postings by Mark Weidemaier

IMF Reverses Policy on Lending into Official Arrears

posted by Mark Weidemaier

So the shoe has finally dropped. IMF policy has been not to lend to countries that have arrears to official creditors. I have long thought the IMF should (and would) depart from its policy in the case of Ukraine's debt to Russia, which was structured in a fairly transparent effort to capture the benefits of both private and official lending. Whether or not one approves of Russia's motives or techniques in structuring the loan, it seems clear to me that the IMF should not allow its policies to be held hostage in this case. 

News reports now indicate that the IMF has switched course. More details to follow, but it seems like this is a general shift in policy rather than (as Mitu Gulati and I suggested in the post linked above) a one-off exception applicable only to the Russian debt. The shift has been in the works for a while and was suggested in an IMF staff report in 2013. Still, it's a pretty big deal for IMF board members to approve. Official creditors generally like to have a veto over Fund decisions, even if they don't always like the consequences of the veto in particular cases.

Dear NY Times: Thank You For Letting Me Sue Only 500 Miles From My Home

posted by Mark Weidemaier

So the New York Times has just finished a three-part series on arbitration. For such lengthy coverage, the Times reveals almost nothing that will be new to those who have been following debates over the use of pre-dispute arbitration agreements. But if you haven't been following the issue, the Times series is a good place to start. It highlights some pressing recent issues, such as the use of arbitration to eliminate class action liability, while also touching on issues that often escape attention, such as judicial enforcement of contracts requiring religious arbitration.

Discussions about arbitration can be frustrating. For one thing, it is hard to have them without sending (often unintended) ideological signals. Those who highlight flaws in anti-arbitration arguments--even if simultaneously supporting greater regulation--are often characterized as "defenders" of "forced arbitration," as if the only valid choice is to justify or oppose (rather than investigate) the practice. Meanwhile, lawyers for large business interests have the irritating habit of presenting themselves as defenders of the common good, rather than as zealous advocates for corporate clients. 

Continue reading "Dear NY Times: Thank You For Letting Me Sue Only 500 Miles From My Home" »

DIRECTV v. Imburgia

posted by Mark Weidemaier

Shutterstock_322927829Yesterday, the Supreme Court heard arguments in yet another arbitration case, DIRECTV v. Imburgia. Here's the transcript. The issue is esoteric even by the standards of the Supreme Court's arbitration docket, but it has a certain practical significance. In a series of recent cases, the Court has mandated the enforcement of arbitration clauses that require claimants to proceed on an individual basis rather than as part of a class action. Many of these cases involve small-dollar consumer claims, so the likely effect is to eliminate, or at least substantially reduce, the potential liability of the business. The opinions can be baffling to read. Even when I agree with the results, it can be hard to accept the Court's application of seemingly-settled arbitration law. The common theme, though, is fairly clear: A small majority of justices view arbitration clauses as a permissible means to avoid class action liability.

Below the jump, more discussion of the specific issue in Imburgia.

Continue reading "DIRECTV v. Imburgia" »

Sovereign Debt Through the Lens of Consumer Debt

posted by Mark Weidemaier

Sovereign debt has traditionally been contrasted with corporate debt. Unlike corporations, sovereigns are immune from suit and asset seizure. Unlike corporations, sovereigns can't reliable promise a lender that it will have seniority over other lenders. Unlike corporations, sovereigns can't access bankruptcy. These and other distinctions drive much of the policy and academic thinking about sovereign debt.

But perhaps there are also lessons to be learned from consumer lending. This new paper by Susan Block-Lieb at Fordham (abstract below) suggests that consumer debt may be a more helpful analogy, one with important policy implications. In both the sovereign and consumer context, she points out, lending is primarily income- rather than asset-based. In both contexts, restructuring is difficult primarily because income-based lenders cannot easily distinguish borrowers who will not pay from those who cannot pay. And in both contexts, there are substantial and cumulative incentives towards over-borrowing and over-lending.

The shift in metaphor from corporate to consumer debt has payoffs for policy actors. Perhaps the most important is that it suggests there has been too much focus on the problems associated with debt restructuring, and not enough on the regulation of sovereign loans. Sovereign borrowers, of course, can't be regulated directly. But sovereign lenders, unlike consumer lenders, enjoy almost complete freedom from regulation. Consumer lenders operate in a thick regulatory environment--for example, in some cases a consumer lender's failure to conduct a meaningful pre-loan assessment of the borrower's ability to repay may excuse a subsequent default. By highlighting similarities to consumer debt and regulation, the paper highlights new ways to think about reform in the sovereign debt markets. That's welcome insight in a field where reformers have historically done little more than tinker with contract boilerplate.

Full abstract below the jump:

Continue reading "Sovereign Debt Through the Lens of Consumer Debt" »

Central Bank Alter-Ego Theory Rejected

posted by Mark Weidemaier

Fed resThis ruling, handed down today by the Second Circuit, may spell the end of one phase of the NML litigation. For some time, the plaintiffs have been trying to find a way to seize assets held by Argentina's central bank. Their latest effort sought an order declaring that Banco Central is an alter ego of Argentina, at least insofar as U.S. law is concerned. The effect of such an order would be to eliminate the bank's claim to be treated as a separate legal entity, making it liable for the government's debts. I understand that Banco Central has already moved most if not all of its assets out of the U.S., and earlier Second Circuit rulings already protect funds held at the Federal Reserve Bank of New York. But the plaintiffs could have taken the order to another country where Banco Central has assets and (conceivably) parlayed it into an order allowing them to attach bank funds. 

This was always a long shot for the plaintiffs. Even if they had gotten their requested relief, officials in other jurisdictions would not be obliged to let them seize bank funds. After today's ruling, though, the plaintiffs face additional practical and legal barriers. Their complaint alleged that Argentina effectively controlled Banco Central by determining who served as an officer of the bank, by borrowing from the bank, and by coordinating with the bank in implementing an inflationary monetary policy. The Second Circuit held that these allegations, even if true, didn't establish that the bank was the government's alter ego. The slippery slope here is fairly obvious. It is common, after all, for there to be a degree of coordination between governments and central bankers. I doubt the Second Circuit was eager to create a precedent that might imply that central bank assets in the United States are at risk. Technically, today's ruling doesn't prevent the plaintiffs from raising the alter ego theory in other jurisdictions (perhaps where the standard for alter ego liability is different). But given today's ruling I would imagine the fight will shift to other fronts.

More Argentine discovery shenanigans

posted by Mark Weidemaier

Much has been going on, although little has actually happened, in the litigation against Argentina. For instance, the court has allowed the plaintiffs to file an amended complaint seeking an injunction blocking payments on the recently-issued BONAR 2024s (USD-denominated, Argentine law bonds). That may prove important, for it's a step toward blocking Argentina from issuing any foreign currency debt, anywhere within the great orange blob known as "places-that-are-not-New-York." But no injunction yet; Argentina has not yet filed an answer to the complaint. 

Plaintiffs have also continued efforts to find executable Argentine assets. I'm interested in the role that sovereign immunity plays in the debt markets, and a development yesterday captured my attention. Readers may recall that, in a 2014 case involving Argentina, the U.S. Supreme Court considered the extent to which a creditor holding a money judgment can use U.S. discovery rules to force disclosure of a sovereign's assets around the globe. The Court ruled against Argentina, thereby opening the door to potentially expansive discovery into the nature and location of the sovereign's assets worldwide. After losing in the Supreme Court, Argentina persisted in refusing to turn over much of the discovery requested by plaintiffs. Yesterday, the district judge sanctioned Argentina by ordering that "any property of the Republic of Argentina in the United States except diplomatic or military property is deemed to be used for commercial activity." (No paper order is available on the court's docket yet.)

