Argentina vs Elliott: It’s not about pari passu any more

By Felix Salmon
April 23, 2012

Earlier this month I wrote about Argentina, Elliott, and the pari passu war — the legal fight between New York hedge funds and the country of Argentina over bonds which Argentina defaulted on almost a decade ago.

The latest development in the case is that Elliott has now filed its own 89-page brief. There’s some smart legal argument in there, as you’d expect from Ted Olson. (Elliott has never been a company to scrimp on legal fees.) But the most surprising bit, at least to me, is that Elliott is quite explicitly distancing itself from its own pari passu argument.

Elliott more or less invented the pari passu argument, in 2000, when it was fighting a similar case against Peru. But this time around, Elliott’s slicing up the pari passu clause very thinly, and discarding the pari passu bit of it entirely.

Here’s the clause that Argentina agreed to when it issued its original debt:

The Securities will constitute… direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness.

And here’s Elliott, parsing it:

That pari passu clause is not at issue here… The relevant clause is the second sentence, in which Argentina promises that it will ““rank”” ““payment obligations”” under the FAA Bonds ““at least equally”” with obligations under its other ““unsubordinated External Indebtedness.”” To distinguish this undertaking from the irrelevant pari passu clause in the previous sentence, Appellees refer to it as the ““Equal Treatment Provision.””

It’s really hard to see how the pari passu clause could be irrelevant in this case while it was relevant in the Peru case, but I’m sure the Second Circuit doesn’t care about that. The important thing, here, is whether, pared down to a single sentence, what Elliott is now calling the Equal Treatment Provision can support a far-reaching court order which doesn’t just encompass Argentina, but also binds the trustees acting on behalf of the holders of Argentina’s new bonds.

After all, the important question in this case is whether the Southern District judge, Thomas Griesa, can slap an injunction on innocent bondholders of Argentina, many of whom took a 70% haircut on their original debt, just to satisfy the debts of creditors who took no haircut at all. That’s a very drastic remedy, and Olson really needs his 89 pages to try to persuade the Second Circuit that such a remedy is somewhere to be found in that one slender sentence.

That said, Elliott has the wind behind it in this case, for two reasons. First is the fact that Griesa is Griesa — a genuinely venerable judge and one whom the Second Circuit will have no particular appetite to overturn. As Elliott puts it,

It is difficult to conceive of any case in which deference to the discretion of the district court is more appropriate than it is here. The same district judge, with nearly three decades of experience on the federal bench, presided over dozens of similar lawsuits against Argentina for more than one of those decades. He has in-depth familiarity with the parties, counsel, and facts, and he has borne witness to virtually every development in the evolving disputes arising from Argentina’’s 2001 default. He has extensively examined the arguments and written more than 100 opinions and orders, many of which favored Argentina.

It’s true that Griesa has owned this case from day one, and that it’s going to be almost impossible for anybody on the Second Circuit to challenge the depth of his Argentine knowledge. On the other hand, Griesa’s orders (here here here) are slim: for all that he took his time delivering them, most of the legal reasoning is left implicit. The Second Circuit really has no choice but to work out its own opinion from first principles.

More interestingly, Elliott’s brief comes just as an international legal nightmare surrounding the nationalization of Argentine oil company YPF is about to begin. Argentina’s decision to nationalize YPF was bad enough on its own, but from a timing perspective you can be sure there were quite a few facepalms at the Cleary Gottlieb offices. The Second Circuit sees its main job as upholding New York’s status as a protector of contractual rights, and Argentina is trampling all over those rights in as public a way as it possibly can. That’s going to make a decision in favor of Argentina that much more difficult for the appeals court.

So the final decision really could go either way. I’ve got a $5 bet with Reynolds Holding on this: I’m taking Argentina, he’s taking Elliott. He’s much more of a lawyer than I am, of course. But I have politics on my side — the United States is arguing siding with Argentina. Which has got to count for something.


