The U.S. Supreme Court on Monday rejected Argentina’s appeal in a high-stakes case stemming from its historic 2001 default, a major blow for the country in its lengthy battle with holdout creditors.
The court, without comment, left in place a lower-court ruling that said Argentina can’t make payments on its restructured debt unless it also pays holdout hedge funds that refused to accept the country’s debt-restructuring offers.
Background from SCOTUSblog explains that when Argentina sold bonds here in the USA, it "made promises to win over investors who were wary because of that nation’s financial past — a history that one U.S. court would disparage as "a diplomacy of default.'"
One promise was that any dispute would have to be settled under New York law. And another was a so-called “equal treatment” guarantee. That second promise goes by a Latin phrase, pari passu. Loosely translated, it means that everybody gets treated the same when it comes to investors’ rights. It is a standard part of almost all international borrowings by governments.
Meanwhile, even as Argentina went on refusing to pay back any of the investors holding the defaulted bonds, it had twice asked those holders to swap those bonds for new ones, and something like three out of every four of those investors had agreed to those deals. It was the holdouts who didn’t, and it was the holdouts who sued in U.S. courts.
One of the legal strategies of the holdouts’ lawyers was to treat their complaint as a simple issue of living up to one’s promises. Argentina, they contended, had promised to treat investors in the 1994 bonds equally with all other overseas investors in Argentine debt, and yet that country was regularly paying back the investors who agreed to the 2005 and 2010 swaps, while paying nothing to the holders of the 1994 paper.
Ultimately, a federal judge in New York City, Thomas P. Griesa (in time, fully supported by a higher court, the U.S. Court of Appeals for the Second Circuit), ruled that if Argentina made any more payments to the swap participants, it had to pay what it owed to the holdouts — that is $1.33 billion. That, Judge Griesa said, is what pari passu means.
And that's the ruling that has been left intact.
In addition, the Supreme Court (7-1) issued a decision that, as the NY Times explains, allows "the bondholders to issue subpoenas to banks in an effort to trace Argentina’s assets abroad."
The pari passu issue is an obscure one, but potentially fascinating. My friends Mitu Gulati and Robert Scott have published a book on the clause, The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design, which argues that:
Boilerplate language in contracts tends to stick around long after its origins and purpose have been forgotten. Usually there are no serious repercussions, but sometimes it can cause unexpected problems. Such was the case with the obscure pari passu clause in cross-border sovereign debt contracts, until a novel judicial interpretation rattled international finance by forcing a defaulting sovereign—for one of the first times in the market’s centuries-long history—to repay its foreign creditors. Though neither party wanted this outcome, the vast majority of contracts subsequently issued demonstrate virtually no attempt to clarify the imprecise language of the clause.
Using this case as a launching pad to explore the broader issue of the “stickiness” of contract boilerplate, Mitu Gulati and Robert E. Scott have sifted through more than one thousand sovereign debt contracts and interviewed hundreds of practitioners to show that the problem actually lies in the nature of the modern corporate law firm. The financial pressure on large firms to maintain a high volume of transactions contributes to an array of problems that deter innovation. With the near certainty of massive sovereign debt restructuring in Europe, The Three and a Half Minute Transaction speaks to critical issues facing the industry and has broader implications for contract design that will ensure it remains relevant to our understanding of legal practice long after the debt crisis has subsided.