U.S. law permits creditors of a foreign state to seize only assets that are "used for a commercial activity" in the country. The district court's order deems all Argentine assets (other than military or diplomatic assets) to satisfy this criterion. In one sense, this is a complete end-run around the statute. By restricting enforcement to commercial assets, the law minimizes the ability of private creditors to create diplomatic headaches for the U.S. government. On the other hand, the sanctions order is analogous to a so-called adverse inference, where the court treats certain facts as established because the sovereign's discovery misconduct has made the facts impossible to prove. There is some authority for adverse inferences as a sanction for a sovereign's litigation misconduct. Right or wrong, however, the result of yesterday's order is an even wider embargo on Argentina's ability to conduct transactions in the U.S.

An Arbitration Between Russia and Ukraine?

posted by Mark Weidemaier

Shutterstock_267853262Russia has threatened to take Ukraine to arbitration unless the country pays its $3 billion bond in full. As Anna notes, the bond gives the holder the option to sue in English court or to arbitrate under the rules of the London Court of International Arbitration (LCIA). The LCIA is a preeminent international arbitration institution, but the choice of arbitration over litigation is an unusual one in this context. Non-consumer lenders typically prefer litigation to arbitration. As I've shown elsewhere, sovereign lenders share this preference. Arbitration clauses rarely appear in sovereign bonds unless (i) the issuer's internal law forbids it to submit to foreign court jurisdiction (e.g., Brazil, El Salvador) or (in English-law bonds) (ii) the issuer has not agreed to enforce English court judgments but has signed on to the New York Convention, which requires it to enforce foreign arbitration awards. Ukraine falls into the latter camp, and its bonds have traditionally given bondholders the option to arbitrate. (Technically, it's the trustee's option; bondholders cannot demand arbitration. But Russia owns 100% of this issue, and I presume the trustee will do what Russia wants.)

I have not seen the trust deed for the Russian bond so I can't say with 100% certainty how the arbitration clause operates. From the prospectus, however, it seems that the clause is identical to the one in Ukraine's other debt (see par. 25.4-25.7). There is a panel of three arbitrators; each party nominates one, and the parties jointly nominate the third. Most lenders prefer judges in New York or London to this kind of arrangement, which arguably ensures at least one arbitrator receptive to the borrower's arguments. From the lender's perspective, there's nothing to argue about. I lent money; you didn't repay it. (Party-appointed arbitrators are formally independent of the appointing party - see LCIA Rules 7.1 and 5.3-5.5 - but some suspect bias nonetheless.) So why does Russia prefer to arbitrate?

Continue reading "An Arbitration Between Russia and Ukraine?" »

Negating Russia's Veto Over Ukraine's IMF Package

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati.

Reports indicate that the IMF's package of financial aid to Ukraine could be in trouble if Ukraine can't or won't pay its $3-billion-plus debt to Russia. The reason is that IMF policy forbids "lending into arrears" to official bilateral creditors. In theory, the policy gives Russia a potential veto over the rescue package. We think the IMF can't--well, certainly it shouldn't, and probably it won't--allow Russia to exercise that veto.

The IMF has waffled on whether Russia is an official creditor. A debt isn't "official" just because it is owed to another government. Governments invest for commercial reasons, and they also make investments that, while not motivated by the search for profit, aren't exactly motivated by altruism. On the "official" side of the ledger, Russia lent money at below-market interest, ostensibly to help a friendly neighboring government. On the "non-official" side, the investment was made by Russia's sovereign wealth fund, the relevant part of which exists to support Russia's pension system--in other words, to make a profit. (In case you were wondering, the fund reportedly had to violate its investment guidelines.) Plus, in Ukraine's telling, the loan was to prop up a pro-Russian kleptocrat and enhance Putin's political stability. Although those sound like official motives, the IMF can't be eager to let the maker of such a loan veto a Fund rescue package.

We don't think the IMF needs to publicly declare that Russia is not an official bilateral creditor. It simply needs to communicate to the Russians that the IMF board is prepared to make an exception to the general policy against lending into official arrears unless the Russians strike a deal with Ukraine. Below the jump, we explain why the IMF should make this threat, and carry through with it if necessary. Simply put: (1) There are strong arguments that the rescue package does not implicate the Fund's lending into arrears policy and (2) these arguments are based on such a unique set of circumstances that an exception would not undermine the IMF's general policy in the slightest.

Continue reading "Negating Russia's Veto Over Ukraine's IMF Package" »

Ukraine's Russian Problem, Part 2

posted by Mark Weidemaier

Ukraine is telling investors it must trim external debt by $15.3 billion. Its bonds have CACs but no aggregation, and a 50% vote is needed to bind holdouts. (Modification requires a quorum of at least 2/3 in aggregate principal amount; 75% of "persons voting" must approve the modification.) Faced with some determined investors, it will have to make holding out unattractive in order to gain approval on favorable terms, and this means dusting off its bonds to see what clauses work to its advantage.

It needs to be even more creative to deal with Russia, which (has an army and) controls 100% of its $3 billion bond issue. Assuming Ukraine is willing to play hardball, I discussed in an earlier post how it might have plausible defenses to enforcement of the debt. The doctrine of prevention--even impracticability (not normally available to debtors, but these are not normal circumstances)--comes to mind. That post elaborated on an argument made in an article by Mitu Gulati and Joseph Blocher. Mitu and Joseph make a second argument, which I want to address in some detail here. In a nutshell, the argument is that, if Russia tries to enforce the debt in English courts, Ukraine can use English procedural rules to demand sensitive information from Russia. As Joseph Cotterill elaborates over at FT Alphaville: "Ukraine could then bring Crimea, plus an examination of the inner workings of both the Putin regime and its relations with the Yanukovich government, into a legal defence..." The resulting embarrassment would be costly for Russia, and this cost, if material, would give an additional incentive for Russia to compromise. But I'm skeptical of the proposal.

Continue reading "Ukraine's Russian Problem, Part 2" »

Legal Options for Ukraine's Russian Debt Problem

posted by Mark Weidemaier

Shutterstock_233925478Ukraine's financial position is worsening, restructuring seems likely, and the big question is what to do about the $3 billion loan Victor Yanukovych saddled the country with before fleeing. Coverage of the loan here and here on Credit Slips, and bonus coverage on FT Alphaville (free registration required). Though a government-to-government loan in substance, the loan is disguised as an ordinary eurobond issue, with contract terms that give Russia extraordinary leverage. These include the right to accelerate early, trigger cross-default, and block or impede restructuring. That may be why recent reports suggest the plan is to pay Russia in full when the bonds mature in December 2015, though I can't imagine either Ukraine or its official lenders are thrilled at the prospect.

Perhaps there are other options. The academic literature on sovereign debt often discounts the relevance of law and legal institutions, although Mitu Gulati and I argue here that this may be a mistake. Ukraine's case may illustrate the point. The country's leverage - what little it has - depends in part on whether it can place meaningful legal barriers in the way of any effort to enforce the bonds. That would likely involve English law and courts (see par. 16, page 35 of the prospectus). Below the jump, I discuss two possibilities. The first is a proposal by Anna Gelpern described in detail in this paper (which also has good background on the loan) and this blog post. The second is a brief but tantalizing proposal by Joseph Blocher and Mitu Gulati in the final section of this paper. In short, Anna proposes legislation making the debt unenforceable in English courts. Joseph and Mitu suggest that Ukraine is entitled to compensation for Russia's annexation of Crimea and can use this claim as a set-off against the debt. Both proposals raise unique challenges and questions.

