When you stiff your creditors, do it with a smile

Steve raises a good point. Contract interpretation is typically a matter of state, not federal, law although this primarily means that state law (1) assigns a default meaning to contract language and (2) supplies rules for courts to apply in determining whether parties to a particular contract meant something different. The Second Circuit's interpretation of pari passu takes care of step 1, at least for contracts that use the same formulation of the clause. If market participants don't like that interpretation, they can (in theory) revise contracts to provide for a different outcome. But it's also possible - and this is Steve's point - that state courts might try to "correct" (my word, not Steve's) the Second Circuit's interpretation of the clause. That is, in a subsequent case involving an equivalent pari passu clause, a New York state court could say that the Second Circuit got it wrong and that, as a matter of New York law (which governs Argentina's bonds), pari passu really means something different.

Procedurally, it's not clear to me how such a case would arise. Perhaps an inter-creditor lawsuit between two non-diverse parties (i.e., creditors from the same state)? Even assuming we get such a case, though, my hunch is that this kind of direct interpretive conflict won't happen. Courts disagree about lots of things, but they tend to have a healthy appreciation for the importance of consistency in contract interpretation, and they try to avoid the appearance of whipsawing contract parties between different interpretations of the same language. But Steve's broader point - that NML might be a one-off - may prove correct. (I'm not convinced, but it's possible.) One plausible scenario, it seems to me, is that a future court will distinguish NML as involving a particularly egregious form of discrimination against creditors. The theory here would be that pari passu doesn't forbid every kind of non-payment, just particularly nasty kinds of non-payment like Argentina engaged in by enacting the Lock Law, etc. You can find the seeds of such a distinction in both Second Circuit opinions in NML.

All of which, in my view, would make for good theatre. Comedy, sure, but good theatre nonetheless. After all, if you aren't getting paid - now or ever - does it really matter whether the person who isn't paying you is being mean about it? Is there a nice way to refuse to pay your creditors until the end of time?

Comments

[mt]

It is hard to imagine a case arising in which the interpretation of a sovereign debt contract was at issue yet a party could not remove it to federal court and make it stick.

[Mark Weidemaier]

mt: Agreed. Certainly most or all cases involving the sovereign itself would either begin in federal court or be removed there. An inter-creditor lawsuit was about all I could come up with (or a lawsuit in the non-sovereign corporate context, although there isn't much pari passu action there either and the scenarios might not be analogous).