Sovereign Piracy

Business Lawyer

Volumn 56, Issue 2, 2001, Pages 635-651

  Gulati, G Mitu ^a   Klee, Kenneth N ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0035583950     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (100)

1. Elliott Assocs., L.P. v. Banco de la Nacion, 194 F.3d 363, 366 (2d Cir. 1999).
2. See id. at 366-67; see also Joshua Chaffin, Investor "Vultures" Come U nder Scrutiny, FIN. TIMES, Oct. 25, 2000, at 19.
3. See id. at 366-67; see also Joshua Chaffin, Investor "Vultures" Come U nder Scrutiny, FIN. TIMES, Oct. 25, 2000, at 19.
4. *2 (S.D.N.Y. Sept. 29, 2000). For descriptions of these recent events involving Elliott and Peru, see ERIC LINDENBAUM & ALICIA DURAN, MERRILL LYNCH & CO., DEBT RESTRUCTURINGS: LEGAL CONSIDERATIONS (Oct. 30, 2000). See also GABRIELLE LIPWORTH & JENS NYSTEDT, INTERNATIONAL MONETARY FUND, CRISIS RESOLUTION AND PRIVATE SECTOR ADAPTATION (paper presented at the First Annual IMF Research Conference, Nov. 9-10, 2000).
5. *2 (S.D.N.Y. Sept. 29, 2000). For descriptions of these recent events involving Elliott and Peru, see ERIC LINDENBAUM & ALICIA DURAN, MERRILL LYNCH & CO., DEBT RESTRUCTURINGS: LEGAL CONSIDERATIONS (Oct. 30, 2000). See also GABRIELLE LIPWORTH & JENS NYSTEDT, INTERNATIONAL MONETARY FUND, CRISIS RESOLUTION AND PRIVATE SECTOR ADAPTATION (paper presented at the First Annual IMF Research Conference, Nov. 9-10, 2000).
6. *2 (S.D.N.Y. Sept. 29, 2000). For descriptions of these recent events involving Elliott and Peru, see ERIC LINDENBAUM & ALICIA DURAN, MERRILL LYNCH & CO., DEBT RESTRUCTURINGS: LEGAL CONSIDERATIONS (Oct. 30, 2000). See also GABRIELLE LIPWORTH & JENS NYSTEDT, INTERNATIONAL MONETARY FUND, CRISIS RESOLUTION AND PRIVATE SECTOR ADAPTATION (paper presented at the First Annual IMF Research Conference, Nov. 9-10, 2000).
7. The reason for this is that generally only property used for the commercial activity in question inside the jurisdiction where the suit is brought may be attached. See, e.g., 28 U.S.C. § 1610 (1994 & Supp. IV 1998). Given that most of the sovereign's assets relating to the borrowing are likely located within the sovereign's own boundaries, this leaves few assets for the creditors to reach. See MOODY'S INVESTOR SERV., SPECIAL COMMENT, How TO SUE A SOVEREIGN: THE CASE OF PERU (Nov. 2000); see also MOODY'S INVESTOR SERV., SPECIAL COMMENT, SOVEREIGN DEBT: WHAT HAPPENS IF A SOVEREIGN DEFAULTS (July 2000).
8. The reason for this is that generally only property used for the commercial activity in question inside the jurisdiction where the suit is brought may be attached. See, e.g., 28 U.S.C. § 1610 (1994 & Supp. IV 1998). Given that most of the sovereign's assets relating to the borrowing are likely located within the sovereign's own boundaries, this leaves few assets for the creditors to reach. See MOODY'S INVESTOR SERV., SPECIAL COMMENT, How TO SUE A SOVEREIGN: THE CASE OF PERU (Nov. 2000); see also MOODY'S INVESTOR SERV., SPECIAL COMMENT, SOVEREIGN DEBT: WHAT HAPPENS IF A SOVEREIGN DEFAULTS (July 2000).
9. See Elliott Assocs., L.P., General Docket No. 2000/QR/92 (Court of Appeals of Brussels, 8th Chamber, Sept. 26, 2000) (unofficial translation on file with The Business Lawyer, University of Maryland School of Law) [hereinafter Brussels Opinion].
10. Id.
11. The settlement includes post-judgment interest. See LINDENBAUM & DURAN, supra note 3, at 2.
12. "[T]he term 'pari passu' is adopted from the Latin for 'with equal step,' or 'side by side.'" Carl S. Bjerre, Secured Transactions Inside Out: Negative Pledge Covenants, Property and Perfection, 84 CORNELL L. REV. 305, 309 n.6 (1999).
13. See Brussels Opinion, supra note 5.
14. See Declaration of Professor Andreas Lowenfeld at 8, Elliott Assocs., L.P. v. Banco de la Nacion, 2000 U.S. Dist. LEXIS 14169 (S.D.N.Y. Sept. 29, 2000); Elliott Assocs., L.P. v. Republic of Peru, 2000 U.S. Dist. LEXIS 368 (S.D.N.Y. Jan. 18, 2000) (executed Aug. 31, 2000) (on file with The Business Lawyer, University of Maryland School of Law).