Continue reading "Legal Options for Ukraine's Russian Debt Problem" »

Waiting for RUFO

posted by Mark Weidemaier

It looks like much of December will be spent sitting around the RUFO sickbed, waiting for the clause to expire of natural causes on December 31. The clause, recall, prevents Argentina from "voluntarily" giving holdout creditors a better deal than the one given to restructuring participants. When the RUFO clause expires, we will see whether country officials viewed it as a serious barrier to negotiation or, rather, as a convenient excuse to justify their refusal to negotiate.

In the interim, however, there are some potentially interesting developments on the horizon:

Continue reading "Waiting for RUFO" »

Here's the Contempt Order. Really.

posted by Mark Weidemaier

Not much new to say from the last time, except that this contempt order was signed by the judge. Argentina must "reverse entirely" the steps it has taken to remove BNY-Mellon and install a new trustee and otherwise start "complying completely" with the injunction. Or else....? The order doesn't say.

So, Argentina has been ordered to stop violating orders. If it doesn't, it will be in violation of another order. Which means basically nothing. Perhaps there was some doubt as to whether the judge meant the injunction as sort of a suggestion? Or perhaps this signals that the judge plans to skip the whole unenforceable-monetary-fine thing and get right to more innovative contempt sanctions if (when) Argentina fails to comply. Or maybe the order is an attempt to defer the confrontation as long as possible. Yawn. Wake me when something interesting happens.


Here's the (edit: Proposed) Contempt Order

posted by Mark Weidemaier

Edit: Oops... my automatic docket feed and determination to post before my morning class got the best of me. This is a proposed order, not signed as yet by the judge.

At a hearing on September 29, Judge Griesa indicated that he would hold Argentina in contempt of court but deferred his ruling on what the sanction would be. He has now issued the sanctions order. Somewhat surprisingly, the order does not impose even a monetary fine. (Perhaps the judge is not eager to deal with Argentina's inevitable noncompliance?) Instead, the order simply declares that Argentina will remain in contempt until it (i) "reaffirms and confirms" BNY-Mellon as trustee and (2) terminates any local trustee appointed as part of the already-not-too-attractive plan to let investors swap into local bonds. The order concludes by noting that the court "will consider the imposition of sanctions upon further application by Plaintiffs."

This is clearly an intermediate step, certainly as the plaintiffs view it. Footnote 5 of their contempt brief noted that Argentina would probably defy any order to pay a monetary fine and alluded to the possibility of additional, unspecified "non-monetary sanctions." What those sanctions might be is anybody's guess for now, but the real fireworks will begin when the plaintiffs propose them. For now, the judge has already ruled that the planned swap violates the injunction, so I don't expect this current order to make much difference.

"Oh Dear Me No, I Couldn't Possibly Hear Another Appeal..."

posted by Mark Weidemaier

The Second Circuit has refused to hear Citibank's appeal of Judge Griesa's order enjoining Citi from making payment on USD-denominated, Argentine-law bonds. The Second Circuit's order is a bit... Delphic. Weighing in at all of 56 words, not counting citations, the court simply "decline[d] to find jurisdiction" because the district judge's order "is a clarification, not a modification" of the injunction. The distinction seems a bit fine, given the stakes. Recall that some USD-denominated, Argentine law bonds are Exchange Bonds (and thus subject to the injunction) while some are not. But it seems that it is impossible to tell them apart. Two options, then: (1) forbid Citi to pay anyone, even though NML concededly has no right to block payment on non-Exchange Bonds, or (2) allow Citi to pay everyone, thus allowing a subset of Exchange Bonds to escape the injunction. The district judge chose option one. In theory, the district judge can reconsider (re-clarify?) that decision, but I am not holding my breath.

Sovereign Chicken

posted by Mark Weidemaier

Nothing to see hereSo Argentina plans to ditch Bank of New York Mellon, deposit funds with a local payment agent, invite bondholders to swap into local law and local payment bonds, etc. Not an optimistic sign for those hoping for a quick resolution. And such a transparent violation of the injunction that there really isn't much to say about it. Here's Judge Griesa anyway, from yesterday's hearing: "I want to be very clear, and I want to state it right now. This proposal is a violation of the current orders of this Court and of the Second Circuit. It is illegal, and the Court directs that it cannot be carried out."

But still, no contempt sanctions. Judge Griesa knows he can't win this game of chicken. A federal court's power to impose contempt sanctions on a foreign government is uncertain. The issue is complicated not only by sovereign immunity but by the intricacies of contempt law. There is some precedent for imposing monetary fines, at least for civil contempt. (A contempt order is civil if it is intended to induce compliance; it is criminal if intended to punish past non-compliance. The latter is especially problematic in the sovereign context.) Here's a case imposing a $50,000-a-day fine against the Russian Federation until it complies with a court order to turn over cultural artifacts. But imposing a fine is not the same as collecting it. Russia hasn't paid its rapidly-accumulating fines, which now total around $15 million. Stay tuned; the plaintiffs want a money judgment for that amount, which they can then try to enforce by seizing Russian assets. (Funny, right?) The US government opposes the request.

An order imposing contempt sanctions would just give Argentina something else to ignore.  So the court, quite sensibly, took a pass. But it hardly matters. In a very real sense, Argentina is not the target of the injunction. The targets are the payment intermediaries, who still risk contempt if they facilitate a swap into local bonds. (As, in theory, do bondholders who participate in the swap or modify their rights to facilitate a violation of the order, although this risk seems remote.) Even if there is a swap, then, participation will probably be low. And that's before we even get into the "murkyparticulars of a swap. Argentina watchers might want to find a comfy chair, because the case doesn't look like it's going away soon.

Car Crash image courtesy of Shutterstock

Where Do We Go Now?

posted by Mark Weidemaier

Updated: here is the transcript.

Axl Rose may have said it best, but "where do we go now" was the theme of today's Argentina hearing. There wasn't really any official business to conduct. Unless you count all those pending motions about whether Bank of New York Mellon should keep or return the money, the Euro bondholders should get paid, etc. But such mundane matters were not on today's agenda. The judge had issued an order scheduling a hearing "regarding the recent default" by the country. (Wait, was it a default? ISDA's determinations committee thinks so.) When everyone was assembled in the courtroom (and the overflow room) the judge announced that the hearing's purpose was "to clarify where we go from here." And then... not much of substance happened, but there were plenty of fireworks. Recap follows. The transcript isn't ready yet, so I'm relying on my notes for both the substance and the quotations.

Continue reading "Where Do We Go Now?" »

A Stay Would Not Affect the Plaintiffs... Except by Eviscerating the Injunction

posted by Mark Weidemaier

Unless the plaintiffs request a stay (and quick!), this will probably be the last request for Judge Griesa to stay the injunction before Argentina defaults officially fails to put money into the bank accounts of exchange bondholders. It is an emergency motion to stay filed by Knighthead Capital Management and other holders of euro-denominated bonds. They want the judge to stay the injunction for at least 90 days, so that they can try to round up votes to waive the RUFO clause, or through the end of the year, when the RUFO clause expires. They add that "a stay would not affect the plaintiffs at all, since they have not been paid since 2001..."

I do worry that, when all of this is over, I will have lost my ability to detect humor. A stay would only remove all of the leverage plaintiffs have spent over a decade obtaining. Sure, the judge can reinstate the injunction. But, having blinked once, Judge Griesa will have lost credibility and Argentina's incentives to negotiate will be reduced even further. That's a problem, when the whole point of the injunction is to present Argentina with a credible threat of default. Anyway, so far as I can tell, the facts on which the motion is premised have been known for some time, and the judge just denied Argentina's request for a stay, so I'm not holding my breath for this to be granted.

