In the NML v Argentina case, the world is witnessing a rare spectacle. The unpredictable consequences of a US judge’s departure from the traditional interpretation of pari passu has unleashed the most extraordinary and unexpected legal issues. While many recognize that a factor in this situation has been the lack of legal bankruptcy principles applicable to sovereign debtors, this factor seems to be conspicuously ignored when it comes to judge Griesa’s recent decision to stop Bank of New York Mellon from using money Argentina deposited with it to pay restructured creditors.

 

A key principle in bankruptcy law is that of universality: bankruptcy proceedings affect all assets and liabilities of the debtor invoking it. This is why all creditors are compelled to show up and make their claims known to the judge appointed in bankruptcy proceedings. The judge’s decision on how to allocate losses or a judge-sanctioned voluntary agreement reached with creditors within such proceedings – different legislations admit different degrees going from one to the other option – is ultimately binding upon all creditors.

 

Bankruptcy legislation does not exist in the case of sovereign debt, and therefore no judge, court or forum could unilaterally make a ruling binding on all creditors. This is why it was immaterial to judge Thomas Griesa’s considerations that Argentina reached agreement with such a high majority (almost 93 per cent) of all its creditors. The case being brought to him involved the claims of creditors that held out of such agreement and were, thus, not bound by it. There was no law providing for them to be bound by an agreement they did not consent to, no judge that could have imposed such agreement on them. Judge Griesa had to examine their specific individual claim. Period.

 

But if that is the principle that was accepted, it should be accepted in all its consequences. A principle cannot be accepted when it is convenient, and ignored when it is not, certainly not in the course of the same judicial case. And this is where judge Griesa’s decision to stop payments made by Argentina to restructured creditors becomes an unwarranted assertion of the universal jurisdiction that was implicitly accepted to rule, on the merits, in favor of the holdouts.

 

Let us be clear that this contention does not concern an extraterritorial overreach, as invoked by the creditors holding instruments to be paid in Argentina and in Europe, but a material one. From the moment the judge ordered Bank of New York Mellon to stop payments to any other bondholders that are not part of the case brought before him, he has exceeded the limits of his jurisdiction. For, in doing so, he is unilaterally and implicitly awarding himself the role of precisely that universal forum that in sovereign debt cases does not exist.

 

Two arguments could be made against this contention. First, that there is nothing unusual in embargoing or otherwise preventing the disposition of assets that are not particularly at stake in a trial but are key to ensure the obligation with the plaintiff will get settled. So what is different with a judicial order preventing the disposition of an asset (cash in this case) that has been identified in a financial institution, even if it was given by the debtor to pay other creditors? Perhaps nothing, if not for the fact that the moment the assets are in the hands of the US bank they are no longer the debtor’s assets, but the assets of a certain creditor on whose behalf the Bank is holding them. An embargo of the asset then only becomes viable if the judge is acting in the context of bankruptcy proceedings with universal jurisdiction, where he has jurisdiction to rule on the hierarchy of the claims vis-à-vis each other and have that ruling affect all claims. Since the basis of our contention – accepted by the judge and the holdout creditors – is that no such a bankruptcy forum with universal jurisdiction exists, then he cannot avail himself of it to stop payments to other creditors.

 

Second, it could be argued that the restructured bondholders, having also accepted jurisdiction in New York for their instruments, are implicitly providing consent to the judge’s exercise of jurisdiction on their claims, too. But this would be ignoring that they brought no claim to judge Griesa’s court. They are neither plaintiffs in a trial they initiated, nor defendants on a trial the debtor did. Those two could be the only basis for giving judge Griesa jurisdiction on their claims, barring, again, a situation of the New York court as a bankruptcy court having universal jurisdiction.

 

The lack of a forum with authority to arbitrate sovereign debt claims in a comprehensive way is a clear gap in the international financial architecture and we should hope the current crisis will lead more countries to get serious about establishing one. The recently adopted General Assembly resolution to launch negotiations on a multilateral legal framework for sovereign debt restructuring is a step in that direction. But, in the meantime, the lack of it, if it is not interpreted in the lopsided way the New York courts did, may become the first line of defense for debtors trying to protect themselves from disgruntled minorities of holdout creditors.

 

- Aldo Caliari

Director, Rethinking Bretton Woods Project, Center of Concern