15. Id.
16. As noted in footnote 10, we have a copy of Professor Lowenfeld's opinion that was submitted in the New York cases. We are advised that the same memorandum was submitted in the Brussels case.
17. Professor Lowenfeld limits his opinion to the context where there is "not enough money to go around," or the debtor is insolvent in the equity sense of inability to pay debts as they become due. In the current case it is unclear whether Peru had enough money to go around. After all, ultimately it paid Elliott in full. Moreover, it is not clear based on its plain meaning that the pari passu clause is restricted to instances where the borrower is insolvent. For example, in theory, the clause could apply to a solvent debtor that was flush with cash but chose not to pay a particular debt. Alternatively, the clause could apply to require ratable payment of all outstanding debts even if a particular debt was not yet due. The authors believe that the basic pari passu clause applies whether or not the borrower is insolvent, but only to guarantee ratable priority, not ratable payment.
18. See Lowenfeld Declaration, supra note 10, at 12.
19. Id. at 11-12.
20. See, e.g., LEE C. BUCHHEIT, HOW TO NEGOTIATE EUROCURRENCY LOAN AGREEMENTS 83 (2d ed. 2000); PHILIP WOOD, LAW AND PRACTICE OF INTERNATIONAL FINANCE 156 (1980) ("The pari passu undertaking is not broken merely because one creditor is paid before another.").
21. See, e.g., LEE C. BUCHHEIT, HOW TO NEGOTIATE EUROCURRENCY LOAN AGREEMENTS 83 (2d ed. 2000); PHILIP WOOD, LAW AND PRACTICE OF INTERNATIONAL FINANCE 156 (1980) ("The pari passu undertaking is not broken merely because one creditor is paid before another.").
22. See, e.g., BARRY EICHENGREEN & ASHOKA MODY, INTERNATIONAL MONETARY FUND, BAIL-INS, BAILOUTS, AND BORROWING COSTS 5-6 (paper presented at the First Annual IMF Research Conference, Nov. 9-10, 2000) [hereinafter EICHENGREEN & MODY]; Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59, 62 (2000); Barry Eichengreen, Bailing in the Private Sector: Burden Sharing in International Financial Crisis Management, 23 FLETCHER F. WORLD AFF. 57 (1999); Samuel E. Goldman, Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt Restructuring, 5 UCLA J. INT'L L. & FOREIGN AFF. 159, 164-65 (2000); Steven L. Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach, 85 CORNELL L. REV. 956 (2000). Elliott's strategy against Peru is not an isolated occurrence. In fact, in 1996, Elliott successfully obtained a $57 million judgment and attachment order against Panama. See Elliott Assocs., LP v. Banco de la Nacion, 194 F.3d 363, 366 (2d Cir. 1999).
23. See, e.g., BARRY EICHENGREEN & ASHOKA MODY, INTERNATIONAL MONETARY FUND, BAIL-INS, BAILOUTS, AND BORROWING COSTS 5-6 (paper presented at the First Annual IMF Research Conference, Nov. 9-10, 2000) [hereinafter EICHENGREEN & MODY]; Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59, 62 (2000); Barry Eichengreen, Bailing in the Private Sector: Burden Sharing in International Financial Crisis Management, 23 FLETCHER F. WORLD AFF. 57 (1999); Samuel E. Goldman, Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt Restructuring, 5 UCLA J. INT'L L. & FOREIGN AFF. 159, 164-65 (2000); Steven L. Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach, 85 CORNELL L. REV. 956 (2000). Elliott's strategy against Peru is not an isolated occurrence. In fact, in 1996, Elliott successfully obtained a $57 million judgment and attachment order against Panama. See Elliott Assocs., LP v. Banco de la Nacion, 194 F.3d 363, 366 (2d Cir. 1999).
24. See, e.g., BARRY EICHENGREEN & ASHOKA MODY, INTERNATIONAL MONETARY FUND, BAIL-INS, BAILOUTS, AND BORROWING COSTS 5-6 (paper presented at the First Annual IMF Research Conference, Nov. 9-10, 2000) [hereinafter EICHENGREEN & MODY]; Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59, 62 (2000); Barry Eichengreen, Bailing in the Private Sector: Burden Sharing in International Financial Crisis Management, 23 FLETCHER F. WORLD AFF. 57 (1999); Samuel E. Goldman, Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt Restructuring, 5 UCLA J. INT'L L. & FOREIGN AFF. 159, 164-65 (2000); Steven L. Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach, 85 CORNELL L. REV. 956 (2000). Elliott's strategy against Peru is not an isolated occurrence. In fact, in 1996, Elliott successfully obtained a $57 million judgment and attachment order against Panama. See Elliott Assocs., LP v. Banco de la Nacion, 194 F.3d 363, 366 (2d Cir. 1999).
