It’s the ruling we were all waiting — and waiting, and waiting — for: six months after hearing oral arguments, the Second Circuit has finally handed down its 25-page decision, finding in favor of Elliott Associates and against Argentina. On its face, the ruling is, as Mark Weidemaier puts it, a big loss for Argentina, and “a total win for NML”, a/k/a Elliott Associates. The ruling was unanimous — the rumored dissent never appeared — and pulls no punches: there’s no indication that this was a hard case to decide, or that the lower court’s extremely aggressive rulings were anything other than entirely reasonable.
Still, there are some oddities here, starting with the fact that this decision took such a long time to appear. The ruling, written by judge Barrington Parker, is not exactly a model of pellucid clarity; rather, it’s messy and scrappy and very narrowly argued. The real power of the lower court’s ruling was not that he told Argentina that it needed to pay Elliott: the court has been making such rulings for years, and Argentina has happily ignored all of them. So the district court judge, Thomas Griesa, went nuclear, and roped in virtually the entire global payments system as well. So long as Argentina was in default to Elliott, said Griesa, he would prevent actors like Bank of New York and Clearstream from doing their job and making the payments they’re contractually obliged to make to Argentina’s bondholders. The entire force of Griesa’s ruling, and the reason why this case is such a huge deal, is predicated on its ability to stop money from being lawfully transferred to bondholders after it has left Argentina and entered the payments system.
And yet here’s the Second Circuit blithely ducking all the hard questions raised by such an order:
The amended injunctions simply provide notice to payment system participants that they could become liable through Rule 65 if they assist Argentina in violating the district court’s orders. Since the amended injunctions do not directly enjoin payment system participants, it is irrelevant whether the district court has personal jurisdiction over them. And of course, “[t]here will be no adjudication of liability against a [non-party] without affording it a full opportunity at a hearing, after adequate notice, to present evidence.” In such a hearing, before any finding of liability or sanction against a non-party, questions of personal jurisdiction may be properly raised. But, at this point, they are premature. Similarly, payment system participants have not been deprived of due process because, if and when they are summoned to answer for assisting in a violation of the district court’s injunctions, they will be entitled to notice and the right to be heard.
Or, to put it another way: we’re going to dismiss all objections to the most important parts of Griesa’s order as being irrelevant or premature, and if you think you’re hurt by them, well, we’ll cross that bridge when we come to it. We’re not going to rule on the substantive issues, and we’re going to disingenuously declare that those issues can be litigated in some hypothetical future hearing — a hearing which will probably never happen, since the payments companies will end up just complying with Griesa’s order rather than risk him finding them in contempt.
It’s important to remember that the Second Circuit, with this ruling, is setting a hugely important precedent with massive consequences for the entire sovereign debt asset class. In such cases, it behooves any serious jurist to address the issue at hand head-on, rather than disingenuously punting with poltroonish pusillanimity.
At one point Judge Parker goes so far as to talk about “some payment system participants, ostensibly concerned about being sued for obeying the injunctions” — the “ostensibly” being a clear signal that he doesn’t even think that they’re particularly worried about being sued at all. It seems, indeed, that the Second Circuit judges take this entire case much less seriously than just about everybody else in their packed courtroom — and much less seriously than, to take one high-profile recent example, the government of France.
Indeed, Parker bends over backwards to try to persuade himself that his ruling really isn’t that important after all:
This case is an exceptional one with little apparent bearing on transactions that can be expected in the future. Our decision here does not control the interpretation of all pari passu clauses or the obligations of other sovereign debtors under pari passu clauses in other debt instruments. As we explicitly stated in our last opinion, we have not held that a sovereign debtor breaches its pari passu clause every time it pays one creditor and not another, or even every time it enacts a law disparately affecting a creditor’s rights. We simply affirm the district court’s conclusion that Argentina’s extraordinary behavior was a violation of the particular pari passu clause found in the FAA.
We further observed that cases like this one are unlikely to occur in the future because Argentina has been a uniquely recalcitrant debtor.
That last sentence carries a footnote, which quotes an FT article as saying that Argentina is an “outlier in the history of sovereign restructurings”. Parker fails to mention that the article in question is in fact all about how important this precedent will be, and how it could radically upend the balance of power in the sovereign debt market. As Joseph Cotterill says, this ruling opens up “a huge fissure in pari passu litigation going forward”, and really only serves to muddy the waters, rather than clearing anything up.
All of which, weirdly, might conceivably end up being a good thing for Argentina. The country has suffered a series of brutal losses in the US courts, and there’s no particular reason to believe that’s going to change. But the Second Circuit did stay its ruling pending an appeal to the Supreme Court — and there’s even reasonably explicit language in the ruling hinting that the appeals court would actually welcome the Supreme Court taking this case. Much of Argentina’s argument was based on the idea that the ruling violates the Foreign Sovereign Immunities Act (FSIA); the Second Circuit decided that it doesn’t, but only “absent further guidance from the Supreme Court”.
As a result, it’s possible — not probable, but possible — that the Supreme Court might at least ask the Solicitor General to weigh in on whether it should accept the appeal. If that happens, the Solicitor General will face an enormous amount of lobbying on both sides, but is ultimately likely to stick with the US government’s stated position to date — which is that the ruling does violate the FSIA. And if that happens, and the Supreme Court is faced with not only France but also the US and the IMF and various other actors all saying that the case was wrongly decided, it could actually go ahead and accept the appeal.
It’s a long shot, to be sure. The Supreme Court rarely accepts appeals where all the lower courts are in agreement with each other, and unanimously so. What’s more, there’s no clear constitutional issue at hand. And in any case even if it does accept the appeal, there’s surely a good chance that the Supreme Court will uphold the Second Circuit’s decision. But I’d say that Argentina’s chances of getting its case heard in Washington probably went up today — which might explain the positive market reaction to the ruling.
In any case, my prediction that Argentina was going to default in 2013 is now straight out the window. I thought that the Second Circuit would rule in April, or maybe May, and that the default would come in June; it never occurred to me that it would take the appeals court six months to write an unimpressive 25-page ruling. And now there are going to be many further months of delay, as Argentina puts together its appeal, and (probably) as the Solicitor General takes his time responding to the Supreme Court.
Indeed, if you read between the lines here, it’s possible to see a slightly different interpretation of the appeals court’s ruling. Remember that the court came out very quickly to ask Argentina to make an offer to Elliott Associates; it then waited a huge amount of time before finally ruling, and even when it did rule, it immediately stayed the ruling pending appeal. It seems to me that the Second Circuit didn’t really want to rule in this case: what it wanted was for Argentina and Elliott to settle, and it gave them every opportunity, and all the time they needed, to do so.
It almost goes without saying that Argentina and Elliott are not going to settle — not so long as Cristina Kirchner is president of Argentina, anyway. But given how long this litigation has gone on already, it’s actually now conceivable that it could still be in front of some court or other when Kirchner finally gets replaced by someone else. (The next presidential election in Argentina is scheduled for October 2015.) The base-case scenario is still, very much, that Argentina will default on its debt once the court ruling takes effect. But looking at how slowly this case is moving, I wouldn’t like to hazard any kind of guess as to when that might be.