Gelpern on the Unexpected Origins of a Sovereign Debt Principle

My Georgetown Law colleague Anna Gelpern has posted Pari Passu's Golden Fossils.  Here is the abstract:

U.S. federal court rulings against Argentina since 2012 have turned the pari passu clause in sovereign bond contracts into the most promising debt collection tool against immune governments since the days of gunboat diplomacy. The large literature on pari passu (“equal step” in Latin) assumes that the clause had not been used for enforcement before the late 1990s, and that it was first construed by a Belgian court in a case against Peru in the year 2000. The Belgian decision was criticized for wrongly interpreting pari passu as a promise of ratable payment to all holders of Peru’s external debt. A decade later, U.S. courts adopted the same interpretation against Argentina, despite interventions by the United States, Brazil, France, Mexico and a slew of eminent experts. The case is now caught up in litigation around the world involving bondholders, trustees, payment and clearing systems.

Debates about the meaning of pari passu have so far drawn on bond language, contract practices and diplomatic statements, not judicial opinions. This essay reports on a once-famous lawsuit in Swiss courts, brought by Swedish holders of German government bonds in 1935 against the Bank for International Settlements as bond trustee. The Swedes claimed that the BIS violated the pari passu clause when it paid them nominal value, while payments to other bondholders were indexed to the value of gold. Three Swiss courts concluded that such payment discrimination was a breach of the pari passu clause; one even suggested that it could give rise to inter-creditor remedies. However, all three courts held against the bondholders on the grounds that the trustee’s duties in this case were limited to following Germany’s instructions. Subsequent commentators criticized the Swiss courts’ views of the trustee’s role, but did not disagree with its reading of the pari passu clause. The case has featured prominently in 20th century sovereign debt literature, but the pari passu angle appears to have been forgotten.