25. See, e.g., BARRY EICHENGREEN & ASHOKA MODY, INTERNATIONAL MONETARY FUND, BAIL-INS, BAILOUTS, AND BORROWING COSTS 5-6 (paper presented at the First Annual IMF Research Conference, Nov. 9-10, 2000) [hereinafter EICHENGREEN & MODY]; Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59, 62 (2000); Barry Eichengreen, Bailing in the Private Sector: Burden Sharing in International Financial Crisis Management, 23 FLETCHER F. WORLD AFF. 57 (1999); Samuel E. Goldman, Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt Restructuring, 5 UCLA J. INT'L L. & FOREIGN AFF. 159, 164-65 (2000); Steven L. Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach, 85 CORNELL L. REV. 956 (2000). Elliott's strategy against Peru is not an isolated occurrence. In fact, in 1996, Elliott successfully obtained a $57 million judgment and attachment order against Panama. See Elliott Assocs., LP v. Banco de la Nacion, 194 F.3d 363, 366 (2d Cir. 1999).
26. See, e.g., BARRY EICHENGREEN & ASHOKA MODY, INTERNATIONAL MONETARY FUND, BAIL-INS, BAILOUTS, AND BORROWING COSTS 5-6 (paper presented at the First Annual IMF Research Conference, Nov. 9-10, 2000) [hereinafter EICHENGREEN & MODY]; Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59, 62 (2000); Barry Eichengreen, Bailing in the Private Sector: Burden Sharing in International Financial Crisis Management, 23 FLETCHER F. WORLD AFF. 57 (1999); Samuel E. Goldman, Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt Restructuring, 5 UCLA J. INT'L L. & FOREIGN AFF. 159, 164-65 (2000); Steven L. Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach, 85 CORNELL L. REV. 956 (2000). Elliott's strategy against Peru is not an isolated occurrence. In fact, in 1996, Elliott successfully obtained a $57 million judgment and attachment order against Panama. See Elliott Assocs., LP v. Banco de la Nacion, 194 F.3d 363, 366 (2d Cir. 1999).
27. See, e.g., BARRY EICHENGREEN & ASHOKA MODY, INTERNATIONAL MONETARY FUND, BAIL-INS, BAILOUTS, AND BORROWING COSTS 5-6 (paper presented at the First Annual IMF Research Conference, Nov. 9-10, 2000) [hereinafter EICHENGREEN & MODY]; Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59, 62 (2000); Barry Eichengreen, Bailing in the Private Sector: Burden Sharing in International Financial Crisis Management, 23 FLETCHER F. WORLD AFF. 57 (1999); Samuel E. Goldman, Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt Restructuring, 5 UCLA J. INT'L L. & FOREIGN AFF. 159, 164-65 (2000); Steven L. Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach, 85 CORNELL L. REV. 956 (2000). Elliott's strategy against Peru is not an isolated occurrence. In fact, in 1996, Elliott successfully obtained a $57 million judgment and attachment order against Panama. See Elliott Assocs., LP v. Banco de la Nacion, 194 F.3d 363, 366 (2d Cir. 1999).
28. Remember, these pari passu clauses are standard.
29. Ecuador's recent Exit Consent offer had in place a couple of provisions that might have worked to thwart the attachment strategy. For one, the restructured bonds had payments coming in through a Trustee (who was technically the agent of the creditors) and not through a Fiscal Agent (who is typically the agent of the debtor). And second, the bonds provided for the time and place of the payments to be altered if the circumstances called for it (i.e., so that the vultures would not know where the payments were coming in). On the Ecuador offer, see REPUBLIC OF ECUADOR: OFFER TO EXCHANGE (June 27, 2000).
30. See Brussels Opinion, supra note 5.
31. See Lowenfeld Declaration, supra note 10, at 11-12.
32. Id.
33. See Brussels Opinion, supra note 5.
34. The phrase, "ranks, and will rank, pari passu."
35. These current creditors are protected by the standard pari passu clause.
36. In this sense, the pari passu clause is the flip side of a subordination agreement. It is an agreement not to subordinate debt that is the beneficiary of the clause to other debts of the borrower. There are two basic kinds of subordination agreements: complete and inchoate. An inchoate subordination agreement becomes operative only when an insolvent debtor makes a distribution of its assets. A complete subordination agreement operates immediately to preclude the borrower from paying principal or interest on the subordinated debt so long as the senior debt remains unpaid. See Dee Martin Calligar, Subordination Agreements, 70 YALE L.J. 376, 377-78 (1961). Just as "subordination" has two meanings, so too does pari passu. If the pari passu clause is complete, it requires all payments by the borrower to be ratable. On the other hand, if it is inchoate, it only precludes the borrower from creating a new class of senior debt or subordinating the existing debt.
37. As a general matter, a debtor cannot legally subordinate a lender unless it obtains her consent. See Buchheit, supra note 16, at 83. The concern with a sovereign, however, is that the sovereign will simply alter the law to subordinate the disfavored lender.
