The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and Other Legal Fauna
Blackman, Jonathan I., Mukhi, Rahul, Law and Contemporary Problems
INTRODUCTION: THE LACK OF BANKRUPTCY PROTECTIONS FOR SOVEREIGNS
The recent global financial crisis vividly displayed the legal protections available in nonsovereign insolvencies. To use a prominent example in the United States, the massive Chrysler Corporation--whose $49 billion in revenue in 2007 was greater than the GDP of more than half the world's nations (1)--was able to leverage the threat of declaring bankruptcy to extract economic concessions from its commercial lenders, bondholders, employees, and other creditors (with significant financial and political support from the U.S. Administration). (2) Once Chrysler negotiated the terms of a sale with the majority of its creditors, it entered bankruptcy with a prepackaged petition, and, shortly thereafter, a new Chrysler entity emerged from the process as a going concern, no longer burdened by billions of dollars of debt. (3) Although a minority of creditors challenged the Chrysler sale as a draconian invalidation of their contract rights, those efforts failed under the debtor-friendly rules of Chapter 11. (4)
As the Chrysler case illustrates--as would other recent examples, such as GM, Nortel, and the like--the safe harbor of insolvency law is a potent tool for private debtors who cannot afford to pay their creditors. Even before formally declaring bankruptcy, sophisticated parties can exploit creditor fears of judicial contract reformation to obtain voluntary liability reduction. Once a private company or individual enters bankruptcy, debt service and litigation against the debtor is automatically stayed pending the completion of a mandatory restructuring plan. (5) Bankruptcy rules also allow for a post-insolvency market for "superpriority" (debtor-in-possession) financing, which the debtor can access to jumpstart its reorganization.
In contrast to distressed private debtors, it is axiomatic that there are no bankruptcy protections for financially impaired sovereign states, though such a system has been advocated for since at least the time of Adam Smith. (6) When a state cannot pay its debts, its only recourse is to enter voluntary negotiations with its creditors, which today are a miscellany of private and public entities with disparate agendas. (7) Unlike the bankruptcy process for private debtors, participation in a sovereign debt workout is optional, and creditors may choose to opt out by bringing lawsuits on the face value of defaulted debt in order to obtain judgments, and try to execute on them.
Although distressed sovereign debtors cannot use the shield of bankruptcy law to prevent creditor litigation, rules concerning foreign sovereign immunity have emerged as a rough, sometimes inadequate, proxy for insolvency laws. There are two categories of sovereign-immunity protections for foreign states: (1) immunity from suit and (2) immunity from execution. Protections concerning immunity from suit derive from the international principle that a sovereign should not be made to suffer the indignity of being haled into court against its will. (8) Immunity from execution provisions stem from long-standing concerns about the disruptions and political ramifications that can result from the seizure of a foreign state's property. (9) Under the modern, "restrictive" theory of sovereign immunity--codified in some jurisdictions by national laws, such as the Foreign Sovereign Immunities Act (FSIA) in the United States--a foreign state's immunity is subject to various exceptions, the extent of which are often at the heart of sovereign-litigation disputes. (10) In a manner somewhat analogous to the way bankruptcy law provides the backdrop to negotiations between an insolvent private debtor and its creditors, the case law that has developed interpreting the scope of foreign sovereign immunity provides the background set of rules that inform the parties to a sovereign debt restructuring.
This article examines the progression of sovereign debt case law as displayed by the succession of litigation strategies employed by professional suers of defaulted sovereign states. …