Updated: The procedure of litigating pari passu?
Lots of activity in the pari passu litigation: The lawyers for the exchange bondholders have been working overtime, filing an emergency motion to stay Judge Griesa's injunction (just granted here!) and asking the Second Circuit to let them intervene in the appeal. And there has been some great analysis of the injunction and its implications for exchange bondholders (by Joseph Cotterill at FT Alphaville), discussion of theconsequences for future restructurings (by Felix Salmon), and consideration of Argentina's suggestion that it might be willing to re-open the exchange offer for holdouts (by Vladimir Werning).
In this post, I want to explore the pari passu litigation from a different angle - one that focuses on a question of procedure raised by the Second Circuit's interpretation of the clause. Here's the question: Let's assume that the pari passu clause entitles creditor A to receive a ratable share of any payment made to creditors with whom creditor A ranks equally: creditors B, C, D, etc. Creditor A sues borrower to enforce this right. Who else should participate in the lawsuit? And can the lawsuit really be structured in a way that will be fair to everyone affected by it? (The exchange bondholders raised these questions in their brief, but the district judge didn't address them.)
I hope civil procedure buffs can weigh in on this, but shouldn't other creditors have a seat at the litigation table? In US federal courts, third parties must be joined as litigants if they have an interest in the subject matter of a lawsuit and if the lawsuit may "as a practical matter impair" their ability to protect the interest. As always, there are exceptions, but the starting premise is that such third parties must be joined. Recall that the Second Circuit interpreted the clause as a promise not to pay exchange bondholders without paying holdouts. Perhaps Argentina can afford to pay everyone, but its potential willingness to default rather than pay NML etc. arguably amounts to a "practical impairment" of exchange bondholders' interests. Plus, the logic of the Second Circuit's interpretation would require a country to make ratable payments even if it couldn't afford to pay everyone in full. So it's easy to imagine a situation where a suit to enforce the pari passu obligation would effectively take money from a creditor's pocket.
If it is necessary to join other creditors - in this case, holders of restructured debt - how might that work? A defendant class action, in which one or more exchange bondholders is appointed to represent all the others on the question of the meaning of the pari passuclause? Perhaps, but such a process would be kind of ironic, given the increasing reluctance of courts to certify plaintiff class actions under US law. Indeed, it might prove impossible to join all relevant parties. In such cases, the rules allow (but do not require) courts to proceed with the lawsuit, but this would result in a process that significantly impacts the rights of people who are not effectively represented. Many pari passuaficionados won't need another reason to question the court's interpretation. But if you are keeping score, this seems like another. Given the clause's inherent ambiguity, why choose an interpretation that is so difficult to enforce in a collectively fair manner?
UPDATED to include a link to the stay order.
Comments