38. See Buchheit, supra note 16, at 84 ("[S]overeign borrowers, because they have it within their power to enact laws affecting the legal ranking of creditors, are thought to be appropriate objects ofa pari passu covenant."); see also Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493, 497 ("[T]he borrower violates [the pari passu] undertaking only by attempting to create a class of senior indebtedness in preference to that outstanding under the loan agreement in which the clause appears."). On this point, the Lowenfeld opinion itself quotes William Tudor John to say of the clause: [I]t is primarily intended to prevent the earmarking of revenues of the government towards a single creditor, the allocation of foreign currency reserves, and generally against legal measures which have the effect of preferring one set of creditors against the others or which discriminate between creditors. Lowenfeld Declaration, supra note 10, at 10 (quoting William Tudor John, Sovereign Risk and Immunity Under English Law and Practice, in 1 INTERNATIONAL FINANCIAL LAW 71, 96 (Robert S. Rendell ed. 2d ed. 1983)). The clause also protects against a law subordinating existing debt to new debt issues.
39. See Buchheit, supra note 16, at 84 ("[S]overeign borrowers, because they have it within their power to enact laws affecting the legal ranking of creditors, are thought to be appropriate objects ofa pari passu covenant."); see also Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493, 497 ("[T]he borrower violates [the pari passu] undertaking only by attempting to create a class of senior indebtedness in preference to that outstanding under the loan agreement in which the clause appears."). On this point, the Lowenfeld opinion itself quotes William Tudor John to say of the clause: [I]t is primarily intended to prevent the earmarking of revenues of the government towards a single creditor, the allocation of foreign currency reserves, and generally against legal measures which have the effect of preferring one set of creditors against the others or which discriminate between creditors. Lowenfeld Declaration, supra note 10, at 10 (quoting William Tudor John, Sovereign Risk and Immunity Under English Law and Practice, in 1 INTERNATIONAL FINANCIAL LAW 71, 96 (Robert S. Rendell ed. 2d ed. 1983)). The clause also protects against a law subordinating existing debt to new debt issues.
40. See Buchheit, supra note 16, at 84 ("[S]overeign borrowers, because they have it within their power to enact laws affecting the legal ranking of creditors, are thought to be appropriate objects ofa pari passu covenant."); see also Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493, 497 ("[T]he borrower violates [the pari passu] undertaking only by attempting to create a class of senior indebtedness in preference to that outstanding under the loan agreement in which the clause appears."). On this point, the Lowenfeld opinion itself quotes William Tudor John to say of the clause: [I]t is primarily intended to prevent the earmarking of revenues of the government towards a single creditor, the allocation of foreign currency reserves, and generally against legal measures which have the effect of preferring one set of creditors against the others or which discriminate between creditors. Lowenfeld Declaration, supra note 10, at 10 (quoting William Tudor John, Sovereign Risk and Immunity Under English Law and Practice, in 1 INTERNATIONAL FINANCIAL LAW 71, 96 (Robert S. Rendell ed. 2d ed. 1983)). The clause also protects against a law subordinating existing debt to new debt issues.
41. See Buchheit, supra note 16, at 84 ("[S]overeign borrowers, because they have it within their power to enact laws affecting the legal ranking of creditors, are thought to be appropriate objects ofa pari passu covenant."); see also Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493, 497 ("[T]he borrower violates [the pari passu] undertaking only by attempting to create a class of senior indebtedness in preference to that outstanding under the loan agreement in which the clause appears."). On this point, the Lowenfeld opinion itself quotes William Tudor John to say of the clause: [I]t is primarily intended to prevent the earmarking of revenues of the government towards a single creditor, the allocation of foreign currency reserves, and generally against legal measures which have the effect of preferring one set of creditors against the others or which discriminate between creditors. Lowenfeld Declaration, supra note 10, at 10 (quoting William Tudor John, Sovereign Risk and Immunity Under English Law and Practice, in 1 INTERNATIONAL FINANCIAL LAW 71, 96 (Robert S. Rendell ed. 2d ed. 1983)). The clause also protects against a law subordinating existing debt to new debt issues.
42. Indeed, it would be interesting to look at the historical evolution of the clause in sovereign lending agreements. Consistent with Lowenfeld's quote from Tudor John, the original goal of the clause may have been to keep sovereigns from earmarking particular revenue streams for favored creditors. At the time (most likely in the early part of the 20th century), there were no sovereign security interests and, hence, no negative pledge clauses. The pari passu clause, therefore, probably served as something of a substitute because the primary risk to guard against was not collateralization but subordination.
