NML v. Argentina, Post 4

In the spring of 2013, I wrote three posts on the litigation between NML and the Republic of Argentina which was then at the Second Circuit.   In the last one, March 31, 2013, I predicted that NML would win hands-down at the Circuit and wrote:

"Argentina will probably file a cert petition, but the issue here is really just one of state law contractual interpretation and doesn't belong in the Supreme Court at all.  I can't imagine how anyone expected anything else from Argentina.  When its senior government officials attended the oral argument at which its counsel took a hardline position, it was obvious that Argentina was perfectly happy to default on the exchange bonds as well."

And, in the wake of the Supreme Court's denial Monday of that cert petition, it appears that Argentina is indeed headed toward yet another default on its bonds.  It's important to remember that Argentina has been in default on the non-exchange bonds, the ones NML and others "fondos buitres" hold since 2003 so a default is not a new default, and apparently intends to remain in default on them forever, based on the remarks of finance minister Axel Kicillof, President Cristina Fernandez de Kirchner and their counsel.  Earlier today, according to Reuters and Clarin, the leading media company in Argentina, the Second Circuit lifted the stay of judgment that had been in effect pending the Supreme Court review, and supposedly the parties are now in chambers with Judge Griesa.  Argentina has supposedly agreed to negotiate with NML but I think that is just one of those negotiations for the sake of appearing reasonable and avoiding further sanctions than anything likely to lead to a substantive result.

A few weeks ago, a strategy memo from Argentina's law firm, Cleary Gottlieb, to Argentina's finance minister somehow made its way into the Argentine press and from there to the world at large.  Although Judge Griesa later ruled the memo remained privileged and thus outside the record, there is nothing in there that isn't otherwise in the public record or irrelevant.   The memo (1) assumes Argentina cannot or will not pay NML and other holdout bondholders, which everyone already knew; (2) observes that the exchange bonds (the ones issued to those bondholders who agreed to restructure Argentina's debt back in 2003) contains clauses requiring Argentina to sweeten their terms if it ever awards the holdouts a better deal, which clauses give the exchange bondholders the same veto over payments to the holdouts that the pari passu ruling gives the holdouts over the exchange bondholders, which again has been in the public record for years; (3) observes that three-way settlement talks among the Republic, the holdouts and the exchange holders to figure out how much NML will take to go away and then how much the exchange holders would require to allow Argentina to pay that would be cumbersome and unlikely to resolve by the June 30 coupon payment date on the exchange bonds, and (4) closes with the observation that was brought to the attention of Judge Griesa and the press that "the best option" is to "immediately restructure" all of the bonds Argentina wants to pay "so that the payment mechanism and the other related elements are outside of the reach of American courts."  Which is as obvious as it is brazen.  But Kicillof has said as much this week: "We are going to initiate a swap of debt with payment in Argentina ..."  And "La Nacion" describes that swap as "the steps the government will follow after the adverse judgment of the Supreme Court of the United States."

The one solution I could see taking place, which is not laid out in the Cleary memo, is for the holders of a very large proportion of exchange bonds, motivated to avoid a default on their own bond holdings, to buy out NML and the other major holdouts at something close to the amount owed, then exchange the acquired bonds for a combination of new exchange (or other) bonds at a much higher ratio than in the 2003 exchange, and for Argentina to pay them cash in U.S. dollars equal to the difference between the amount they paid and the face amount of the new exchange bonds.  Then, with the impasse eliminated, Argentina could do a second, new issue of bonds to replenish the foreign exchange reserves it had to pay out to get the deal done.  That would allow Argentina to save face by, formally at least, not paying NML directly, but instead paying their friendly creditors for doing them a favor, and being able to do so, ultimately, just with paper, not foreign reserves.   Because the holdout bonds are not that large an amount relative to Argentina's debt capacity, this seems economically feasible.  But the ability to pull it off hinges on one big unknown, which is whether a supermajority group of exchange bondholders can be pulled together (a supermajority being needed  to waive the clause in the exchange bonds that restricts Argentina from exchanging the defaulted bonds at a better ratio than was set in 2003.  