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“the United States is arguing with Argentina”

Uh, I think you mean “for Argentina” or “on Argentine’s side of the dispute.”

That said, distorting “rank pari passu” into “rank” should win the Humpty Dumpty Legal Argument of the Year Award.

Posted by klhoughton | Report as abusive

“But I have politics on my side — the United States is … siding with Argentina. Which has got to count for something.” (FS)

Are you sure it’s still so, FS?

Obama just had some critical words for Argentina over the YPF thing. A US court decision perceived as giving the gauchos a green light to welch on their debts doesn’t really fit with policy anymore, does it?

Posted by MrRFox | Report as abusive

So let’s see – Elliott (actually NML and several other creditors) “really needs” its 89 pages, yet Argentina’s 84 pages are “masterful”. You don’t mention the page count of the US amicus brief (it’s 41), but Judge Griesa’s orders are “very short” (5 and 6 pages) and thus “don’t make sense” and “are notable for their lack of legal reasoning”.

Rather than pursuing such dubious quantitative analysis, you really should put your political baggage aside and actually look at the arguments.

Argentina and its amici the US (with you cheerleading from the sidelines) are effectively attempting to re-argue the 12-year-old case of Elliott vs. Peru. Why is that ? Because of the plain and undeniable fact that by passing the “Lock Law” and formally subordinating the thousands of creditors who were unwilling to accept Argentina’s take-it-or-leave-it scalping (i.e. beyond a ‘haircut’), Argentina actually did breach the contractual promises it made to induce people to buy its bonds. The US pointedly “takes no position” on this central legal issue.

By falling for this diversionary tactic, you confuse breach with remedy. Judge Griesa found in his first order that Argentina breached its contract (no surprise there) but was then faced with the problem of fashioning a remedy. He sought further briefing and argument, and following that decided in his informed discretion to order Argentina and its agents to make equal payments. There is a very large difference between ordering an equal payment remedy as opposed to relying upon the antique equal payment interpretation of pari passu to determine breach (which Griesa did not).

Your hysterical assertion that Judge Griesa’s order would “slap an injunction on innocent bondholders of Argentina, many of whom took a 70% haircut” could not be more incorrect, although Argentina would have you think so. The order’s effect stops at the US border, and undoubtedly Minister Lorenzino and his attorneys at Cleary Gottlieb have already devised clever ways to pay exchange bondholders through other jurisdictions.

This is really not simply a war between Elliott and Argentina as you portray. There are thousands of involuntarily subordinated creditors, among them Italian pensioners and other major investors who have filed their own briefs. The real nature of this war is between Argentina and the rule of law. Doesn’t it seem right to you that if a borrower exploits US capital markets but breaches its contracts and then defiantly thumbs its nose at hundreds of US federal court judgments, it should not be allowed to further abuse the fundamental rules and principles of our system ?

You really should stop drinking the Argentine Kool-Aid. They aren’t nice people.

Posted by anoldbanker | Report as abusive

While the simple old-fashioned approach is that Argentina breached, end of story. However, the dysfunction of creating a sovereign insolvency regime may open roads to additional outcomes.

The difference between pari passu and priority is important. For example, the judge may find that the IMF has priority in restructurings based on habitual international practice. Then, Argentina would not breach when not paying Elliott its haircut or when paying the IMF 100%. However, Argentina would still be breaching if it were to pay any other pre-insolvency creditor more than it is paying Elliott. More interestingly even, Argentina may breach if it it fails to comply with the IMF conditions after the restructuring under the rationale that the habitual international practice of subordinating Elliott to the IMF is conditional on Argentina’s compliance with IMF’s conditions. If the court went that far, then it would start creating some hope for an international insolvency regime with the ability to induce compliance on the debtor country. Fat chance? (nlg64 at mindspring dot com)

Posted by nlg64 | Report as abusive

$5–Ah, the courage of your convictions. Come on, guys!

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