43. Whether the context is corporate or sovereign debt, however, the function of the clause is to assure equality of rank. Inevitably there are recognized senior claims to which the debt will be subordinated. Examples include secured claims, claims of favored creditors such as depositors, and the like. A commentator, writing about the giving of pari passu opinions by counsel, explains: "In many cases, it is suggested that the opinion recipient recognize that preferred claims may exist and that a general exception should be read into the pari passu opinion." Michael Gruson & Stephan Hutter, International Bar Association Project on Legal Opinions in International Business Transactions, 10 U. PA. J. INT'L BUS. L. 71, 85 (1988). As discussed infra notes 39-56 and accompanying text, when the parties' intent is for the equal ranking to be broader than priority status and to have the meaning attributed to the clause by the Brussels court, the debt instrument either contains additional language that is used to supplement the standard clause or includes other clauses.
44. As the Lowenfeld opinion explains: "A clause such as Section 11(c) [the basic pari passu clause] is a standard clause included in virtually all loan or debt restructuring agreements." Lowenfeld Declaration, supra note 10, at 9. Implicit in that statement is the assertion that the rights granted by that clause are ones that the sovereign debtor has agreed to give all of its creditors.
45. The IMF and World Bank are a crucial source of continuing credit for a sovereign in trouble.
46. On the effectively preferred creditor status of the international financial institutions such as the World Bank, the IMF, and the ADB, see Lee G. Buchheit, Of Creditors, Preferred and Otherwise, INT'L FIN. REV., June 1991, at 12-13.
47. In his classic bond contract interpretation opinion in Sharon Steel Corp. v. Chase Manhattan Bank, N.A., Judge Winter explains: Where contractual language seems designed to protect the interests of both parties and where conflicting interpretations are argued, the contract should be construed to sacrifice the principal interests of each party as little as possible. An interpretation which sacrifices a major interest of one of the parties while furthering only a marginal interest of the other should be rejected in favor of an interpretation which sacrifices marginal interests of both parties in order to protect their major concerns. 691 F.2d 1039, 1051 (2d Cir. 1982).
48. With respect to new debt issues, however, the sovereign can select English law rather than New York law. See infra note 57.
49. See, e.g., BARRY EICHENGREEN & ASHOKA MODY, WOULD COLLECTIVE ACTION CLAUSES RAISE BORROWING COSTS? AN UPDATE AND ADDITIONAL RESULTS (May 2000), available at >http://elsa.berkeley.edu/users/eichengr/research.htm<; EICHENGREEN & MODY, supra note 17, at 5-6; Liz Dixon & David Wall, Collective Action Problems and Collective Action Clauses, FIN. STABILITY REV., June 2000, at 142.
50. See, e.g., BARRY EICHENGREEN & ASHOKA MODY, WOULD COLLECTIVE ACTION CLAUSES RAISE BORROWING COSTS? AN UPDATE AND ADDITIONAL RESULTS (May 2000), available at >http://elsa.berkeley.edu/users/eichengr/research.htm<; EICHENGREEN & MODY, supra note 17, at 5-6; Liz Dixon & David Wall, Collective Action Problems and Collective Action Clauses, FIN. STABILITY REV., June 2000, at 142.
51. See, e.g., BARRY EICHENGREEN & ASHOKA MODY, WOULD COLLECTIVE ACTION CLAUSES RAISE BORROWING COSTS? AN UPDATE AND ADDITIONAL RESULTS (May 2000), available at ; EICHENGREEN & MODY, supra note 17, at 5-6; Liz Dixon & David Wall, Collective Action Problems and Collective Action Clauses, FIN. STABILITY REV., June 2000, at 142.
52. A recent Moody's Investor Service Special Comment makes the same point with respect to a different issue in the Elliott versus Peru proceedings. What Elliott succeeded in doing was attaining: "post-judgment attachment of all assets of the sovereign's agent, Banco de La Nacion, in the United States." SPECIAL COMMENT, HOW TO SUE A SOVEREIGN, supra note 4, at 1. The Special Comment further explains: That an entity closely related to the sovereign can conceivably be held financially liable and that all of its assets in the jurisdiction where the suit is brought may be attached to make good on defaulted debt opens a door that had hitherto not been considered available . . . . [And it turns the investor's] suit from an academic and avenging "I told you so" exercise to a more lethal weapon lending this disconsolate investor's bark a bit more bite. This case has also raised concerns that proliferation of such suits by aggressive investors could realign incentives of sovereign and other creditors. After all, when a sovereign settles out of court for a substantial sum with one litigious creditor it will adversely impact, however marginally, the claims of its other creditors. It is possible, and indeed probable, that to protect their interests these creditors will attempt to somehow hinder their uncooperative brethren. Id.