The Incredible, Magical, Shrinking Injunction?

posted by Mark Weidemaier

Judge Griesa has approved Citibank's request to transfer funds it received in payment of both dollar- and peso-denominated, Argentine-law bonds. Order attached. The difficulty, as described in this recent letter from Citibank, is that some of the country's Argentine-law bonds are subject to the injunction, and some are not. The latter group includes bonds issued as part of the country's settlement with Repsol. But it isn't possible to distinguish the payments, because all the bonds have the same ISIN number. Oops. What to do? Judge Griesa "does not wish to upset the settlement with Repsol," so he has allowed Citibank to make payment on all of the Argentine-law bonds, including exchange bonds subject to the injunction. But just this once. The parties are supposed to work together to "devise a way to distinguish between the Repsol bonds and the exchange bonds before the next interest payment is due." I'm not sure how that will work, but I suppose there are bigger fish to fry at the moment. Tick tock. Tick tock.

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."

Continue reading "You Say Poignant, I Say Depressing" »

A Sort of Special (Sovereign Debt) Language

posted by Mark Weidemaier

I thought I'd write a quick follow-up to Anna's thorough post about the latest in the Argentine bond saga. A lot happened at Friday's hearing, which was convened after NML requested that the judge hold Argentina in contempt for transferring funds to Bank of New York Mellon and others. The transcript reveals an exasperated judge without a great deal of interest in parsing the separate parties and interests at stake. The result was one clear loser (holders of English-law bonds denominated in euros) and one clear winner (holders of Argentina's local-law bonds).

Continue reading "A Sort of Special (Sovereign Debt) Language" »

Sound and Fury, Signifying... Contempt for Argentina?

posted by Mark Weidemaier

Ordered not to carry out its planned swap into local-law (and local payment) bonds, Argentina has now deposited funds for the June 30 payment with Bank of New York Mellon, trustee under the exchange bonds. Via Joseph Cotterill at FT Alphaville, here is NML's response, which asks Judge Griesa to schedule contempt hearings. (Technically, to order Argentina to show cause why it should not be held in contempt.) The plot thickens.

Judge Griesa's contempt power in this case is limited. That is putting it mildly. Argentina has violated the injunction - or so it seems - by depositing funds for exchange bondholders without tendering the required payment to plaintiffs. In an ordinary case not involving a sovereign government, such a willful violation might result in contempt sanctions. But in this case, an order of contempt would be largely symbolic, as no meaningful penalty can be imposed. The judge might (even this is disputed) be able to impose a fine. But the fine, like the money judgments against Argentina, would be uncollectible. So an order of contempt cannot change the status quo in any material way. Nor is it likely that BNY Mellon will pass the deposited funds along to exchange bondholders. Unlike Argentina, it has a real reason to fear contempt sanctions.

Consequently, whatever happens in Judge Griesa's courtroom will be little more than a sideshow at this point. What the deposit accomplishes for Argentina is unclear. It demonstrates good faith to exchange bondholders. Perhaps (though I have my doubts) it also allows Argentina to argue that it is in technical compliance with its obligations under the exchange bonds. And the payment may serve to maintain negotiating leverage with NML and the other plaintiffs. That may be the important point. At this point, any meaningful action will take place behind closed doors, in negotiations between Argentina and the plaintiffs.

We Have Our "Nope"

posted by Mark Weidemaier

As expected, Judge Griesa has reportedly denied Argentina's request for a stay. At his recent news conference, Economy Minister Axel Kicillof did not quite suggest that the government would negotiate only if the stay was granted - instead, he implied that Argentine officials couldn't weigh options without knowing how much time they had. Well, now they know.

News of the Obvious: NML et al. Oppose the Stay

posted by Mark Weidemaier

Yesterday's post noted that, by asking Judge Griesa to re-impose a stay of the injunction, Argentina was effectively asking for permission to pay exchange bondholders on June 30 without making any payment whatsoever to NML and the other plaintiffs. Not surprisingly, plaintiffs oppose the motion. (Here's their response.) The parties held a telephone conference today with the judge, so I would expect a ruling soon.

Argentina needs time to fashion a global resolution that will encompass potential "me too" claimants. But after years of litigation (and a stay of more than two years), extra time may not come for free. As I suggested in an earlier post, if Argentina needs more time and wants to avoid default on the exchange bonds, it might need to pay plaintiffs to extend the stay. In their response to Argentina's stay request, Plaintiffs also raise this possibility, noting that any agreement would have to "provide Plaintiffs with suitable protections and compensation for the risk that the settlement effort will fail." So, we will see. I am skeptical that Judge Griesa will grant the stay, and even more skeptical that he will grant it without imposing any conditions. At this point, he has every reason to keep the pressure on Argentine officials so as to give urgency to the settlement talks. If a stay proves necessary, and the parties cannot agree to one, he can always reconsider his decision. Conceivably, he might even condition a stay on Argentina providing some compensation to plaintiffs. That would raise interesting questions under the Foreign Sovereign Immunities Act - since the order would condition relief on Argentina's parting with immune assets - but I don't think it is obviously beyond the scope of the judge's power. 

Let the Negotiations Begin (Updated)

posted by Mark Weidemaier

Argentina will negotiate with NML. Or maybe it won't. Instead, it will let exchange bondholders swap into local law bonds, in clear defiance of the injunction. Except that this recent order by Judge Griesa forbids the swap and declares Argentina's Economy Minister in violation of the injunction. Well... on second (third?) thought, let the negotiations begin.

The country has sent confusing signals since the Supreme Court rejected its appeal in the pari passu case. Now, however, it seems that negotiations will begin in earnest under the auspices of a special master appointed today by Judge Griesa. Here's the order, which appoints Daniel Pollack (of the McCarter & English law firm) to oversee negotiations. Unlike some other cases involving financially-distressed governments (here's looking at you, Detroit), the special master won't play a quasi-judicial role. The master has no authority to make rulings of any kind, only to supervise settlement discussions.

Perhaps Argentina's somewhat erratic behavior - including essentially forcing Judge Griesa to forbid the debt swap - has been designed to make it seem that the country has been forced to negotiate. The RUFO clause entitles exchange bondholders to participate in any better deal voluntarily offered to holdouts. The clause seemingly excludes settlements and so arguably wouldn't apply, but it can't hurt to be careful. In any event, the prospect of a settlement is a welcome one for Argentina-watchers.

Update: Also today, Argentina filed this letter, asking Judge Griesa to reinstate the stay of the injunction. Although the letter doesn't spell it out, this would allow Argentina to make the June 30 payment without making any payment whatsoever to NML. The letter (somewhat curiously) doesn't say whether Argentina has consulted with NML about a potential stay; I assume NML will oppose it. 

About That June 30 Payment...

posted by Mark Weidemaier

So, Argentina lost its bid to have the Supreme Court overturn the injunction. It also has a payment due exchange bondholders on June 30. Recall that the Second Circuit stayed enforcement of the injunction so that the Supreme Court could consider Argentina's petition for certiorari. Is that stay still in place? Can Argentina get more time (until after June 30) by asking the Supreme Court to reconsider the denial of certiorari? And if not, does the country have any good options? There has been a fair bit of speculation about these questions.

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A Quick One-Two Punch: Argentina Loses Discovery Case, Too

posted by Mark Weidemaier

In other news, the Supreme Court has also ruled against Argentina on the merits in its discovery dispute with NML. Refresher posts here and here. Quickly (because, despite what you may have heard, Greyhound buses are not ideal for blogging) the case involves whether NML can take broad discovery of Argentina's assets in an effort to locate assets that might not be protected by sovereign immunity. If it can find non-immune assets, NML can try to seize them to satisfy money judgments it holds against Argentina. (These judgments are independent of the injunction NML has also obtained.) The Supreme Court held that NML is entitled to the discovery. The 7:1 opinion is here. Scalia authored the majority, and Ginsburg dissented. Sotomayor took no part.