FT Alphaville has kept the best running tab, now up to 58 stories, on the subject.  They seem skeptical the exchange will succeed.  It faces two big hurdles, even assuming that the exchange holders want to participate at a high level:  1) obtaining legal, professional and financial assistance with the mechanics of the exchange entirely from people not subject to U.S. jurisdiction, since an intentional violation of the injunction would expose violators to the risk of prosecution for contempt of court; and 2) somehow hoping that Judge Griesa does not extend the injunction to bar holders subject to U.S. jurisdiction from tendering bonds in the exchange.

In addition, Linette Lopez at Business Insider had a sharp analysis of the political / historical context of bond defaults within Argentina this week: "The One Thing You Need to Know About Argentina is Everyone in Argentina is a Bond Geek".

There is, however,  one more thing you need to know, which Lopez doesn't address, and that is to see how the dispute arises out of the fundamental clash between the populist philosophy that Kirchners's Argentina runs on, and the rule of law, which U.S. courts run on.  I touched on this in my March 31 post, and the speech Kirchner gave this week in the wake of the cert denial exemplifies it.  When you read the speech, she constantly emphasizes how over 90% of the bondholders in 2003 exchanged into the restructuring and that the holdouts, a small minority, would make a lot of money if paid off in full. The classic populist argument  --any time a small minority makes a lot of money in finance, in and of itself, that is not morally legitimate. That they had a contract, and a freedom to decline the exchange, as would be unquestioned under Anglo-American common law, is not acknowledged as a legitimate right.  This is what Kirchner means when she says, in Lopez's translation, "it's not a judicial or legal problem; it's the result of a business model on a global scale that, if it continues, will produce unbelievable tragedies." Contract rights, the return of money borrowed, and private property are just obstacles to a populist political philosophy.  Contrary to the Anglo-American notion of individuals and minorities having inalienable rights against the state, embodied in the Bill of Rights for instance, in Kirchner's mind, nothing can be allowed to interfere with the agenda of a government once it wins an election.  This is how Argentina has been run under the Kirchners (it's also the rationale Maduro gives for everything he has done since taking power in Venezuela, including imprisoning political dissidents). They have used their electoral majority (acquired by promising unsustainable consumption subsidies to the lower earning portion of the electorate) to whittle away at all forces that might constrain their political power, like eliminating the independence of the judiciary and breaking up the largest media company, as retribution for political disagreements, after having spent the first ten years in power confiscating private property left and right, as I outlined in the March 31, 2013 post.   That's why this is an important issue of principle for the U.S. courts, because Argentina's stance is fundamentally an assault on the rule of law and on the most basic tenets of the Anglo-American legal system.

While I was typing this, the story came out that Judge Griesa said in court today that Cristina Kirchner's speech did not inspire confidence in him regarding the Republic's negotiating good faith. Quite so.  But I think the final word on the Kirchner speech deserves to go to the arbolitos, the Argentine citizens who exchange Argentine pesos for U.S. dollars in the black market in Buenos Aires, who bid the U.S. dollar up more than 4% the day after her speech.

Further on the Effect of the GM Bankruptcy on New GM's Exposure to Ignition Defect Litigation

The Wall Street Journal website has recently run a series of posts about “GM’s liability for claims related to the recall of cars with defective ignition switches” from various persons with knowledge – some professional, some academic - about chapter 11 matters, whom the Journal has labeled “The Examiners”.

I was quite stunned at the extent to which certain of the posts contained wildly inaccurate or inapposite observations about the matter.   In particular, that from a tenured professor at Harvard Law School who teaches bankruptcy, Mark Roe, seemed remarkably disconnected from both  the facts and the applicable law, and left me to ponder what his students actually learn from taking his course. 
Roe writes:  “Bankruptcy law says that an ‘old GM’ was sold to a ‘new GM’ and the ‘new GM’ excluded product liability from the debts it picked up in the sales agreement. But it’d take a bankruptcy expert to know the difference between the old and the new GM; GM today is the same organization as the one that put the bad switches into its cars and, the media reports, knew about it years ago.”