53. A recent Moody's Investor Service Special Comment makes the same point with respect to a different issue in the Elliott versus Peru proceedings. What Elliott succeeded in doing was attaining: "post-judgment attachment of all assets of the sovereign's agent, Banco de La Nacion, in the United States." SPECIAL COMMENT, HOW TO SUE A SOVEREIGN, supra note 4, at 1. The Special Comment further explains: That an entity closely related to the sovereign can conceivably be held financially liable and that all of its assets in the jurisdiction where the suit is brought may be attached to make good on defaulted debt opens a door that had hitherto not been considered available . . . . [And it turns the investor's] suit from an academic and avenging "I told you so" exercise to a more lethal weapon lending this disconsolate investor's bark a bit more bite. This case has also raised concerns that proliferation of such suits by aggressive investors could realign incentives of sovereign and other creditors. After all, when a sovereign settles out of court for a substantial sum with one litigious creditor it will adversely impact, however marginally, the claims of its other creditors. It is possible, and indeed probable, that to protect their interests these creditors will attempt to somehow hinder their uncooperative brethren. Id.
54. See Buchheit & Gulati, supra note 17, at 83 (making the point that protections against holdouts serve not only the debtor's interests, but also those of the non-holdout creditors).
55. For example, in the recent Southeast Banking bond contract interpretation case, the New York Court of Appeals explicitly talked about the importance, in commercial matters, of giving deference to market understandings. See Chemical Bank v. First Trust of New York, N.A. (In re Southeast Banking Corp.), 710 N.E. 2d 1083, 1086 (N.Y. 1999). Doing so, the court explained, provides for "reliance, definiteness and predictability," which enables the parties to "intelligently negotiate and order their rights and duties." Id.
56. See Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982); see also Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate Contracting ("or the Economics of Boilerplate"), 83 VA. L. REV. 713, 718 (1997) (describing the "learning" and "network" benefits of standardization in corporate contracts).
57. See Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982); see also Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate Contracting ("or the Economics of Boilerplate"), 83 VA. L. REV. 713, 718 (1997) (describing the "learning" and "network" benefits of standardization in corporate contracts).
58. Of course it is possible that the market's understanding has changed over time. For example, from 1890 until 1966 New York had a preference law that imposed personal liability on officers of an insolvent corporate debtor that paid one creditor in preference to another. See N.Y. Stock Corporation Law ¶ 15 (McKinney 1940) (historical note referring to previous similar laws dating back to 1890). During this era, the market might have assumed that the pari passu clause also prohibited preferential payments. But New York repealed its preference law in 1966, and since then the markets could well assume that the pari passu clause likewise does nothing to deter preferences in the absence of a specific contractual covenant to the contrary. See 1966 N.Y. Laws, c. 664, § 16.
59. See Southeast Banking, 710 N.E.2d at 1086 (looking to commentary and case law).
60. Cf. Chase Manhattan Bank v. Traffic Stream (BVI) Infrastructure Ltd., 86 F. Supp. 2d 244, 257 (S.D.N.Y. 2000) ("In construing a contract, one of a court's basic goals is to avoid an interpretation that would leave contractual clauses meaningless.").
61. LEE C. BUCHHEIT, HOW TO NEGOTIATE EUROCURRENCY LOAN AGREEMENTS (2d ed. 2000); Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59 (2000); Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493; Lee C. Buchheit, The Pari Passu Clause sub specie aeternitatis, INT'L FIN. L. REV., Dec. 1991, at 11 [hereinafter Pari Passu Clause]; Lee C. Buchheit, Of Creditors, Preferred and Otherwise, INT'L FIN. REV., June 1991, at 12-13.
62. LEE C. BUCHHEIT, HOW TO NEGOTIATE EUROCURRENCY LOAN AGREEMENTS (2d ed. 2000); Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59 (2000); Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493; Lee C. Buchheit, The Pari Passu Clause sub specie aeternitatis, INT'L FIN. L. REV., Dec. 1991, at 11 [hereinafter Pari Passu Clause]; Lee C. Buchheit, Of Creditors, Preferred and Otherwise, INT'L FIN. REV., June 1991, at 12-13.
63. LEE C. BUCHHEIT, HOW TO NEGOTIATE EUROCURRENCY LOAN AGREEMENTS (2d ed. 2000); Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59 (2000); Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493; Lee C. Buchheit, The Pari Passu Clause sub specie aeternitatis, INT'L FIN. L. REV., Dec. 1991, at 11 [hereinafter Pari Passu Clause]; Lee C. Buchheit, Of Creditors, Preferred and Otherwise, INT'L FIN. REV., June 1991, at 12-13.
64. LEE C. BUCHHEIT, HOW TO NEGOTIATE EUROCURRENCY LOAN AGREEMENTS (2d ed. 2000); Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59 (2000); Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493; Lee C. Buchheit, The Pari Passu Clause sub specie aeternitatis, INT'L FIN. L. REV., Dec. 1991, at 11 [hereinafter Pari Passu Clause]; Lee C. Buchheit, Of Creditors, Preferred and Otherwise, INT'L FIN. REV., June 1991, at 12-13.
65. LEE C. BUCHHEIT, HOW TO NEGOTIATE EUROCURRENCY LOAN AGREEMENTS (2d ed. 2000); Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59 (2000); Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493; Lee C. Buchheit, The Pari Passu Clause sub specie aeternitatis, INT'L FIN. L. REV., Dec. 1991, at 11 [hereinafter Pari Passu Clause]; Lee C. Buchheit, Of Creditors, Preferred and Otherwise, INT'L FIN. REV., June 1991, at 12-13.
