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You Say Poignant, I Say Depressing

posted by Mark Weidemaier

As Anna points out, there are indeed moments of poignancy in the pari passu litigation, largely having to do with the fact that, days from a major sovereign default induced in no small part by their rulings, the US courts only now seem to be discovering basic facts about the case. The transcript of the most recent hearing before the district court contains passages that might have been appropriate two years ago, but are depressing to encounter now.

For example, the court was initially willing to let Citibank Argentina pass along payments it received on USD-denominated, Argentine-law bonds, despite the fact that the injunction doesn't seem to distinguish these payments from those made to other bondholders. But then it turned out the judge was assuming that (i) the relevant bonds were not issued in exchange for defaulted debt (transcript, p. 5), (ii) were held by folks in Argentina who didn't need to be "dragged into this overall difficulty" (p.7), and (iii) in any event comprised only a "minute exception" to the injunction because the amount of money was small (p. 10). Upon learning that each of these assumptions was false, the judge lamented: "There is a lot to do today."

Perhaps the most depressing part of the hearing was how ad hoc many important decisions seem to be. Consider the exchange over whether Bank of New York Mellon should retain or return payments it has already received from Argentina. There is an important context for this decision: Argentina will argue that its only obligation was to transfer funds to BNY Mellon and that it therefore has not defaulted. If accepted, that interpretation will have broad consequences (including, perhaps, for any parties who might happen to have CDS positions on Argentina). The interpretation is weakened, though not fatally, if BNY must return the money.

BNY Mellon wants to keep the money, and its counsel had barely begun to speak when the following exchange took place (p. 40):

THE COURT: What do you believe should be done with the money?

MR. SCHAFFER: Your Honor, [I] think consistent with the existing injunctions we should be holding the money pending whatever further proceedings take place here either with the special master or-

THE COURT: I agree with that. Thank you very much.

And that was that. Until the very next second, when counsel for the plaintiffs spoke briefly in favor of making BNY Mellon return the money. Whereupon this happened (pp. 42-43):

THE COURT: Can I interrupt you again. I want to conclude this and get to something else. I would say to you that I would certainly be willing to sign an appropriate order having that money returned. It should be returned. Maybe there will be objections to the order. Obviously, I don't care. I think the money should be returned. Can we leave it at that?

Understandably puzzled, BNY Mellon's counsel objected along the lines of: What now? Which prompted this (P. 43):

THE COURT: Can you tell me what should be done.

MR. SCHAFFER: Your Honor, I believe the answer is we hold the money right where it is...

THE COURT: I'm completely silent because I have nothing to say. Try to work something out that you can agree on, the thing that will create the least problems, the least potential litigation we want to do. Unfortunately, we are in the soup. I can't help that...

So, to sum up: Keep the money. Return the money. I have nothing to say. Soup.

What has been clear all along, but is now being acknowledged openly, is just how much the rulings in this case have been motivated by pique that Argentina refused to pay money judgments issued by US courts. The passage quoted by Anna makes this relatively clear; the court links pari passu rights, "whatever they were," to the need to recognize the rights of judgment holders. Other passages from the hearing transcript make this even more explicit, including this one (pp. 45-46), which immediately precedes the one quoted by Anna:

THE COURT: We went for about 10 years, 11 years, whatever it was, with the Republic refusing to pay the judgments... The rhetoric that was developed in the Republic during this time was unfortunate, although not as incendiary as recent rhetoric. The Republic took every step it could to indicate it would not pay the judgments, it would not negotiate the judgments... This was unfortunate. Judgments are judgments.

That part, at least, is accurate. Judgments are judgments. No getting around it. I'm not exactly sure how that justifies an injunction that makes satisfaction of the judgments (with, ahem, immune assets) a condition of a government's continued service of its public debt. Be that as it may, it would have been nice if the courts had invested the time necessary to understand the parties, the transactions, and the payment mechanisms first.


to make the "judgments are judgments" line bizarre however is the fact that this case is explicitly about "pre-judgment" debt, as judgments are theoretically barred from exercising pari passu rights by the merger doctrine. Although the judge in the Grenada case apparently feels differently

Mark, given the difficulties faced by BONY and potential harm to it (if it keeps or returns the money) is there any mechanism to request a stay at a higher court? Would be very interested in your views.

FS: Since the judge doesn't seem to have entered an order, there is nothing to stay. For now, BNY can keep the money, which is what it wants to do. Although an order directing it to do so would probably provide more protection.

plasmajeff: Right, this case involves pre-judgment debt, although NML also holds money judgments. Apparently the court isn't pleased that Argentina won't pay them.

i believe griesa
has been dealing with five issues here
three of them already ruled the last two kept in reserve
in favor of a negotiated settlement before july 30 bond deadline

1. pari passu
2. formula
3. escrow

here he stated two categories
the bony bonds that are subjet to escrow
and the citibank and jp morgan non-american-law bonds
that are beyond the court's jurisdiction and not subject to escrow

4. default
5. contempt

what is implied in his non answer
to bony lawyer is that as argentina's partners
in an illegal payment banks might well be accomplices
citibank and jp morgan should take note they are in the soup as well

I am a newcomer to this blog, brought here in recent weeks by my personal interest in the issue (I am a resident of Argentina). I thank everyone who has contributed to this discussion, this is one of the few truly informative sites on the issue. My question to the scholars who have been analyzing this issue: Citibank Argentina has just publicly declared (at least here in Argentina) that the rulings regarding paying (or rather not paying) local law exchange bonds would also block payments on the Repsol bonds issued this year. They argue those bonds are fungible, or indistinguishable from the exchange bonds, and are all paid in the same lump payments. What are the implications of this declaration from Citibank Argentina? Would this also be the case for the payments held by BONY, Euroclear, etc..? If they withhold payment on all the bonds, including Repsol ones, wouldn't they be very exposed to litigation from Repsol bondholders?

gringuita: You are right there are big implications. The amounts of money involved are large, even just on USD-denominated, Argentine-law bonds that are (a) External Indebtedness and (b) exchange bonds (although the percentages may be small as a proportion of the overall outstanding debt). If Citi is enjoined from passing on all funds (including to holders of bonds that don't satisfy criteria a & b) then, yes, Citi might be exposed to litigation. The fact that it was simply obeying a court order might protect it, of course. But that still wouldn't justify an over-broad injunction.

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