I'm not surprised by the result. As I noted in an earlier post (the first link above), the Foreign Sovereign Immunities Act doesn't give sovereigns any explicit protection from discovery. The Court assumed (without deciding) that a judgment holder could get this sort of discovery from a private defendant. On that assumption, there really isn't any statutory basis for treating a sovereign differently. So... a pair of very big wins for NML.

Argentina's Cert Petition Denied

posted by Mark Weidemaier

Order denying cert here. More on this later, of course. The next payment on the exchange bonds is due June 30, I believe.

Leaked Memos and Litigation Leverage (Argentina Version)

posted by Mark Weidemaier

There has been some recent excitement over a leaked memo penned by Argentina's lawyers at Cleary Gottlieb. (Registration required for the first two links.) The memorandum supposedly advises Argentina to defy the US courts, if the Supreme Court turns down its appeals, by creating a mechanism to pay exchange bondholders outside the United States. So interpreted, the memorandum comes dangerously close to violating the "no workaround" injunction now in place, which forbids Argentina and its agents to take steps to evade the court's "ratable payment" injunction. Because Argentina and its lawyers have repeatedly said that the country has no plans to violate the ratable payment injunction, the Cleary memo also might be viewed as evidence of a fraud upon the court. This is how NML characterizes it. I have elected not to post the Cleary memo here and will just say that Argentina disputes this characterization. Interested readers can easily find links to the memo on-line, including in the news reports linked above. The parties' lawyers also attended a brief hearing on Friday before Judge Griesa, and the hearing transcript succinctly covers their arguments.

The memo prompted NML to ask Judge Griesa to enter this proposed order, which the judge has taken under advisement. The most relevant bits (1) instruct Argentina to file a translated copy of the Cleary memo with the court, (2) forbid the country to carry out its alleged plan to evade the ratable payment order, and (3) require the country to turn over to the plaintiffs any communications or information relating to any plan to evade the ratable payment order. In some respects, part (3) is the most interesting.

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Round One in the Books: Oral Argument in NML v. Argentina

posted by Mark Weidemaier

On Monday, lawyers for NML and Argentina (with a cameo by lawyers for the US Department of Justice) were before the Supreme Court arguing about the scope of a US court's power to order discovery in aid of execution. (Here's the transcript; here's a good summary of the argument itself.) This case is about the proper interpretation of the Foreign Sovereign Immunities Act (FSIA) and is unrelated to the pari passu litigation. The question, in a nutshell, is whether a creditor that holds a money judgment from a US court can obtain broad discovery into the nature and location of the sovereign's assets worldwide. Bear in mind that the US court can only enforce its judgment by allowing the creditor to execute on commercial assets located in the United States; it has no power to reach assets overseas. But NML wants to use the information it uncovers during discovery to identify assets in other countries that might be subject to seizure under the law of those countries. Let's call this the "discovery case" to distinguish it from the "pari passu" case.

The discovery case has provoked a bit of discussion, most recently by Jonathan Macey in the Wall Street Journal and Jonathan Adler in the Washington Post. Both characterize the issue as whether US courts should hold Argentina to its promises to investors. That's...not what the case is about.

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The Pari Passu Posse Arrives. (And Paul Singer Goes to Space.)

posted by Mark Weidemaier

Shutterstock_161010305The amicus briefs in support of Argentina's petition for certiorari are in (and most can be found here). As Anna notes, Mexico's brief may be the most pertinent, as that country is ideally positioned to refute the false CACs-solve-everything premise underlying the Second Circuit's decision. The others cover a range of issues, although they mostly stay on familiar turf. I'll give a few of the highlights below the jump.

But first: Yesterday, NML filed a suit in California federal court to execute on rights in a contract between CONAE (Argentina's National Space Activities Commission) and Space Exploration Technologies Corp. (SpaceX). Basically, SpaceX has agreed to launch satellites for Argentina from Vandenberg Air Force Base in California. NML wants those rights sold to the highest bidder, with the proceeds used to pay down Argentina's debt to NML. More from Bloomberg here.

The timing is curious. I doubt NML's lawyers worked too hard to put this lawsuit together - they filed a similar one back in 2011. The launches aren't imminent, so there's also no obvious rush. Perhaps the exotic collection suit will divert attention from the amicus briefs. (See, it's working!) If so, it's a diversionary tactic worthy of those masters from Little Britain.

Continue reading "The Pari Passu Posse Arrives. (And Paul Singer Goes to Space.)" »

An Amicable Separation for Arbitration and the Class Action Waiver

posted by Mark Weidemaier

Shutterstock_124671304To follow up on Adam's post about the Dropbox arbitration clause and its class action waiver, I want to highlight two aspects of the clause that may not be apparent on first glance. First, Dropbox's procedures for individual arbitration are actually quite fair. That's worth emphasizing, but so is the likely explanation: that Dropbox views a fair individual process as the cost of getting insulation from class actions. Second, Dropbox's clause suggests that the long-standing link between arbitration and class action avoidance may be breaking down. (This isn't necessarily good news if you value the deterrent effect of class actions.)

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Cert granted in that *other* Argentina case

posted by Mark Weidemaier

As Argentina-watchers know, the pari passu saga is only one aspect of the broader kerfuffle between Argentina and NML. On Friday, the U.S. Supreme Court agreed to hear Argentina's appeal of another Second Circuit decision, this one allowing NML and other judgment creditors to take broad post-judgment discovery into the country's assets. As Anna Gelpern and I have written elsewhere, creditors probably can't seize much in the way of sovereign assets, but they can use a money judgment to impose an embargo on the sovereign's commercial and financial transactions. The more you know about those transactions, the tighter and more effective the embargo.

The outcome of this case is unlikely to change the fundamental dynamic between Argentina and NML - at least not any time soon. But it offers the Supreme Court a chance to clarify the scope of a sovereign's immunity after a judgment has been rendered against it. The basic question - on which the courts of appeals have disagreed - is whether creditors must target their discovery towards identified assets that are plausibly subject to seizure. The dilemma for creditors is apparent: Without discovery, how can you identify assets that satisfy this criterion?

No Argentine Settlement Yet. Some Light Reading While You Wait?

posted by Mark Weidemaier

Shutterstock_124585378Despite rumblings of an inter-creditor settlement in which exchange bondholders would pay NML to go away (details here; registration required), no end is yet in sight in the NML v. Argentina saga. On Friday, the Second Circuit denied NML's request to lift the stay. That means there's little to do on the legal front right now except wait for the (puzzlingly delayed) decision on the petitions for en banc review. Assuming the petitions are denied, that will start the clock for the next round of certiorari petitions.

In the interim, Anna Gelpern and I have posted an article with the catchy title, Injunctions in Sovereign Debt Litigation. The subject is... er, perhaps you can figure it out. It represents our very best effort to explain our reservations about the NML injunction - and injunctions against foreign sovereigns in general - while using the word passu as little as humanly possible. Here's the abstract:

Injunctions against foreign sovereigns have come under criticism on comity and enforcement grounds. We argue that these objections are overstated. Comity considerations are important but not dispositive. Enforcement objections assign too much significance to the court's inability to impose meaningful contempt sanctions, overlooking the fact that, when a foreign sovereign is involved, both money judgments and injunctions are enforced through what amounts to a court-imposed embargo. This embargo discourages third parties from dealing with the sovereign and, if sufficiently costly, can induce the sovereign to comply. Nevertheless, we are skeptical about injunctions in sovereign debt litigation. They are prone to dramatic spillover effects precisely because they cannot reach their primary target, the sovereign government. Recent decisions in NML v. Argentina illustrate the way in which a court's inability to compel compliance by the sovereign may lead it to impose dramatic and unwarranted costs on third parties, turning traditional equitable analysis on its head.

Piggy bank photo courtesy of Shutterstock.