66. LEE C. BUCHHEIT, HOW TO NEGOTIATE EUROCURRENCY LOAN AGREEMENTS (2d ed. 2000); Lee C. Buchheit & G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, 48 UCLA L. REV. 59 (2000); Lee C. Buchheit & Ralph Reisner, The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships, 1988 U. ILL. L. REV. 493; Lee C. Buchheit, The Pari Passu Clause sub specie aeternitatis, INT'L FIN. L. REV., Dec. 1991, at 11 [hereinafter Pari Passu Clause]; Lee C. Buchheit, Of Creditors, Preferred and Otherwise, INT'L FIN. REV., June 1991, at 12-13.
67. Lowenfeld's opinion quotes the following language from one of Buchheit's articles: "The fact that no one seems quite sure what the [pari passu] clause really means, at least in a loan to a sovereign borrower, has not stunted its popularity among drafters of loan agreements and debt restructuring agreements." Lowenfeld Declaration, supra note 10, at 11 (quoting Pari Passu Clause, supra note 44, at 11). The latest version of Philip Wood's treatise expresses a similar agnosticism about the precise meaning of the pari passu clause in the sovereign context. Wood writes, "[i] n the state context, the meaning of the clause is uncertain because there is no hierarchy of payment which is legally enforced under a bankruptcy regime." PHILIP R. WOOD, PROJECT FINANCE, SUBORDINATED DEBT AND STATE LOANS 165 (1995) [hereinafter 1995 Wood].
68. Lowenfeld's opinion quotes the following language from one of Buchheit's articles: "The fact that no one seems quite sure what the [pari passu] clause really means, at least in a loan to a sovereign borrower, has not stunted its popularity among drafters of loan agreements and debt restructuring agreements." Lowenfeld Declaration, supra note 10, at 11 (quoting Pari Passu Clause, supra note 44, at 11). The latest version of Philip Wood's treatise expresses a similar agnosticism about the precise meaning of the pari passu clause in the sovereign context. Wood writes, "[i] n the state context, the meaning of the clause is uncertain because there is no hierarchy of payment which is legally enforced under a bankruptcy regime." PHILIP R. WOOD, PROJECT FINANCE, SUBORDINATED DEBT AND STATE LOANS 165 (1995) [hereinafter 1995 Wood].
69. Lowenfeld's opinion quotes the following language from one of Buchheit's articles: "The fact that no one seems quite sure what the [pari passu] clause really means, at least in a loan to a sovereign borrower, has not stunted its popularity among drafters of loan agreements and debt restructuring agreements." Lowenfeld Declaration, supra note 10, at 11 (quoting Pari Passu Clause, supra note 44, at 11). The latest version of Philip Wood's treatise expresses a similar agnosticism about the precise meaning of the pari passu clause in the sovereign context. Wood writes, "[i] n the state context, the meaning of the clause is uncertain because there is no hierarchy of payment which is legally enforced under a bankruptcy regime." PHILIP R. WOOD, PROJECT FINANCE, SUBORDINATED DEBT AND STATE LOANS 165 (1995) [hereinafter 1995 Wood].
70. Lowenfeld Declaration, supra note 10, at 11-12.
71. See Pari Passu Clause, supra note 44, at 12.
72. See Buchheit, supra note 16, at 83.
73. See Wood, supra note 16, at 156; see also 1995 Wood, supra note 45, at 165.
74. See Wood, supra note 16, at 156; see also 1995 Wood, supra note 45, at 165.
75. See Pari Passu Clause, supra note 44, at 12.
76. According to Brian Semkow: In the event that the corporate laws governing the borrower will rank the unsecured claims, however, the covenant will not prevent the lending banks from being discriminated against [(citing Wood, supra note 16, at 156)]. In the context of the sovereign borrower, the pari passu covenant has a different effect. This provision will prevent sovereign borrowers from discrimination against the lending banks in the payment of creditors out of general revenues or foreign currency reserves. Brian W. Semkow, Syndicating and Rescheduling International Financial Transactions: A Survey of the Legal Issues Encountered by Commercial Banks, 18 INT'L LAW. 869, 899 (1984).
77. As noted earlier, there is a meaning that commentators do give to the pari passu clause in the sovereign context (relating to the sovereign making laws that alter priority) that has nothing to do with making ratable periodic payments.
78. See Buchheit, supra note 16, at 84.
79. See Buchheit & Reisner, supra note 28, at 497.
80. See Buchheit, supra note 33, at 12 (noting three of these five terms). See also Bjerre, supra note 8.
81. See Buchheit, supra note 33, at 12 (noting three of these five terms). See also Bjerre, supra note 8.
82. We are grateful to both Lee Buchheit and Marcel Kahn for their suggestions regarding some of the points in this paragraph.
