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216 Jamaica Avenue and the Prospect of Breathing Life Into Antique Chinese Bonds

posted by Mitu Gulati

One of the more fun discussions we have had in my international debt class this term has been the question of whether a clever plaintiff's lawyer might be able to breathe life into defaulted Chinese bonds from the period 1911-1948. (Our thanks to Tracy Alloway's delightful piece in Bloomberg on this matter (here)).

Part of our inspiration for this discussion, however, was also reading an enormously fun 2008 Sixth Circuit opinion from Judge Jeff Sutton, in the 216 Jamaica Avenue case (here). The context of the case was the abrogation of gold clauses 1933 that we've discussed before on this site (here, here and here).  What we have not talked about, however, is what impact the removal of that 1933 prohibition on the use of gold clauses in 1977 had.  For long-term contracts that were written in the early 1900s that then had their gold clause index provisions abrogated in 1933, the 1977 law arguably re activated them.  Congress tried to stop most of the attempts at reactivation.  But for the cleverest of lawyers, there was always going to be a way.  For these contract arbitrageurs, scouring old contracts for lottery tickets through the re activation of these old clauses that everyone else has long forgotten is fun. It certainly was fun for us to read about (Congrats, Cooper & Kirk, who note their victory in this case on their website (here)).

As a general matter, courts don't tend to be very sympathetic to lawyers trying to reactivate old clauses to earn giant lottery payouts.  But in 216 Jamaica Avenue, that's precisely what happened. The opinion is an absolute delight, not only because of the wonderful facts and analysis of basic contract law matters such as "meeting of the minds" that befuddles most first-year students (and me), but also because it is written in a style that is reminiscent of the classic Richard Posner opinions; short, incisive and witty.   

I'm hoping that my students, if they find interesting ways in which to overcome the significant barriers to bringing suit on the antique Chinese bonds -- namely, the statute of limitations and jurisdictional hurdles -- will post about them in the comments.  The barrier is high though, despite Mr. Horatio Gadfly's optimism some years ago (here and here).

I do wonder though whether the Chinese (and Russian) governments will some day soon decide that they should just enter into global settlement with the owners of these antique bonds for pennies on the dollar and stop the periodic pesky lawsuits. Otherwise there will come a day where someone somewhere figures out a way to do a set off or restart the statute of limitations. 216 Jamaica Ave points in that direction.


One thing that comes to my mind is acknowledgement of the debt. Acknowledgement does not have to be an explicit one. It can include an implicit promise so long as the acknowledgement can be fairly inferred. We know that PRC has repeatedly expressed its intention not to pay and that it does not recognize the debt. However, in 1987, with the threat of being kept out of the British financial markets, it settled and agreed to pay its debt to British citizens and that debt is alleged to be owed from the sale of these exact same bonds to British investors. PRC defaulted selectively depriving payment to other bond holders. This very payment to British bond holders can be accepted as an acknowledgement which may toll the statute of limitations.

I note that the 216 Jamaica opinion states that the landlord demanded "rent EQUIVALENT TO the value of 35,000 1912 gold dollar coins" (emphasis added). In other words, the landlord isn't really expecting the tenant to go out onto the numismatic market and acquire pre-1933 gold coins with a face value of $35,000 -- or even the equivalent amount of Krugerrands or some similar modern bullion coin -- and deliver them to the landlord's office. No, it sounds like the landlord wants a check in an amount equal to the value, at today's gold prices, of $35,000 worth of gold in 1912 (for reference, the source I consulted says the official 1912 price was $20.67/ounce but the open market was $18.93/ounce).

If the parties concede that delivery of actual gold is not required, doesn't the pertinent clause just become a rent escalator tying the rent to the base rent times the change in the price of a commodity? Viewed that way, it seems pretty non-controversial.

$35,000 equals 1693 ounces of gold at the official rate in 1912. At today's spot price of $1572/ounce, that's $2,661,396. Ouch.

However, would there be any argument that the parties intended the effective rent to vary by changes in the real VALUE of the commodity in constant dollars? It makes a big difference. If you work in constant dollars ($1 in 1912 = about $28.56 today), the 1912 official gold price becomes $590.33/oz in today's dollars. That wouldn't lead to quite as crazy of a rent increase.

I hope we find some kind of interesting new way to look at the Chinese bond problems! However, looking at all the information available and discussing it with my peers, I grow concerned we are just looking at the same issues as every other lawyer. Maybe the most important part of revitalizing such antique bonds is finding the right judge.

I still think, as I have said here before, that the arguably more interesting legal case for enforcing the Chinese bonds is the case against Taiwan -- because they have, after all, long claimed that they, not the PRC, are the legitimate successor to, or continuation of, the regime that controlled the entire territory pre-1949.

The exclusive focus on the PRC has obvious political motivations. However, pursuing Taiwan does not require leaving the PRC off the hook. In fact, it could put the PRC in a position where it has an incentive to acknowledge its liability on the bonds in order to avoid a court ruling backing up Taiwan's sovereignty claims.

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