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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