83. In addition, if the pari passu clause were to have the meaning that Elliott attributes to it, one would expect to see bond contracts to contain "negative" pari passu clauses akin to negative pledge clauses. After all, many lenders (especially those such as the IMF and the World Bank who are used to receiving preferential payments) will, before lending, want to make certain that the sovereign borrower has not promised the Elliott type pari passu treatment to others. As things stand today, we do not see such negative pari passu clauses. That suggests that the reading of the clause that Elliott advocates is inconsistent with the market's understanding of the clause.
84. In sovereign debt issues New York shares the majority of the market with the United Kingdom. "There is a fundamental difference between English Law bonds and New York Law bonds. English Law bonds generally have a super-majority collective-action-clause (CAC) which enforces the new terms of the exchange instrument on all debt-holders." MOODY'S INVESTOR SERV., SPECIAL COMMENT, HOW TO SUE A SOVEREIGN: THE CASE OF PERU 3 n.7 (Nov. 2000).
85. New York law governed the Peruvian bonds at issue in the Elliott case. See Lowenfeld Declaration, supra note 10, at 13.
86. See Laba v. Carey, 277 N.E.2d 641, 644 (N.Y. 1971).
87. See, e.g., Sharon Steel v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982) (defining "boilerplate" provisions as "contractual provisions which are standard in a certain genre of contracts" such as bond indentures); Chase Manhattan Bank, N.A. v. Traffic Stream Infrastructure Ltd., 86 F. Supp. 2d 244, 256 & n.19 (S.D.N.Y. 2000).
88. See Broad v. Rockwell Int'l Corp., 642 F.2d 929, 943 (5th Cir. 1981) (en banc), cert. denied, 454 U.S. 965 (1981).
89. Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982), cert. denied, 460 U.S. 1012 (1983).
90. See id. at 1048. Interpretation of boilerplate provisions such as those at issue here does "not depend upon particularized intentions of the parties to an indenture." Id.
91. See Franklin Life Ins. Co. v. Commonwealth Edison Co., 451 F. Supp. 602, 614-15 (S.D. Ill. 1978), aff'd per curiam, 598 F.2d 1109 (7th Cir.), cert. denied, 444 U.S. 900 (1979).
92. See Morgan Stanley & Co. v. Archer Daniels Midland Co., 570 F. Supp. 1529, 1539 (S.D.N.Y. 1983).
93. See id. at 1542 ("to cast aside the holding in Franklin would . . . result in the very situation the Second Circuit sought to avoid in Sharon Steel," i.e., "intolerable uncertainty in the capital markets.").
94. The federal Rule of Explicitness requires explicit language in ajunior indenture alerting junior noteholders to the risk that senior noteholders will get postpetition interest in a bankruptcy case before juniors get principal. Otherwise senior noteholders will not get such interest even though the terms of the subordination agreement require them to be "paid in full" before juniors share. See Continental Ill. Nat'l Bank & Trust Co. v. First Nat'l City Bank (In re King Resources Co.), 528 F.2d 789, 791-92 (10th Cir. 1976); In re Time Sales Fin. Corp., 491 F.2d 841, 844 (3d Cir. 1974); Bankers Life Co. v. Manufacturers Hanover Trust Co. (In re Kingsboro Mortg. Corp.), 379 F. Supp. 227, 231 (S.D.N.Y. 1974) (originating the name "Rule of Explicitness"), aff'd per curiam, 514 F.2d 400, 401 (2d Cir. 1975). Accord In re MCorp Fin., Inc., 160 B.R. 941, 959 (Bankr. S.D. Tex. 1993); First Fidelity Bank, N.A. v. Midlantic Nat'l Bank (In re Ionosphere Clubs, Inc.), 134 B.R. 528, 535 n.14 (Bankr. S.D.N.Y. 1991).
95. Chemical Bank v. First Trust of New York, N.A. (In re Southeast Banking Corp.), 156 F.3d 1114, 1124-25 (11th Cir. 1998) (footnote omitted).
96. See Chemical Bank v. First Trust of New York, N.A. (In re Southeast Banking Corp.), 710 N.E.2d 1083, 1087 (N.Y. 1999).
97. See id. at 1087 (citing In re Pavone Textile Corp., 97 N.E.2d 755 (N.Y. 1951), aff'd per curiam sub nom., United States v. Bloom, 342 U.S. 912 (1952)).
98. In Southeast Banking, Elliott was a junior bondholder that benefited when the New York Court of Appeals adopted the Rule of Explicitness in accordance with Sharon Steel.
99. See Andrew Yianni, Resolution of Sovereign Financial Crises - Evolution of the Private Sector Restructuring Process, FIN. STABILITY REV., June 1999, at 78, 80-81.
100. To avoid claims of "champerty" or "maintenance" the vultures cannot admit that they acquired the debt for purposes of instituting litigation.