Hello, kettle? This is the pot. We should talk.

posted by Mark Weidemaier

From the October 7 Financial Times, there's this opinion piece by Elliott's Jay Newman. The gist of it is that, for more than a decade, Elliott has been uber-reasonable in trying to negotiate with Argentina, but that the country has simply refused to discuss how much more it is willing to pay... er, I mean, refused to pursue a "conciliatory and open process of negotiations" over restructuring terms that would benefit not just Elliott but "the rest of Argentina's creditors."  The title pretty much captures the rest: Now that the Supreme Court has rejected Argentina's first (but not last) petition for certiorari, "It is high time Argentina talked to its creditors."

It's easy and appropriate to bash Argentina, and Newman gets in some zingers. Here he is on Argentina's threat to defy any US court judgment it doesn't like: "This is like threatening a judge that you will break out of jail unless your sentence is commuted." (Yes, exactly! Only, what if you are the leader of a foreign government and... oh, never mind.)

Anyway, maybe it is time for Argentina to put its litigation woes to rest. If that happens, however, it won't be because the Supreme Court denied its recent petition for certiorari. As Anna noted in her last post, that decision isn't a big deal. We may have another 12-18 months before the Supreme Court proceedings are over with. But assuming the injunction survives that process, it might be enough to bring Argentina to the negotiating table. Which will prove that the same world really can't contain both an irresistible force and an immovable object. Or something like that.

Don't even think about it, Argentina. (And tell us if you do.)

posted by Mark Weidemaier

No news as yet about whether the Supreme Court has reached a decision on Argentina's pending petition for certiorari. In the interim, however, the district judge decided to enter this order. Recall that the injunction against Argentina includes a "no workaround" part that forbids the country to take steps to evade the injunction. Remember, too, that immediately after the Second Circuit's recent opinion affirming the injunction, Argentine officials (including President Kirchner) announced plans to defy the injunction by letting exchange bondholders swap into bonds that would be paid in Argentina. Thinking about violating a court's order doesn't normally count as a violation, and so far Argentina claims not to have taken any steps towards implementing the swap. Still, it seems the district judge isn't too pleased. The latest order (linked above) repeats that the "no workaround" injunction remains in effect during Argentina's appeals. More astonishingly, the order (see par. 4 on pp. 6-7) gives Argentina 5 days to turn over to the plaintiffs any communications it may have had, with pretty much anyone in the world (except, as I read the order, its lawyers), relating to any plan that might be "deemed by a reasonable person" to evidence the intent to violate the injunction. The order even specifies that Argentina must turn over any communications with the United States government.

It will be interesting to see how Argentina responds. If there is already a paper trail related to a future debt swap, those communications will likely now have to be turned over. Or Argentina could ignore this order, too. If it picks the latter route, no one will be the wiser, yet. (The order is directed only to Argentina; it doesn't require third parties to produce information.) But the communications, if they exist, will be discovered eventually. If that were to happen while Argentina was seeking relief from the Supreme Court... well, it wouldn't look good.

Edit: Bonus coverage of the order over at FT Alphaville.

Pari passu poetry (doggerel, more like it...)

posted by Mark Weidemaier

We are in a brief pari passu hiatus while we wait for the Supreme Court to decide what it wants to do with Argentina's first petition for certiorari and for the Second Circuit to decide the petitions for panel and en banc rehearing that have been filed by Argentina and others. (Briefs and opinions here). Given the temporary lull, it seemed a good time to reflect briefly on the fact that, thanks to the Second Circuit, we finally, after over 100 years, know what pari passu means when used in a sovereign bond.

Without repeating the details, the short version is that the appeals court interpreted the clause to  allow a sovereign to refuse to pay holdouts, but not when the sovereign is mean about it. In the court's view, Argentina breached the clause by enshrining its refusal to pay NML in legislation (the Lock Law), repeatedly vowing in public not to pay NML, and generally pairing its refusal to pay with "extraordinary behavior" (p. 23 of the most recent opinion). Basically, in Anna Gelpern's accurate shorthand formulation: "selective nonpayment plus somethingorother means breach" of pari passu.

Reader, I must confess that I had my doubts about this interpretation. Find in RuritaniaWhy, exactly, would investors value such a random and unpredictable form of protection against selective nonpayment? But my doubts were stilled during a recent trip to the famed pari passu archives in Strelsau, Ruritania.
There, I found the amazing scroll you see to the right (click to enlarge), which seems rather definitive as to the historical meaning of pari passu, at least at it was understood by the famously-indebted nation of Ruritania. The meaning seems to have been well enough settled that the early Ruritanian bards saw fit to incorporate pari passu into their poetry. Long live "selective nonpayment plus somethingorother!"

Should NML move to lift the stay?

posted by Mark Weidemaier

An update on where matters stand in NML v. Argentina: I don't see it listed on the court's calendar on PACER, but the parties reportedly had a meeting scheduled for this afternoon with Judge Griesa to discuss Argentina's plan to let exchange bondholders swap into bonds governed by Argentine law. Whether or not the meeting happens, the more important question, as I noted in yesterday's post, is whether NML will ask the Second Circuit to lift the stay on the ratable-payment part of the injunction. Michelle Celarier at the New York Post reports that NML is considering doing just that.

As I said several days ago, if I were NML, my inclination would be to ask the Second Circuit to lift the stay. Doing so would jeopardize Argentina's ability to pay exchange bondholders at a time when it does not yet have a mechanism in place to circumvent the injunction. (I hate to sound so cynical, but Argentina has clearly announced that it won't comply.) Filing a motion to lift the stay also gives NML another chance to portray Argentina as a uniquely defiant and unsympathetic defendant. On the other hand, there is a potential cost to lifting the stay: the added urgency might highlight the significance of the case to the Supreme Court. Plus, the Supreme Court justice assigned to the Second Circuit could always re-impose the stay, taking away the leverage an order lifting the stay would give to NML.

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More on an Argentine debt swap (and why it doesn't matter whether the "no workaround" injunction is stayed)

posted by Mark Weidemaier

Just a few additional thoughts about reports that Argentina might allow exchange bondholders to swap into Argentine-law bonds. The injunction, remember, has essentially two parts (over-simplifying): There's the ratable payment part, requiring Argentina to pay NML if it pays on the exchange bonds, and there's the no-workaround part, forbidding Argentina to take steps to evade the injunction. As reflected in my last post (link above), there is some confusion about whether this no-workaround part of the injunction is itself stayed. The Second Circuit's decision stayed "enforcement of the amended injunctions" (see the last paragraph). Presumably, that includes the no-workaround part, too. However, in a separate order not under appeal, entered on March 5, the district court imposed a similar no-workaround injunction "during the pendency of the appeal." If "pendency of the appeal" means something like "until the Second Circuit issues its mandate" (and paragraph 1 of the order suggests that this is what it means), then there is a no-workaround injunction that remains in effect for the short term only (basically until 7 days after the Second Circuit denies rehearing, assuming a petition for rehearing is filed).

As Felix Salmon notes, whether or not the no-workaround injunction is stayed seems to be a big deal. If it is stayed, then Argentina can take steps to evade the order without risking contempt sanctions. However, I don't think the question is as important as it seems - and not only because the March 5 injunction will soon expire by its own terms. I explain why below the jump.

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Now things are getting a bit crazy - Argentina style.

posted by Mark Weidemaier

The dust is nowhere near settled after the Second Circuit's blunt affirmance of the injunction against Argentina. Still, there are valuable preliminary takes by Felix Salmon, on FT Alphaville by Joseph Cotterill, and here on Credit Slips. Argentina isn't staying quiet either. The initial reaction to the Second Circuit's ruling is... well, not meek compliance. Bloomberg reports that Argentina plans to reopen the debt exchange - offering holdouts the same terms as were offered to participants in the 2005 and 2010 exchanges, and also offering exchange bondholders the chance to swap their bonds into securities governed by Argentine law. According to the report, a bill to this effect will be sent to Congress tomorrow (August 27).

