caused by other policies of the Kirchner - Ferndandez government. They maintain stiff capital controls, etc. Their economy could generate more foreign exchange if the government wanted to do so. The government, however, is pursuing the chavismo-lite strategy of subordinating everything in their economy to a political alliance between the rulers and those with low income, who consume more than they produce, and thus create a net deficit that needs to be filled by capturing and transferring other people's money and property, whether the other people be foreign companies like Repsol or domestic savers and exporters. There is no real scarcity in the sense that say Somalia might have a shortage. Argentina has an intrinsically strong economy. It is just that its political economy is and long has been run in such a way as to default from time to time on its external debt.