Pay Dick, Ditch Harry: More on 'Ratable Payment' and Its Implications
Creditors owed identical amounts under identical defaulted Argentine bonds, including identical pari passu clauses, could get very different recoveries under the plaintiffs' theory of ratable payment--unless all such creditors are corralled into a mandatory class action that divvies up Argentina's surplus among them under equitable supervision of the courts.
Unequal recovery under identical instruments could happen if, for example, Argentina ran out of money after paying the first wave of pari passu litigants. The result seems out of whack with the original "Tom, Dick, and Harry" theory of the pari passu clause in sovereign debt instruments, as famously articulated by Professor Lowenfeld beginning in 1997 (this version 2000):
Suppose, for example, the total debt is $50,000 and the borrower has only $30,000 available. Tom lent $20,000 and Dick and Harry lent $15,000 each. The borrower must pay three fifths of the amount owed to each one -- i.e., $12,000 to Tom, and $9,000 each to Dick and Harry. Of course the reamaining sums would remain as obligations of the borrower. But if the borrwer proposed to pay Tom $20,000 in full satisfaction, Dick $10,000 and Harry nothing, a court could and should issue an injunction at the behest of Harry. The injunction would run in the first instance against the borrower, but I believe ... to Tom and Dick as well.
Contrast the plaintiffs' interpretation (fuller quote in a previous post):
If holders of other defaulted indebtedness later bring equal treatment claims of their own, Argentina will have ample opportunity both to litigate the merits ... and to make a showing of financial need, based on circumstances then prevailing, for the district court to consider in shaping a remedy. [Emphasis added]
In other words, if Harry does not sue along with Dick, the borrower can later claim "financial need" from paying Dick as a defense to paying Harry.
Fear not, Harry: back in 2002, Buchheit and Gulati proposed mandatory class actions under the Federal Rules of Civil Procedure, to help nice, slow, or sleepy plaintiffs just like you. Where the sovereign has a "limited fund" (eg, scarce foreign exchange) available for distribution to all creditors, FRCP Rule 23(b)(1) would permit certifying a class if ...
... adjudication with respect to individual members of the class [Dick] ... would as a practical matter be dispositive of the interests of the other members not parties to the adjudications [Harry] or substantially impair or impede their ability to protect their interests ...
The class action solution also finds support with David Skeel here. In the Buchheit-Gulati view, mandatory class actions in sovereign debt would be the natural heirs of equity receiverships, used to reorganize railroads under judicial supervision before bankruptcy laws were amended in the 1930s.
The alternative -- following from the Lowenfeld interpretation -- would appear to give Harry a cause of action against Tom and Dick. Then Sally would sue Harry to get her ratable piece of the pie, then Sue, then Fred, and so on.
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