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Puerto Rico: PROMESA and Presiding Judges

posted by Melissa Jacoby

Shutterstock_419380498H.R. 5278, containing debt restructuring authority and an oversight board for Puerto Rico, inched closer to passage after yesterday's approval by the House Natural Resources Committee. A combination of Rs and Ds rejected amendments that would have unraveled the compromise (scroll here for the amendments and their fates). They indicated an appreciation for the automatic stay, for the downsides of exempting classes of debt from impairment, and even for the assumption of risk taken by recent bond purchasers (bond disclosures quoted!). The discussion reflected the creditor-versus-creditor elements of the problem and the need for a legal mechanism to discourage holdouts and encourage compromise. Even though they have been asked not to call it "bankruptcy" (or to say "control board"), it was clear they know the restructuring provisions come from Title 11 of the U.S. Code.   

Given that derivation, many judges on the merit-selected bankruptcy bench could admirably handle the first-ever PROMESAnkruptcy, drawing on their directly-relevant experiences with large chapter 11s, if not chapter 9s.  

But section 308 of H.R. 5278 prevents that, and the Natural Resources Committee, in light of its jurisdiction, may not have been in the best position to appreciate the resulting risks. 

 Sec. 308 SELECTION OF PRESIDING JUDGE (a) For cases in which the debtor is a territory, the Chief Justice of the United States shall designate a district court judge to sit by designation to conduct the case.

In other words, the first territorial bankruptcy in history would be handled by a judge who, in all likelihood, has never presided over a bankruptcy of any size. Let's take a closer look at the language. The phrases "shall designate [    ] judge" and "to conduct the case" come from section 921(b) of the Bankruptcy Code. In municipal bankruptcies, the chief judge of the relevant circuit picks the bankruptcy judge to preside. The judge need not be from the district containing the municipality (see Central Falls RI), but section 308 of PROMESA additionally assures that understanding with "sit by designation." So Chief Justice Roberts could select any district judge, from any district. I don't read this language or the intentional departure from section 921(b) as empowering the district judge to turn around and refer the case to a bankruptcy judge, even though district judges haven't regularly presided over bankruptcies for decades (and, by most accounts, do not miss it). District courts occasionally have jointly presided with bankruptcy judges over mass tort cases. Particularly relevant might be A.H. Robins (involving the Dalkon Shield litigation). Read all about how that worked out in Richard Sobel's unsubtly titled  "Bending the Law"  and Elizabeth Gibson's case study. A bankruptcy judge was on hand and participated in A.H. Robins, but there is no question who ran the show. But in addition to the joint model being far from optimal, does section 308 even tolerate it? Also, the no-special-master rule for bankruptcy arguably applies to PROMESAnkruptcies; section 310 says "The Federal Rules of Bankruptcy Procedure shall apply to a case under this title and to all civil proceedings arising in or related to cases under this title" (various other "title" and "Code" cross references generate my "arguably" qualifier). 

How would Chief Justice Roberts manage the risk imposed on the judiciary if section 308 becomes law? My own guess is that he will look to a long-time district judge with extensive behind-the-scenes experience with the biggest municipal bankruptcy in history: Hon. Gerald Rosen, a President George H.W. Bush appointee, who has finished his Detroit "mediation" duties as well as his turn as chief judge  of the Eastern District of Michigan and, at least as reported in the press, is eager for the next big challenge

Gavel image courtesy of Shutterstock.com

 

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