postings by Melissa Jacoby

Police Misconduct in Bankrupt Cities: Ninth Circuit Update

posted by Melissa Jacoby

"But Chapter 9 has awakened, and we do not presume further disputes over its interpretive and practical complexities will remain long at rest."

So says a panel of the U.S. Court of Appeals for the Ninth Circuit in Deocampo v. Potts (14-16192), filed since the last Credit Slips posting about civil rights debts in municipal bankruptcy. My working paper is newly revised to discuss the Ninth Circuit's ruling. Just a few points here.

The Ninth Circuit reached the right result in holding that the Vallejo bankruptcy did not relieve the police officer defendants of their individual liability for 1983 violations (excessive force). The court also held that Vallejo's state law obligation to indemnify the police officer defendants was not discharged by the city's bankruptcy, arising as it did after the city received its discharge.

Another element of the opinion should alarm civil rights advocates, however. For example, although it does not decide the issue, the panel suggests a surprising (especially for the Ninth Circuit) level of openness to explicit non-debtor releases of police officers in municipal bankruptcy restructuring plans. Surely everyone involved with the pending San Bernardino case is paying close attention.

Police Misconduct in Bankrupt Cities

posted by Melissa Jacoby

Bankruptcy filings by major cities have reinvigorated attention to municipal bankruptcy. As chapter 9 and its application have become more like chapter 11, a wide range of creditors are being swept into the process. As written before, city cases now have classes of general unsecured creditors. Those classes also have been including plaintiffs in civil rights lawsuits alleging unconstitutional police conduct. The proposed payouts vary.  San Bernardino's bankruptcy plan, which seeks to release the liability of non-debtor officers as well as the debtor, has been proposing a 1% payout. The confirmation hearing is currently set for October 2016.  Some cities with systemic police practice problems - Ferguson, Chicago - also are known to have pervasive financial difficulties. I am not suggesting or predicting they will end up in bankruptcy, but it is another reminder that civil rights advocates need to be up to speed on the impact of chapter 9, if only to be able to bargain in its shadow as other types of creditors do.

I have just posted a paper on this topic (revised and updated from a version posted earlier this summer). It walks through the issues and gives three brief case studies. Feedback from the Credit Slips readership would be very welcome, and/but please also pass along the link to civil rights lawyers who do § 1983 litigation. Here is the brief abstract:

When a financially distressed city files for bankruptcy, recovery for civil rights violations is at risk. This article examines the impact of bankruptcy on civil rights claims, with an emphasis on allegations of police misconduct resulting in lawsuits under 42 U.S.C. § 1983. We walk through how a bankruptcy filing affects civil rights plaintiffs, starting with the immediate injunction against litigation and debt collection activity, and ending with the legal release of debt and a restructuring plan. Using primary source materials, we offer three brief case studies: Detroit, Vallejo, and San Bernardino. We conclude with suggestions on where to go from here in research and advocacy.

Essential Resources on Burdens of Proof in Bankruptcy Litigation: Property Exemptions and Beyond

posted by Melissa Jacoby

Shutterstock_380908687Deliberations of the Advisory Committee on Bankruptcy Rules have generated great materials relevant to burdens of proof in bankruptcy litigation that judges and lawyers should read and keep on their shelves, whether physical or virtual. Judge Christopher Klein's Suggestion 15-BK-E, submitted in July of 2015, posited that Rule 4003(c) (which gives the objecting party the burden of proof in property exemption disputes) exceeds the authority of the Rules Enabling Act "with respect to claims of exemption that are made under state law that does not allocate the burden of proof to the objector." The document includes a detailed court decision, In re Tallerico, setting forth the reasoning. In a memorandum starting on page 67 of the agenda book downloadable here,  Assistant Reporter/Professor/prior Credit Slips guest Michelle Harner takes a deep dive into the intersection of burdens of proof and the Rules Enabling Act. The Harner memo considers two key Supreme Court decisions that present different standards. The first is Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15 (2000), which played a central role in Judge Klein's submission and court decision. The second is Hanna v. Plumer, 380 U.S. 460 (1965). Harner concludes that Hanna is more on point in the event of a conflict between a federal bankruptcy rule and state law. And, as Harner explains, the Supreme Court in Hanna "rejected the argument that a rule is either substantive or procedural for all purposes" (p78), walks through the questions to be considered, and seeks to apply them to the exemption issue at hand. It looks like the Bankruptcy Rules Committee will not be proposing changes to Rule 4003(c) at this time, but this memo should live on, alongside the case law, as an essential resource for judges and lawyers who encounter disputes over the propriety of burdens of proof in federal rules. 

Bookshelf image courtesy of Shutterstock.com

 

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. 

Continue reading "Puerto Rico: PROMESA and Presiding Judges" »

Puerto Rico: Debt Restructuring and Takings Law

posted by Melissa Jacoby

ConstitutionPer the last words of my PROMESA post, click here for an interview with Professor Charles Tabb, who discusses the (limited) impact of the Takings Clause on debt restructuring and moratorium legislation. 

Constitution image courtesy of Shutterstock.com

Puerto Rico: PROMESAnkruptcy

posted by Melissa Jacoby

301The House Natural Resources Committee has released draft legislation - with the acroynym PROMESA - in response to Puerto Rico's financial crisis and Speaker Ryan's call for action. The contents continued to shift over the past few days but a recent version is here. PROMESA spans many topics, including an oversight board, employment law, infrastructure, and beyond. Without detracting from the importance of this range of topics, this is Credit Slips, so these initial observations focus on debt restructuring provisions principally housed in Title III of the bill.