Most of that is just wrong.   Bankruptcy law does not say that an “old GM” was sold to a “New GM”.   First, obviously, bankruptcy law states general legal rules not specific facts.  Second, “old GM” was not “sold”, it was the seller.  It was an asset deal, not a stock deal.  Old GM sold certain of its assets to “New GM”, a newly formed company that was owned by the Department of the Treasury of the United States,  a Canadian government agency, a trust for UAW retirees and 10% by Old GM, but which had no prior operating existence.  Secondly, one does not have to be “a bankruptcy expert” to know the difference between the two companies.  One was owned by public shareholders, and was bankrupt.  One was 90% owned by two North American governments and some UAW retirees, and was solvent, with access to fresh capital to pay its debts in full on time.  It simply isn’t true that they are “the same organization”.  There were completely different directors and shareholders; the CEO has changed twice since the filing; there are different creditors; and  a different cost structure.  Plants, employees, brands and dealerships were all reduced, generally by more than 20 percent of the pre-filing total.  As President Obama said the day GM filed for bankruptcy, “the GM of the future will be different from the GM of the past.”  In any relevant legal sense, it is.

Roe goes on to write: “GM’s sale was no arms-length deal with a third-party organization, as a sale to Toyota or Fiat or a hedge fund would be.  So it’s not so clear what bankruptcy law ought to be here.  If anyone bought GM, the government did, and it’s doubtful the government would have cut out the tort claimants had it focused on them.”

Regrettably, every one of those statements is factually wrong.  How someone makes so many errors in so few lines just boggles my mind.  Judge Gerber’s decision approving the sale says at page 40: “To the contrary, the evidence establishes that the 363 Transaction was the product of intense arms’-length negotiations.”  And that order became final.  Therefore, contrary to the professor’s post, the sale was “arms’-length” and it is quite evidently “clear what bankruptcy law should do here.”  It shouldn’t rewrite, ignore or deny the facts, as the professor chooses to do.
 
When Roe writes “it’s doubtful the government would have cut out the tort claimants had it focused on them”, that is also manifestly false.  Had Roe "focused on the facts and the doucments, perhaps he wouldn't have mischaracterized them.  The government as buyer did indeed "focus" intensively on the issue of which tort liabilities to assume, as the Judge recited in his opinion, and deliberately modified the purchase agreement to specify the scope of them, agreeing to assume only those tort liabilities “arising from operation of GM vehicles occurring subsequent to the closing of the 363 Transaction“ (see page 15 of the decision linked to above).   So, beyond a shadow of a doubt, the government “focused on” the tort claimants and “cut [them] out” contrary to the professor’s unmoored assertions.  As the Judge wrote at 51: “in a 363 sale … the bankruptcy court is invariably asked to provide, in its approval order, that the transferee does not assume liability for the seller’s pre-sale conduct.  …  New GM would not assume liability for any injuries or illnesses that arose before the 363 Transaction.” Judge Gerber considered at length (pages 50-61 of the decision) the objections of numerous tort claimants to New GM’s request for an injunction against them pursuing New GM under theories of successor liability and overruled them all.
 
Roe’s next paragraph completely slips the bonds of earthly reality and becomes one of the weirdest pieces of legal gibberish I have ever read.  “Bankruptcy courts should worry about a company selling its assets back to itself, or its ongoing owners, to wash itself clean of preexisting tort liabilities. Such sales may really be reorganizations of existing debts, not true sales to third parties.  What if GM were viewed as being reorganized, rather than sold? Concealed debts do not get the same full discharge as debts that were fully listed and disclosed. Whether the judge who oversaw GM’s “sale” to itself would backtrack and consider it a reorganization will be interesting to watch.”

Roe uses the name “GM’ in those sentences but, other than that, what he wrote bears no relation to what actually happened in the bankruptcy case of “GM” but seems to be the product of his imagination.  Yes, I suppose a bankruptcy court “should worry about a company selling its assets back to itself or its ongoing owners” and proposals like that were in fact made and litigated in the early days of business reorganizations in the US.  Based on the well-developed case law that resulted, which included, inter alia, the absolute priority rule (see here for an excellent summary), I am quite confident, however, that if Old GM had actually proposed to do that, Judge Gerber would have stopped it and probably appointed a trustee, but that isn’t close to what Old GM proposed or Judge Gerber approved; it simply didn’t happen in our universe, as explained above.  So, whether “such sales may really be reorganizations” is irrelevant to analyzing the consequences of the GM sale that took place in the real world. 

