Pari Passu Nevermind
One last (I hope) gift from the pari passu litigation against Argentina: this opinion ruling that Argentina does not breach its pari passu obligations by paying holdouts like NML (who recently settled claims against the country) or by paying bondholders who had previously participated in its 2005 and 2010 exchange offers. The result was basically a given. The judge was hardly going to lift the injunction only to reinstate it when the next holdout came along. The interesting question was how the judge would distinguish bondholders who refused Argentina's latest settlement offer from bondholders who had refused prior offers.
There was an obvious and sensible answer. Because holdouts already have claims for money damages, the meaning of the pari passu clause isn't all that important unless violation produces a different remedy, such as an injunction. But an injunction is appropriate only when the benefits to the plaintiff exceed the costs to the defendant and third parties. Now that Argentina has made a reasonable settlement offer (in the court's judgment) and obtained the assent of the vast majority of bondholders, an injunction might do more harm than good. Thus, in the opinion linked above, the court holds that, whatever the meaning of the pari passu clause, an injunction would be inappropriate because "significantly changed circumstances have rendered the pari passu injunctions 'inequitable and detrimental to the public interest'" (p. 9). So far, so good. But the opinion doesn't stop there. Instead, the court's primary ruling is that the selective payments Argentina is currently making do not violate the pari passu clause at all.
To summarize the court's ruling here: selective payment of one bondholder over another isn't enough to violate the pari passu clause. Argentina's prior violation consisted of a course of conduct, including not only selective payments but (a) legislation deterring further settlements (the Lock Law) and (b) a variety of "incendiary statements by the former administration," mostly about federal judges in the US (p. 5). In other words, Argentina violated the pari passu clause by being "a uniquely recalcitrant debtor" and by being a meanie to members of the federal judiciary.
I suppose those who disagree with the court's earlier pari passu rulings should cheer this one, since it appears to limit the potential fallout. As a matter of contract interpretation, however, I find it baffling. Courts normally resolve issues of contract interpretation by predicting how the parties would have resolved the issue if they had foreseen it during negotiations. I'm skeptical that parties to a sovereign debt contract would ever embrace such a vague, ill-defined limit on the borrower's restructuring options. (And do I have to explain that investors in sovereign bonds do not care whether the borrower's public officials say mean things about the federal judiciary?)
Perhaps the closest analogy here is to the duty of good faith and fair dealing. The law imposes this duty on parties to a contract and deliberately defines the duty imprecisely. The core idea is that, during contract performance, one party may gain temporary leverage and may be tempted to exploit this leverage to extract better terms than it was able to negotiate ex ante. The duty of good faith and fair dealing forbids such opportunistic behavior. In effect, the court has interpreted the pari passu clause to imposes a good-faith-like obligation on sovereign borrowers in the conduct of debt restructuring operations.
That may or may not be a good idea. But it raises a number of puzzles. For one thing, the duty of good faith is generally reciprocal. If sovereign borrowers must conduct restructuring negotiations in good faith, why don't creditors have a similar duty when it comes to participation? (Some observers think creditors should have such a duty.) For another, if sovereign borrowers have an obligation not to be "uniquely recalcitrant"--whatever that means--why should the obligation derive from the contract rather than from the law itself? To ask the question differently: If a government omits the pari passu clause from its bond contracts, has it reserved the right to conduct debt restructuring operations in a "recalcitrant" manner? If it hasn't, why are we talking about the pari passu clause at all, rather than about the duty of good faith and fair dealing as it applies to sovereign debt obligations?
As I said at the outset, the present holdouts were not likely to succeed in reimposing an injunction against Argentina. But the way the litigation has unfolded makes the US courts appear unprincipled, as if judges gave the pari passu clause whatever meaning was necessary to bring Argentina to heel and now want to limit the fallout. Fair enough; perhaps that's exactly what's going on. Time will tell how easily this genie goes back into the bottle.