Argentina, Elliott, and the pari passu war
Anna Gelpern puts it well: “for the small but committed contingent of pari passu pointy heads, this is WorldCupOlympicMarchMadnessSuperBowl.” I’m one of the contingent, and I’ve been actively enjoying myself reading various appeals and amici briefs in the case of Elliott Associates vs Argentina. (Technically, it’s not Elliott Associates but rather NML, an Elliott sub-fund, but make no mistake: this is very much a fight between Argentina and the most famous vulture fund in the world.)
Elliott, which is run by the billionaire Republican activist Paul Singer, has suffered a rare and public loss with respect to its Argentina strategy. It bought up Argentine debt around the time the country defaulted, and then refused to enter into the country’s bond exchange, taking its chances in U.S. court instead. That, in hindsight, was a mistake: Argentina’s new bonds, turbo-charged with GDP warrants, performed extremely well. While its defaulted debt has gone absolutely nowhere.
When Elliott started litigating its defaulted debt a decade ago, it quite explicitly told the judge in the U.S. Southern District, Thomas Griesa, that it wouldn’t wheel out the most notorious and legally dubious weapon in its arsenal: the pari passu argument it used to devastating effect against Peru in 2000. In 2003, indeed, Argentina’s lawyers asked the court for a declaration that the argument was legally bonkers; the only reason that Griesa didn’t provide that declaration was that Elliott Associates — in line with all the other holdout creditors — said that it had no intention of making the argument, “at any time in the near or distant future”.
In fact, Elliott was just playing the waiting game — waiting, that is, for 91% of the other creditors to go away, persuaded by Argentina to accept its exchange offer. And then, after a decent amount of time — five years — it suddenly decided that it was going to attempt to use its rather odd pari passu argument after all.
Waiting that long held dangers, since it smells of what lawyers call “laches” — unreasonable delay in making a claim. But it was also quite smart, since at that point Elliott had been fighting Argentina in front of Judge Griesa for a decade, and Griesa was officially Fed Up with the whole thing and just wanted to make it go away.
Griesa’s orders (here here here) are notable for their lack of legal reasoning: Griesa is throwing his hands in the air, here, and basically punting the whole issue up to the appeals court. Each one is very short, certainly in comparison to the long, compelling, and clearly-argued amici briefs, let alone Argentina’s masterful, 84-page response. After reading that, and the briefs from the Justice Department and The Clearing House , it’s basically impossible to see how Griesa’s order can possibly be upheld on appeal.
It’s hard to count the number of reasons why Griesa’s ruling doesn’t make sense, but it’s worth running down a few of them. For one thing, the whole thing is based on the “ratable payment” reading of the pari passu clause — that, in the words of NYU law professor Andreas Lowenfeld, “a borrower from Tom, Dick, and Harry can’t say ‘I will pay Tom and Dick in full, and if there is anything left over I’ll pay Harry’.” Unfortunately, that’s exactly what the borrower can do. If I owe money to my landlord and to my credit-card issuer and to my brother-in-law, it’s up to me which of them I repay, and in which order. All those creditors might have legal recourse if I don’t pay them. But the landlord can’t claim the money I’m paying to my brother-in-law, nor vice-versa.
In this case, Argentina is paying the holders of its new bonds, or, to be precise, it’s paying the trustee who accepts money on their behalf. Once it has transferred money to the trustee, that money no longer belongs to Argentina: it belongs to the new bondholders, the people who accepted a large haircut on their debt as part of Argentina’s bond exchange. What’s scary about Griesa’s order is that he’s ordering and injunctioning not only Argentina, but also the innocent bondholders of Argentina’s new debt. It’s almost impossible to see why they should be paying off Elliott, especially since Elliott wants to be paid all principal and interest payments on its bonds, sans any kind of haircut at all. That doesn’t sound very pari passu to me, if all the other bondholders have taken a 70% haircut.
The problem for Elliott, here, is that it rushed, very soon after Argentina defaulted, to convert its Argentine bonds into court judgments.* That’s easy: Any bondholder who has been defaulted on can become a judgment creditor pretty easily. But becoming a judgment creditor also happens to be the remedy, in the bond documentation, if Argentina violates the pari passu clause. (Which, incidentally, no one knows what it means.) Griesa, in going after the trustee for other Argentine creditors, is going well beyond the letter of the contract, just because that seems to be the only way of getting Argentina’s attention.
Certainly Argentina has no intention of paying Elliott anything. The country’s view of Elliott is that it’s an annoyance, which is causing it to rack up millions of dollars in legal expenses. And as a result, Griesa’s view of Argentina is that while it will happily send expensive lawyers to appear in front of him on a regular basis, it will never actually pay the plaintiffs, no matter what he rules. Which is why, I think, he finally cracked and issued this pari passu ruling: it was the only way he could think of to get Argentina’s attention.
The ruling doesn’t make a lot of sense. For one thing, it requires that Elliott will suffer “irreparable harm” if it isn’t paid. But of course the harm here isn’t irreparable: it’s just money. You pay Elliott money, the harm goes way. That’s pretty much the definition of reparable harm. And then there’s the fraught sovereign-immunity aspect of everything: Griesa’s ruling flies in the face of the Foreign Sovereign Immunities Act, which for obvious reasons the U.S. and most other countries are big fans of. Argentina did waive its sovereign immunity in its original bond issue, but the degree to which that’s even really possible is far from settled under case law.
All of which is to say that Reynolds Holding is wrong when he says that Elliot has “shown it’s possible to win against debtor nations”. Elliott has been a judgment creditor of Argentina for a decade now, and it’s still a judgment creditor: Griesa is a judge, and he can’t ultimately do much more than hand down judgments. The difficult bit has never been getting a court to rule that you’re owed money: that’s the easy bit. The difficult bit is actually collecting on that judgment. And the base-case scenario here is that Elliott is not going to collect.
In fact, the sovereign-debt world is probably a little bit relieved that the Court of Appeals now has the opportunity, once and for all, to set a clear precedent on what the pari passu clause really means in sovereign debt contracts. This issue has been up in the air for far too long, unhappily for sovereigns. When Griesa gets his ruling overturned on appeal, we’ll finally have the pari passu ruling we’ve been waiting for since 2000. Of course, it’s conceivably possible that the appeals court will uphold Griesa’s ruling, and thereby deal a massive and pretty much unenforceable blow to sovereign debt management around the world. But it’s very unlikely. Elliott might have won the battle for its unorthodox pari passu interpretation. But in doing so, it’s set itself up for losing the war.
Update: I’m now told that despite litigating this suit for a decade, Elliott has chosen not to become a judgment creditor. Which may or may not be smart. In any case, bondholders have the right to accelerate their bonds — make all principal and interest due and payable immediately — if the pari passu clause is breached. But Elliott has already done that.
*Update 2: Elliott now confirms that it is a judgment creditor of Argentina after all. Right first time. Sorry about that.