Legal Scholars Advance the Principle of Odious Debts

Equitable subordination, fraudulent transfer, and sovereign debt

(November 27, 2007)

Adam Feibelman
UNC Legal Studies Research Paper No. 1032309.
Tuesday, November 27, 2007
Abstract: There is a growing body of scholarship that attempts to identify workable mechanisms to enable sovereigns to repudiate ‘odious’ sovereign debt – obligations incurred by sovereign regimes that provide no corresponding benefit to the sovereign debtor itself.

 Initial work in this literature focused on doctrines of international law and/or international decision-makers. More recently, some writers have considered whether various domestic private-law doctrines – especially doctrines of agency law – might be available to provide odious – debt – relief in U.S. courts. This Article proposes that doctrines of equitable subordination and fraudulent transfer are better suited to address the problem of odious debt than other private-law doctrines. Equitable subordination and fraudulent transfer doctrines focus narrowly on inequitable or fraudulent conduct by creditors and their counter-parties. More important, because these doctrines can be invoked by creditors who have been harmed by the creation of odious debt, they harness the interests and skills of these creditors in monitoring sovereign debtors and pursuing claims against other creditors. This may be especially valuable when sovereign regimes do not have good incentives to repudiate their own odious obligations. Doctrines of equitable subordination and fraudulent transfer should be available to sovereigns’ creditors as a matter of state law in most if not all U.S. jurisdictions. If courts can narrowly define fraudulent or inequitable behavior that triggers liability in this context, then lenders to sovereigns should have relatively clear guidance about how to avoid such behavior. In that case, the application of these doctrines should not undermine the market for non-odious sovereign debt. In fact, if these doctrines can be used to reduce the amount of odious debt extended and help create safe-harbors for non-odious creditors, they might reduce the cost of non-odious sovereign debt.

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