Puerto Rico: Help Still Wanted
For the past two weeks, Credit Slips posts have considered the role of the Executive Branch in facilitating a Puerto Rico debt restructuring in the absence of Congressional action. That constraint is hereby relaxed, and thus future posts may well include the role of Congress and the judiciary in various combinations. For example, whatever one's view of the GM and Chrysler bankruptcies, they show that the administration can shape a restructuring by working within the framework of formal bankruptcy law. Imagine, for example, that Congress adopts the most modest of the proposals, H.R. 870, which merely fixes the unfortunate exclusion of Puerto Rico municipalities from ordinary chapter 9. The administration could put together post-filing financing packages with the stream of loan proceeds conditioned on the inclusion of various covenants, including those imposing fiscal reforms.
Meanwhile, March 22 is drawing near. On that date, the United States Supreme Court will review a legal challenge to the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. Below the jump are reminders and new points about the role of this court fight in Puerto Rico's debt crisis and why Congress and the Executive Branch are not off the hook.
- Scope of Supreme Court challenge: The Supreme Court will address preemption, not the other pending constitutional challenges to the Recovery Act relating to contract impairment or a taking under the Fifth Amendment. Preemption comes in three flavors: express, field, and conflict. I have seen arguments under all three, although none is a slam dunk. Even if the Supreme Court found no basis for preemption and reversed the First Circuit and district court, that will not end the litigation over the legality of the Recovery Act. On the other hand, while based largely on federal bankruptcy law, the Recovery Act is less protective of creditors than chapter 9. The Recovery Act also lacks the full structure and history of the Bankruptcy Code. Surely, most creditors would prefer chapter 9 to the Recovery Act. So if the Supreme Court reverses quickly, a shift in the Capitol Hill lobbying dynamics might follow.
- Scope of debtor eligibility: The Recovery Act is directed to Puerto Rico's public corporations such as PREPA and PRASA, not the Commonwealth itself, the GDB, COFINA, or even municipal governments. Given the eligibility restrictions in Puerto Rico's own law, and the broad definition of municipality in federal bankruptcy law, it appears that Puerto Rico could restructure less of its debt through the Recovery Act than if it had access to ordinary chapter 9 for municipalities (it is a separate questions how the issuers would fare under other eligibility requirements, such as insolvency). By its own terms, the Recovery Act also cannot be used by an entity that is eligible for relief under title 11 of the United States Code. So if Congress did extend chapter 9 to Puerto Rico municipalities, that would be the only restructuring option for entities otherwise dual-eligible.
- Seven Justices: Justice Alito is not taking part in this case. Predictions in the press of the impact of Justice Scalia's death, tying political ideology to pro- or anti-debtor sentiment, seem off-base. Justice Scalia's bankruptcy rulings, particularly dissents, should not be characterized as anti-debtor. The bigger issue is the rather substantial role legislative history has played in this case's preemption analysis so far. And, to Justice Scalia, it was not the court's job to clean up messes Congress created, however unlikely it was that Congress would undertake the fix itself. Thus, while it seems implausible that Congress would have excluded Puerto Rico municipalities from chapter 9 in the 1980s only to allow them to enact a bankruptcy law of their own choosing, Justice Scalia probably not have given that policy rationale much credence. Overall, I'd venture to say that reversal of the First Circuit's Recovery Act preemption ruling would have been more likely with Justice Scalia than without him. Yet, still possible.
Three-branch photo courtesy of Shutterstock.com