Um, wow... The injunction clearly extends Argentina's ratable payment obligation to any payments it might make under new, Argentine-law bonds (par. 2a). That part of the order has been stayed, for now. But the injunction also forbids Argentina to take any steps "to evade the directives" of the injunction or to "render it ineffective" (par. 4), and this part of the order has not been stayed (caveat below).* The swap, assuming it happens, seems close to the line. When paired with the country's steadfast refusal to pay NML, it certainly looks like a preliminary step towards evading the order by allowing payment to take place outside the United States (thus bypassing financial institutions who would otherwise risk contempt if they processed payment).

The devil is in the details, I suppose. Maybe the swap can be portrayed as consistent with a future in which Argentina complies with the injunction. Still, my initial thought is... why? With another possible petition for en banc review - and conceivably a request for panel rehearing (although really, why bother?) - plus a second petition for certiorari, it could be late 2014 or even 2015 before the case is finally resolved. And as long as the stay remains in place, Argentina is free to pay exchange bondholders while making NML cool its heels. But this latest seems really, really provocative. If I'm NML, I file a motion to lift the stay. Now.

*Caveat: The original injunction imposed the "no workaround" requirement only during the pendency of an appeal. The amended injunction (linked above) doesn't have that time limit; it forbids efforts to evade the injunction, whenever they occur. However, when the district court lifted the stay (in November), the Court of Appeals reinstated it with respect to "the November 21, 2012 orders." Although this probably isn't what the Court of Appeals had in mind, this may have stayed the operation of the "no workaround" provisions. If that's true, Argentina can't commit a violation now. The point is the same, however. The timing seems awful, and it might be provocative enough to convince the court to lift the stay.

When you stiff your creditors, do it with a smile

posted by Mark Weidemaier

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?

Argentina loses... big.

posted by Mark Weidemaier

The opinion is out, and I'm happy to be asked back to Credit Slips to talk about it. The Second Circuit affirmed the injunction against Argentina... full stop. No changes to the list of third parties potentially subject to contempt sanctions, no changes to the payment formula, just a straight-up affirmance.*

To recap, for those who have let their attention wander to other topics (is this even possible?): The Second Circuit has now definitively approved an injunction that forbids Argentina to pay exchange bondholders (i.e., holders of its restructured debt) unless it pays NML and other plaintiffs the full amount of their accelerated debt and interest. That's roughly $1.4 billion. The opinion is hot off the press, so I'm sure there will be plenty more to say about the case later. For now, you'll find a few more details below the jump.

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Pari passu realpolitik (big news, and a goodbye)

posted by Mark Weidemaier

The pari passu hearing is over and done and, as Anna Gelpern described, what a hearing it was. Perhaps most interesting was the panel's apparent openness to an alternative payment formula that wouldn't require Argentina to pay the full accelerated debt immediately. But it looked unlikely that such a compromise could be reached. The panel seemed unwilling to limit holdouts to payments equivalent to those received by exchange bondholders, and Argentina seemed unwilling to pay a penny more (and possibly not even that). That doesn't leave many options.

In an unusual move, the panel has reached out to break the impasse. It just entered an order requiring Argentina, by March 29, to specify "the precise terms of any alternative payment formula and schedule to which it is prepared to commit." In a sense, the order is an attempt to save face. The court clearly thinks Argentina should pay something, yet it is understandably hesitant to issue an order that Argentina will simply disregard. ("Not gonna happen," I think was the phrase used by Argentina'a counsel during Wednesday's argument...)

From start to finish, this case has involved a clash between one of the (perhaps the) most preeminent commercial courts, which hardly wants its credibility threatened by an openly defiant debtor, and a country determined, for its own political reasons, not to respect that court's judgments. Given the court's limited enforcement power in the sovereign context, that kind of clash calls for a negotiated solution. Yet as an institutional matter, courts aren't very competent at negotiating directly with the parties before them. Desperate times call for desperate measures, I guess... In any event, this is potentially big news, but only if Argentina is willing to budge a little. And if Argentina does budge, and the court enters an order imposing on NML whatever agreement the court strikes with Argentina, doesn't that seem an awful lot like a sovereign bankruptcy regime?

As a final note, this will be my last guest post for Credit Slips, though I'm happy to continue responding to comments on this or other posts. Thanks very much to Credit Slips for providing such a great platform for discussing matters related to sovereign (and other) kinds of credit.

Arbitration versus sovereign debt: Where will YOU be on February 27?

posted by Mark Weidemaier
February 27 is a big day for people interested in financial markets, consumer credit, and... well, many things of interest to Credit Slips readers. I'll be in New York, attending round two of the Second Circuit oral arguments in NML v. Argentina. Meanwhile, the Supreme Court will be hearing argument in In re American Express Merchants Litigation - the latest big arbitration case. Much of my academic writing deals with arbitration, so I want to take a minute to highlight the significance of the AmEx case.

Like many credit providers, American Express tries to escape class action liability by pairing an arbitration clause with a class action waiver, thus requiring customers to bring claims in arbitration, as individuals. In AT&T v. Concepcion, the Court rejected an attempt to use state law unconscionability doctrine to invalidate a clause like this. In the AmEx case, the Court must resolve an arguable conflict between two federal laws. Plaintiffs are merchants who accuse American Express of violating the Sherman Antitrust Act and want to bring a class action in federal court. (Actually, they waffle a bit on this (pp. 35-36), but let's just say they wouldn't turn up their nose at a federal class action...) Relying on the Federal Arbitration Act, American Express argues that the plaintiffs must honor their agreement to pursue these claims individually in arbitration. In its prior cases, the Court has resolved such disputes in favor of arbitration so long as that forum allows claimants to "effectively vindicate" their statutory rights.

Continue reading "Arbitration versus sovereign debt: Where will YOU be on February 27?" »

Forty-nine minutes of contempt (Argentina edition)

posted by Mark Weidemaier

The briefs have been filed in NML v. Argentina (a complete set here), and the Second Circuit has revised the hearing schedule, expanding the time for oral argument on February 27 to a total of 49 minutes. The new schedule grants some time to Bank of New York Mellon and the exchange bondholders (7 minutes each) and gives NML a bit of extra time to compensate. This is a positive development, no matter how you think the case should come out. The most challenging legal issue relates to the scope of the district court's injunction, especially to whether BoNY, as trustee under the exchange bonds, can be held in contempt if it passes funds along to the exchange bondholders. If oral argument means anything, the extra argument time should held the court better address these questions.

BoNY's potential exposure to contempt sanctions comes down to what it means to be "in active concert and participation" with a party who willfully violates a court order. BoNY's argument, in a nutshell, is that it can't be held in contempt unless its purpose is to help Argentina evade the injunction. Just transferring funds, BoNY says, doesn't satisfy that standard, because it would simply be carrying out contractual duties incurred before the injunction. (Readers interested in more detail might want to check out Shearman and Sterling's summary of the arguments here.)

Initially, I thought BoNY clearly had the better of the argument on this question, but I'm increasingly uncertain.

Continue reading "Forty-nine minutes of contempt (Argentina edition)" »

Hardship and sacrifice, now at the Warwick Hotel

posted by Mark Weidemaier

Periodically, I get emails from media relations firms on behalf of American Task Force Argentina, a somewhat hard-to-pin-down group organized, as best I can tell, to lobby the US government to pressure Argentina to pay holdouts like Elliott Associates. (ATFA's website lists Elliott as one of its "Members and Supporters.") Yesterday, an email informed me that a group of Argentine pensioners who held out from the country's 2001 restructuring will hold a press conference January 29 in New York at the Warwick Hotel to share "stories of hardship and sacrifice." I probably won't be going - although the Warwick does sound nice (a four-star "oasis of quiet luxury" with a "refreshing blend of grandeur and intimacy") - and not only because I have to teach two classes that day.

