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Roundtable: Argentina and its Pari Passu Clause - April 18, 2012

EMTA Presents Roundtable Discussion on Argentina

On April 18, 2012, EMTA hosted a roundtable discussion “Argentina and its Pari Passu Clause”.  This event was held at EMTA’s offices at 360 Madison Avenue in NYC.

Argentina has been the subject of a number of court decisions, most recently the December 2011 and February 2012 Orders, in which Judge Griesa has seemingly adopted the broader interpretation of the pari passu clause, which could potentially affect the way that other, non-litigating creditors of Argentina are paid and the way that the payment intermediaries conduct their business.  Pursuant to these Orders (which have been stayed pending their appeal to the Second Circuit Court of Appeals), Argentina is precluded from making debt service payments to holders of the bonds issued in its 2005 and 2010 debt exchanges unless it simultaneously makes a proportionate payment on the remaining defaulted bonds held by plaintiffs.  Without re-litigating these decisions, EMTA’s panel explored some of the issues raised by the plaintiffs, the defendant and various amici in these cases (including differing interpretations of the pari passu clause, as well as appropriate remedies for breaches of sovereign obligations).

Michael Chamberlin, EMTA’s Executive Director, introduced the speakers (James Kerr, Davis Polk, and Whitney Debevoise, Arnold & Porter) and his introductory remarkscan be accessed by Clicking Here.

Mr. Chamberlin asserted that the controversy regarding the meaning of the pari passu clause predates Argentina’s 2001 default and 2005 restructuring.  He reiterated that EMTA is not taking any position regarding either the result of the litigation against Argentina, or the application of the pari passu clause in that context.  Because of the diversity of views within, and held by, EMTA member firms, it is very unlikely that EMTA could reach the necessary consensus to take any specific position on the matter.  Perhaps the only consensus view held by EMTA members is that, other things being equal, they wish that the whole litigation would somehow go away.

Mr. Chamberlin explained that there are two theories of how the typical pari passu clause should be interpreted: a broad view, espoused by the plaintiff-creditors, to the effect that, while in default, a sovereign creditor should pay its creditors ratably; and a more narrow (and probably more common) view, asserted by Argentina, to the effect that the clause protects a creditor from being, in effect, subordinated to other creditors, but it does not protect a creditor against simply being paid less than other creditors (or not being paid at all, while other creditors are being paid).

The confluence of events – a deep financial and economic crisis, unusually persistent creditors, an unusually resistant debtor, an unusual local law (Lock Law), multiple unsuccessful collection efforts, abundant appearances before an unusually frustrated federal court judge and an abundance of talented and expert amici to guide the court to the appropriate resolution – have led to a difficult path for Judge Griesa and the Second Circuit judge(s) after him, who must interpret the clause, determine if it was violated and, if so, provide the appropriate remedy.  It is in the best interest of Argentina and the market to get past this litigation and normalize relations, without damaging the payment system or the protections afforded by the Foreign Sovereign Immunities Act (FSIA).

Mr. Kerr provided some background information on the clause and its first court “appearance” in the cases brought by Elliott Associates against Peru in New York, London, Brussels and Luxembourg relating to a 2000 interest payment.  The courts never fully interpreted the clause (although an ex parte injunction was successful based on Professor Lowenfeld’s affidavit espousing the broader interpretation in the Brussels court) and Peru

settled with its plaintiffs.  In the 2003 case against Nicaragua, Mr. Link’s affidavit was used for the contrary interpretation, and the meaning of the clause may surface again in connection with the Greece exchange.  Mr. Kerr distributed the precise language of the clauses at issue in the Peru and Argentina litigation and stated that the pari passu clause was a possible means to interfere with the principal and interest payments on restructured debt.

Mr. Debevoise framed the discussion with the following three points:

What is the proper interpretation of the clause (what is the intent of the parties and their contract expectations)

How should the clause be interpreted in the specific context of the Argentina case (what is the impact of the Lock Law, and do the facts and circumstances change the first bullet point)?

Assuming a violation of the clause, what is the appropriate remedy (and is equitable relief appropriate)?

In reviewing whether the clause is unenforceable boilerplate in relation to the FSIA (and concern about its reciprocal implications) and otherwise, Mr. Debevoise also raised the issues of assets not being accessible in the U.S. and judgments not being effectively enforced.  From 1907 (when the Convention against the use of force to collect debts was promulgated), courts have grappled with enforceability of (and respect for) contracts in the non-corporate bankruptcy scenario.

The IMF’s Sovereign Debt Restructuring Mechanism (SDRM) proposal was discussed as a way to enforce debtor obligations, as was the introduction of collective action clauses (CACs).

Mr. Link suggested that the result of Judge Griesa’s ruling would “lock down the market”, as new investors would unlikely invest in a market where some creditors were forced to bail-in others, and that the larger issue of sovereign restructurings should not be dealt with in the court system.  Mr. Debevoise agreed that the official sector needs to refine its policy on restructurings (perhaps by amending the FSIA) and, together with the market, determine what the appropriate restructuring acceptance percentage level should be.  Mr. Chamberlin stated that any official sector solution imposed on the market may make it easier to restructure and he was not in favor of it.  Rather, he questioned what remedy would be appropriate for judgment creditors, and what message can be passed through to a defaulting sovereign by the use of such remed(ies).

Is there a proper mix of a voluntary market and statutory approach that is feasible?


Michael Chamberlin Introductory Remarks

Pari Passu Clause Used in Peru and Argentina Contracts

Declaration of Troland Link in Nicaragua Case

Declaration of Professor Andreas Lowenfeld in Peru Case

Recent litigation materials involving Argentina (including the Orders, amicus briefs and other court filings) can be found in the Argentina area of EMTA’s website: