Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation

posted by Melissa Jacoby

The lives of Puerto Rico residents remain profoundly disrupted by the aftermath of Hurricane Maria measured by metrics such as electricity, clean water, and health care access, with death tolls mounting. This week, though, in a federal court hearing on January 10, 2018, Puerto Rico has the extra burden of confronting Hurricane Aurelius.

Continue reading "Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation" »

The Hausmann Addendum to the Roosevelt Corollary to the Monroe Doctrine

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Ricardo Hausmann, Harvard economist and former Venezuelan Planning Minister, has been a thorn in the side of the Maduro administration. His blog posts at Project Syndicate condemning the Maduro administration’s continued payment of bondholders while the people of Venezuela starve may well have deterred new lending to the regime. Among other things, Hausmann-induced opprobrium at Goldman Sachs’s infamous "hunger bond"—now trading at a deep discount--has scared many in the market. For more background, check out Cardiff Garcia’s FT podcast interview with Hausmann.

Hausmann’s latest Project Syndicate post goes well beyond complaining about the ethics of Wall Street bond investors. Hausmann first sets out his view of the political realities, in which Maduro’s manipulation of elections and co-option of the military negate any realistic chance for the political opposition to overthrow the regime, notwithstanding U.S. economic sanctions. Given the severe humanitarian crisis, astonishing depletion of national wealth, rampant inflation, widespread corruption, and other harms inflicted or exacerbated by the Maduro regime, Hausmann advocates military action by the United States and like-minded nations. The other nations presumably include countries like Peru, Colombia, Honduras, Argentina, and Chile, all signatories to the Lima declaration condemning the Maduro regime. 

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Implications of the Third Circuit’s Crystallex Decision

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

On Wednesday, the Third Circuit granted Venezuela a victory in its ongoing settled-but-not-settled litigation with Crystallex. The case deals with a limited issue: Whether Delaware law imposes liability for the fraudulent transfer of an asset on an entity that is not itself a debtor.  We want to use this post to speculate a bit about the implications the decision may have for the bigger Venezuelan debt drama. If the new decision is important, it is because it signals something about the receptivity of US courts toward claims that Venezuela, PDVSA, and perhaps US entities like CITGO are “alter egos.” We disagree a bit about that question. But first, some background on this aspect of the Crystallex case.

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Is Poland on its Way to Being Expelled From the EU?

posted by Mitu Gulati

Poland has been thumbing its nose at key European Union norms for some time now (refusal to comply with environmental commitments, unwillingness to take refugees, and so on). The most recent and egregious norm violation being the reforms of the judiciary being pushed by the current right-wing ruling party that will (in the view of critics) enable it to stack the judiciary with judges favoring it. These were signed into law by President Duda roughly ten days ago.

The European Commission, the EU’s principal administrative body, viewing these latest actions as inconsistent with basic democratic commitments of all EU nations to rule of law principles (independence of the judiciary and so on), has recommended that Article 7 proceedings be initiated. That could end up stripping Poland of its voting rights in EU matters; something that would be unprecedented in EU history. As a practical matter this is not likely to happen, because the removal of voting rights requires a unanimous vote of the remaining 27 members of the EU, and Hungary (with a government of similar inclinations to the Polish one) is one the members. But in a community that values collegiality and cooperation to a very high degree, this is a big deal (at least to this outsider).

There is a broader question here, that some in the press are already asking, which is whether, at some point soon, Poland’s (and perhaps Hungary’s) refusals to act consistently with EU values can constitute enough of a justification for the rest of the EU to expel them? As I explain below, an argument can be made that no member of the EU can ever be expelled, given that there is no explicit process contemplated in any of the EU treaties for expulsion. But can that really be the case?

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Battle of the Bonds: PDVSA Versus Venezuela

posted by Mark Weidemaier

Mitu Gulati and Mark Weidemaier

Over at Bloomberg, Katia Porzecanski notes that investors in Venezuelan debt are “worried they’re getting ghosted.” Overdue coupons are piling up, and no one is sure whether it is because the government is done paying or because U.S. sanctions have made financial intermediaries slow to process payments. Meanwhile, the government has maintained radio silence about the restructuring it purported to announce six weeks ago. The fact that a few PDVSA coupons have been paid in the meantime prompts Porzecanski to ask whether Venezuela is capitalizing on bondholder inertia to “quietly, selectively default,” and whether the government “may ultimately prioritize PDVSA’s debt over its own.” This Reuters article by Dion Rabouin answers the latter question in he affirmative, opining that Venezuela is more likely to default on its own bonds than on PDVSA’s, for two related reasons. First, PDVSA’s oil revenues are the government’s main source of foreign currency; second, a PDVSA default may prompt creditors to seize oil-related assets abroad, potentially including CITGO.

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Tax "Reform"

posted by Stephen Lubben

Key takeaways for Slips readers from a Moody's report, dated today:

The legislation is credit negative to the US sovereign, owing to the reality that the cuts do not pay for themselves, and Moody's estimates the cuts will add $1.5 trillion to the national deficit over ten years. Higher deficits will put further pressure on the federal government's finances, which are already facing prospects of increased costs of entitlements. Unless fiscal policy reverses course, Moody's estimates that the federal government's debt-to-GDP ratio will rise by over 25 percentage points over the next decade, to above 100%. Combined with rising interest rates, debt affordability for the US will weaken significantly.

The net impact to state and local governments is negative. While the new $10,000 limit on state and local tax (SALT) deductions does not directly impact state or local tax receipts, it will blunt the effect of lower federal rates for many taxpayers. Because the state and local provisions raise the effective tax cost for many taxpayers, public resistance to tax increases will likely rise, and that in turn will constrain local governments' future revenue flexibility. In addition, if larger federal deficits caused by the tax cuts result in attempts to cut entitlement spending, states will be pressured to backfill cuts to federal funds from their own budgets.

The SALT change, combined with the higher standard deduction and tighter limit on the mortgage interest deduction, also reduces the tax incentive for home ownership, which is likely to slow home construction and sales, and moderately suppress home values and property tax growth in higher-price markets.

 

Comparative Insolvency Conferences of Note

posted by Jason Kilborn

I thought Credit Slips readers might be interested in using some holiday down-time to catch up on a couple of recent comparative insolvency conferences with particularly cutting-edge presentations, some of which are or will be available for viewing online (and many of the papers are available on SSRN or elsewhere).

First, on Nov. 23-24, the Notary College of Madrid offered its spectacular hall to host an international conference on consumer credit information privacy and regulation (day one) and the treatment of insolvency for SMEs and consumers (day two). The second day offered a particularly interesting presentation by one of the leaders of the EU Commission's initiative for a Directive on harmonization of European laws on preventive restructuring and second chance discharge relief (followed by a bit of constructively critical commentary by an American who fancies he knows something about European personal insolvency). Recordings of the entire conference were just posted to YouTube--most of the recordings are in Spanish, but the EU Directive and critical commentary presentations are in English after a short Spanish intro (nos. 8 and 9 of the 10 recordings). Congratulations to the architects of this fabulous event, who also made impressive presentations: Matilde Cuena Casas (Univ. Complutense de Madrid), Ignacio Tirado Martí (Univ. Autónoma de Madrid), and David Ramos Muñoz (Univ. Carlos III de Madrid).

Second, the following week offered a special, rare treat with the conference, Comparative and Cross-Border Issues in Bankruptcy and Insolvency Law, hosted by the Law Review of the Chicago-Kent College of Law. The line-up of panels on both comparative and cross-border issues was particularly impressive, and we were treated to a keynote by Jay Westbrook refining his latest thinking about cross-border coordination. The conference was live streamed, and the recordings are promised in the near future, but for now, the livestream page still has (scroll down to Day 1) the recoding of Adrian Walters's terrific paper on restrictive English interpretation of the notion of international cooperation. Again congratulations to the organizers of this fabulous event (who, again, gave very impressive presentations of their own): Adrian Walters, Chicago-Kent College of Law, and Christoph Henkel, Mississippi College School of Law.

Puerto Rico: Unexpectedly Hilarious Gifts From YouTube

posted by Mitu Gulati

HT: Joseph Blocher & Rich Schmalbeck

Joseph Blocher and I were talking to our tax guru friend and colleague, Rich Schmalbeck, yesterday about the provisions in the new tax bill relating to Puerto Rico and, specifically, how it was that the Puerto Rico could be treated as "foreign" for certain purposes (e.g., taxes on intellectual property).  The context being that these taxes will likely cause some employers to move operations from Puerto Rico to the mainland or elsewhere, thereby worsening the economic crisis on the island.  The answer, best we can tell, goes back to the horribly racist Insular Cases from the early 1900s that allow for Puerto Rico to be treated as "foreign in a domestic sense" (i.e, not on its way to incorporation into the United States - and therefore not worthy of full constitutional protections) -- something that Joseph and I have been railing about (here).

During that conversation, Rich asked us whether we remembered a tourism jingle that ended with "Puerto Rico -- a vacation . . . that lasts a lifetime . . . "   So, of course, Joseph and I went looking for it on YouTube (Rich has a brilliant sense of humor and we knew that we'd laugh if we could find it) . . . we didn't find it (still searching though), but we found a truly hilarious (unofficial, surely) government video touching on many of our favorite topics (debt, colonialism).  For my friends who work on Puerto Rican debt -- this will make you laugh as well, I think --  the video is here

Of course, going down that the YouTube path, takes one back to John Oliver's hilarious riff on the second class status of Puerto Rico, here

And if you watch that, you get taken to this one on the territories.

And then this (the Trump response to Hurricane Maria). For this one, all I can say is Aiyiyiyiyi

John Oliver is able to do harsh social commentary and humor in a way few others can.

And now, I'm watching cat videos.

Call for Commercial Law Topics (and Jargon!)

posted by Melissa Jacoby

For the spring semester, I am offering advanced commercial law and contracts seminar for UNC students, and have gathered resources to inspire students on paper topic selection as well as to guide what we otherwise will cover. But given the breadth of what might fit under the umbrella of the seminar's title, the students and I would greatly benefit from learning what Credit Slips readers see as the pressing issues in need of more examination in the Uniform Commercial Code, the payments world, and beyond. Some students have particular competencies and interests in intellectual-property and/or transnational issues, so specific suggestions in those realms would be terrific. Comments are welcome below or you can write us at bankruptcyprof <at> gmail <dot> com. 

We also are going to do a wiki of commercial law jargon/terminology. So please also toss some terms our way through the same channels as above (or Twitter might be especially useful here: @melissabjacoby).

Thank you in advance for the help!

(Updated) About That Mysterious Crystallex Settlement

posted by Mark Weidemaier

[Update: Here is the unsealed letter describing the settlement between Crystallex and Venezuela. As expected, it reveals nothing of note, simply explaining that the settlement's terms require confidentiality and redacting portions discussing the settlement itself. Also, note that the first paragraph of the original post (below) has been edited for clarity.]

We have covered Crystallex’s attempt to enforce its $1.2 billion judgment against Venezuela a bunch here on Credit Slips (for example, here, here, here, here, and here). In late November, the parties reached a settlement, shortly before a December 5 hearing in Crystallex's lawsuit seeking to attach assets belonging to PDVSA. The hearing was to address Crystallex's argument that PDVSA is the government's alter ego, and PDVSA’s cross motion to dismiss. A ruling in Crystallex’s favor would have let it look to PDVSA’s assets to satisfy its judgment against the government. As noted in the Financial Times, a pro-Crystallex ruling might also have had broader implications, potentially letting “holders of defaulted Venezuelan sovereign bonds ... seek to seize PDVSA assets, potentially including those of Citgo.”

Continue reading "(Updated) About That Mysterious Crystallex Settlement" »

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