Snarkiness aside, this is a useful reminder that not all holdouts are well-heeled hedge fund types. As Anna has noted, selling such risky investments to retail investors is a questionable practice. (Although I'm on the fence; historical evidence - summarized here, pp. 151-154 - suggests that higher yields have sometimes been sufficient to compensate investors in foreign bonds notwithstanding default risk.) There are plenty of small retail holders of Argentine debt in Argentina and elsewhere. For years, sovereign debt litigation - or at least, successful sovereign debt litigation - has been a rich person's game. That's because it takes real patience and resources to enforce a judgment against a sovereign. On February 27, the Second Circuit is scheduled to hear the next phase of arguments in NML v. Argentina. To me, the case is significant primarily because the court has managed to fashion a remedy with real teeth. If the court continues down this path and leaves the injunction against Argentina in place, it will be interesting to see whether the decision makes litigation a viable option for the non-hedge-fund types.

An Empirical Overview of Modern Sovereign Debt Litigation

posted by Mark Weidemaier

In December, I attended a terrific conference examining historical parallels to the European debt crisis. I was there to talk about the early-20th century antecedents of modern collective action clauses, the magic contractual potion - or is it snake oil? - that will banish holdout litigants from the kingdom forever more. There were some really great papers, including this one (Sovereign Defaults in Court: The Rise of Creditor Litigation 1976-2010, by Julian Schumacher, Christoph Trebesch, and Henrik Enderlein), which may interest many Credit Slips readers.

One of my interests involves how changes in sovereign immunity law influence bond contracts, and I have written about that relationship here. Schumacher et al. address a related but quite distinct subject: the determinants of sovereign debt litigation. Why are some restructurings followed by a flood of lawsuits when others produce few or none? Are poorer countries more likely to be targeted? Does the size of the haircut matter? They have assembled a comprehensive dataset, which includes essentially all lawsuits filed in London and New York since the advent of the modern era of sovereign immunity (which they date to the 1976 enactment of the Foreign Sovereign Immunities Act in the US). My synopsis of their findings after the jump.

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Putting the E(lliot) in Sovereign Debt Enforcement...

posted by Mark Weidemaier

Until a month or so ago, you could have asked almost any economist or political scientist whether sovereign borrowers worry about legal enforcement, and, by way of answer, you would gotten a technical version of "Huh?" Academics disagree about why sovereigns repay loans, but almost no one thinks they do so to avoid being sued. So although bond investors are technically entitled to sue sovereign borrowers, there is no evidence that these formal legal entitlements actually impact the likelihood of repayment. That's why NML v. Argentina has captured so much attention. Hedge funds like Elliott Associates (and NML Capital, a related fund) are finally at the cusp of creating potent remedies for jilted bond investors.

If this effort succeeds, it will mark a revolution in the sovereign debt markets, one that will give sovereign borrowers reason to fear legal enforcement. And at first glance, one would think investors would welcome such a development. In a private loan, lenders typically want strong legal enforcement rights - the better to ensure they get their money back. Surprisingly, however, this hasn't always been true in the sovereign debt context. In this recent paper, I track how sovereign bonds evolved in response to the momentous changes in the US law of sovereign immunity that happened in the 20th century. Between 1952 and 1976, foreign sovereigns gradually became subject to the jurisdiction of US courts and eventually to coercive methods of judgment enforcement (i.e., asset seizure). Investors had these rights, however, only if the bond contract granted them, and almost no bond contract did. To the contrary, throughout most of the 1970s and 1980s, bonds issued under New York law provided only symbolic enforcement rights - basically, allowing investors to sue the borrower but not to enforce the judgment. What's more, investors didn't seem to be willing to pay more for the new enforcement rights they did receive. Basically, a major doctrinal revolution occurred, but investors didn't seem to notice.

As for NML v. Argentina - well, investors seem to have noticed. Later this week, I'm heading to a conference in Geneva, where a group of lawyers, economists, and political scientists will talk about past debt crises and the lessons they offer for the present one. I expect that NML v. Argentina will capture a fair amount of academic interest. After many years of discounting the relevance of legal enforcement, academics may have to start taking it seriously too.

Updated: The procedure of litigating pari passu?

posted by Mark Weidemaier

Lots of activity in the pari passu litigation: The lawyers for the exchange bondholders have been working overtime, filing an emergency motion to stay Judge Griesa's injunction (just granted here!) and asking the Second Circuit to let them intervene in the appeal. And there has been some great analysis of the injunction and its implications for exchange bondholders (by Joseph Cotterill at FT Alphaville), discussion of the consequences for future restructurings (by Felix Salmon), and consideration of Argentina's suggestion that it might be willing to re-open the exchange offer for holdouts (by Vladimir Werning).

In this post, I want to explore the pari passu litigation from a different angle - one that focuses on a question of procedure raised by the Second Circuit's interpretation of the clause. Here's the question: Let's assume that the pari passu clause entitles creditor A to receive a ratable share of any payment made to creditors with whom creditor A ranks equally: creditors B, C, D, etc. Creditor A sues borrower to enforce this right. Who else should participate in the lawsuit? And can the lawsuit really be structured in a way that will be fair to everyone affected by it? (The exchange bondholders raised these questions in their brief, but the district judge didn't address them.)

Continue reading "Updated: The procedure of litigating pari passu?" »

NML v. Argentina: No love for exchange bondholders

posted by Mark Weidemaier

Anna Gelpern has already posted on the pari passu wipeout of Argentina. As she noted, NML got pretty much everything it wanted. By contrast, the exchange bondholders got no love whatsoever. The district judge dismissed their argument that it was unfair for NML to get 100 cents on the dollar when they had received only 30. In essence, the judge replied that exchange bondholders, unlike NML, lacked the stomach for a decade of litigation and so shouldn't complain. This may be true, but it seems puzzlingly disconnected from the realities of most sovereign restructurings. Sure, successful holdouts tend to be specialized investors with long time horizons and a fair appetite for risk. (There are of course other holdouts who don't meet this description.) But in general, holdouts recover 100 cents on the dollar only because other creditors agree to take less. If everyone had the stomach for a decade of litigation, it's likely that no one would recover in full. 

Another interesting thing about the district judge's opinion is that it doesn't really engage with any of the more substantive legal arguments made by the exchange bondholders. This is in part due, I'm sure, to the judge's desire to rule quickly, and also to the limited scope of issues on remand. So we'll see, I guess, whether their arguments get taken any more serioulsy by the Second Circuit. As Anna says, it's getting increasingly hard to see the Second Circuit making major changes at this point.

Allied Bank revisited?

posted by Mark Weidemaier

Last Friday was the filing deadline set by (a rather irked) Judge Griesa for Argentina and interested third parties in that country's long-running battle with NML and other restructuring holdouts. NML's reply brief is due today, but it has already made clear that it wants to be paid in full (roughly $1.4 billion) and that it expects the district court's injunction to bind a lot of third parties, including the trustee for the exchange bondholders. The genius of NML's strategy is that it has found a way to enforce its claims without having to find and seize Argentine assets. (Not that it's afraid to seize an asset or two.) If the strategy works and can be used in other cases, it will have major policy implications.

Readers familiar with the sovereign debt markets may remember the Allied Bank litigation - a trilogy of opinions that launched the modern era of holdout litigation. The parallels between the Allied Bank case and this one are striking, right down to the identity of the district judge.

Continue reading "Allied Bank revisited? " »


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