Roe’s reference to “concealed debts” is also ridiculously inaccurate and misleading as it rests of multiple false premises.   The first false premise is that the law he refers to dealing with the discharge of “concealed debts” has anything to do with the liabilities assumed in the GM 363 order.   It doesn’t.  New GM assumed what it assumed; what it chose to assume was disclosed to the world (that's why the plaintiffs were objecting!); and the court’s order bars everything else from passing over to New GM.  If something was “concealed”, then New GM didn’t assume it.  The other false premise is that “the debts” were concealed.  Here, Roe seems to confuse the existence of debts with the amount of them, or the evidence in support of the claims.   The existence of product liability suits did not go undisclosed and, even if they did, that has nothing to do with whether the buyer assumed them.   Judge Gerber specifically mentions at page 21 of the opinion that GM’s contingent liabilities “are difficult to quantify” but notes without comment that its then most recent 10-Q “present valued contingent liabilities of $934 million for products liability …”   The ignition defect was alleged in multiple pre-petition lawsuits and the evidence related thereto was discovered in those lawsuits.  Thus, any concealment was of evidence or of the prospective size of the resulting liability, but not of the existence of the debt.  And in any case, whether GM had $934 million or $9.34 billion in products liability exposure, New GM didn’t take any of it. So it’s just a red herring from a legal perspective.

Roe goes on to muse “What if GM were viewed as being reorganized, rather than sold?” and further asks whether Judge Gerber “would backtrack and consider it a reorganization.”   He seems unaware that this question too was also considered at length and resolved by the judge.  See pages 26-38 and 41-47 of the decision linked to above.  The judge decided the transaction was not a sub rosa plan of reorganization and could be authorized under section 363 rather than having to be proposed in a plan of reorganization. As the numerous citations in his decision to pre-existing precedents demonstrate, the GM sale broke “no new ground.  This is exactly the type of situation where under the Second Circuit’s many holdings there is good business reason for an immediate sale. GM does not have the luxury to wait for the ultimate confirmation of a plan, and the only alternative to an immediate sale is liquidation.”  Decision at 39.  Nor does Roe explain how a bankruptcy judge can “backtrack” from a final order that authorized a transaction that closed nearly 5 years ago.   To suggest such an outcome probably implies, to the uninformed reader, that such an eventuality is somewhat plausible when in fact it is one of the most outlandishly implausible outcomes possible in federal jurisprudence.   I went over the reasons why it is so implausible in my prior post on this topic and won’t repeat them here.  

Roe concludes with the lament that “GM’s winning would look to the country, its leaders, and car buyers as hiding behind a bankruptcy technicality.”  I suppose that’s true if persons identified as bankruptcy experts supply the media, as Roe has done, with inaccurate and uninformed “analysis” that supports such a conclusion.  But the truth is that, as Obama himself stated when he announced the Treasury’s commitments on the day GM filed for 11:  “Throughout this process, I wanted to ensure that none of GM's stakeholders receives special treatment because of our government's involvement. That's why I instructed my Auto Task Force to treat all of GM's stakeholders fairly and to ensure that this restructuring was carried out in a way that was consistent with past precedent -- and it was.”  (Italics added).  Following the 363 buyer’s manual gave the then-new Administration a politically essential argument that it was not acting in a suspect manner from an economic or political perspective, neither taking improper risk with  taxpayer money, nor playing favorites with that money  (even though it was, as between retirees and  other creditors).   It was the Administration’s choice, not GM’s, to pattern its assumption of liabilities on the business practices of hundreds of private sector buyers that had made 363 purchases before it.  It was the Administration's considered choice not to privilege all the non-bondholder constituencies and they picked one that -- the UAW -- that carried more weight than plaintiffs and their lawyers.  That’s not a “bankruptcy technicality” nor was it GM’s decision, both facts Roe gets absurdly wrong.   It was a conscious political and financial decision by the government buyer.   That is what “the country” should conclude -- and might, if it were not being misled by gibberish like Roe’s essay. 

Whether New GM chooses to do something for these plaintiffs as a business matter defies legal analysis. It strikes me as mainly a media-driven decision -- there are plenty of Old GM products liability lawsuits left behind; favoring the subset with ignition defect issues has no legal rationale and could only be justified as a response to the effect on the brand of the media focus.  Ironically, that subset of plaintiffs could wind up benefiting dramatically from the alleged concealment of evidence, since, had the facts been brought out years earlier, there would have been no media frenzy to pressure New GM to extract those lawsuits from the mass of lawsuits left behind and give them a better deal than the government bargained for back in 2009.