  1. PROMESAnkruptcy: The new territorial debt restructuring law would not be in title 11 (home of the Bankruptcy Code). But as shown in the visual, section 301 incorporates many key title 11/Bankruptcy Code provisions, including automatic stay, financing, majority voting rules, cramdown, discharge, and the discharge injunction. Other sections of PROMESA repurpose title 11 provisions with slight tweaks, while still others expressly depart from current bankruptcy law and make new rules. For the lawyers, also note that the Federal Rules of Bankruptcy Procedure also apply (section 308). Still, the drafters don't want to call it bankruptcy or chapter 9. Okay. I commend the drafters for recognizing the importance of a mechanism to bind holdouts and I'll call it whatever they want, within reason. PROMESAnkruptcy may sound a little funny, but let's be clear that Puerto Rico's dire situation is no joke. 

Continue reading "Puerto Rico: PROMESAnkruptcy" »

Puerto Rico: The Recovery Act's Potential Second Wind

posted by Melissa Jacoby

 

This post continues the long-running Credit Slips discussion of Puerto Rico's Recovery Act, now the subject of U.S. Supreme Court review in Puerto Rico v. Franklin California Tax-Free Trust, 15-233, as indicated in Lubben's recent post and in last week's preview. In the video above, posted with permission of the American Bankruptcy Institute, I interview Bill Rochelle, who was at the Supreme Court for oral argument and makes some intriguing predictions on the vote, timing of issuing the opinion, judicial selection, and other matters. A few more reflections below the break.

Continue reading "Puerto Rico: The Recovery Act's Potential Second Wind " »

Puerto Rico: Help Still Wanted

posted by Melissa Jacoby

BranchFor 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. 

Continue reading "Puerto Rico: Help Still Wanted" »

Puerto Rico: LoPucki's Virtual Bankruptcy Proposal

posted by Melissa Jacoby

Hard to believe it has been over a year since a creditor representative opposing H.R. 870 characterized chapter 9 municipal bankruptcy as "the Wild West" in Congressional testimony. Whatever uncertainties bankruptcy law contains (and, sure, they are not trivial), our symposium reveals that the true legal wilderness in government debt restructuring lies beyond the boundaries of title 11. 

Enriching the collective brainstorm is a proposal by the always-innovative UCLA law professor Lynn M. LoPucki published in the Huffington Post. Here's the link, and here's a quote:  

LoPuckiVirtual9

 

 

 

 

 

The full story offers plenty of caveats and risks for creditors - including that this approach could be considerably less protective of creditors' interests than bankruptcy - so do read the whole thing. Although the piece does not expressly mention the Executive Branch, prior Credit Slips posts (such as here) have illustrated the potential combination of the Administration's use of soft powers to promote restructuring efforts formally initiated by Puerto Rico - again, potentially without the creditor protections normally associated with bankruptcy and without other pieces of financial reform that many have advocated. 

 

 

[UPDATED] Puerto Rico: More Views, Including on the Role of the Obama Administration

posted by Melissa Jacoby

Watch here at 1pm ET to see former Treasury official Brad Setser, now senior fellow at the Council on Foreign Relations, talk about Puerto Rico (along with Cate Long, Dick Ravitch, and Aaron Kuriloff). [March 9 UPDATE: transcript available here]

Read here for proposals of Puerto Rico governor candidate Ricardo Rosselló Nevares, including Treasury assisting with interim financing, with an analogy to GM and Chrysler during the 2008 financial crisis (see point 6 in the document).

[March 9 UPDATE: lest anyone need reminding of what can happen when a majority of creditors cannot bind holdouts, check out Anna Gelpern's recent assessment of the Argentina settlement]  

 

Puerto Rico Symposium: Of Wills and Ways

posted by Melissa Jacoby

JigsawDebt relief without Congress? No one promised it would be pretty.  

Our brainstorm (remember the ground rules) has included Levitin's MacGyver-inspired local currency, eminent domain, and liberally-interpreted exchange stabilization, Weidemaier's use of COFINA doubts to wedge open the door for a Executive Branch/Puerto Rico partnership, and, thanks to economist Arturo Estrella, a long menu of options with examples, summarized succinctly as "where there is a will, there is a way" (p. 1) (english report at bottom of this page). Could the federal government underwrite new bonds in an exchange offer, asks Pottow? Be the mediator with a big stick, asks Lubben?  Might a holdout creditor be liable to shareholders if it rebuffed a reasonable deal, asks Jiménez? (scroll to the comments). Marc Joffe notes the potential analogy of the City of Hercules tender offer (as well as the fact that Levitin's local currency suggestion has a history from the Depression). 

Lawless reminds us of the risks associated with discriminatory treatment of Puerto Rico's debt and access to legal tools. Of course, there is a long history here. Maria de los Angeles Trigo points to UT professor Bartholomew Sparrow's study of the Insular cases. And while most expect debt relief will be conditioned on some sort of fiscal oversight, it needs to be designed in a way to avoid the foibles of the past.

Returning to Lubben's mediation theme, let's push the brainstorming a step farther: could Treasury appoint a federal judge, such as Chief District Judge Gerald Rosen (E.D. Mich.), to oversee the mediation, and demand that all creditors participate in good faith until released? Even in the absence of legal authority for this move, would creditors formally object or fail to show up? 

Thanks to participants and readers for active involvement so far, and please keep your thoughts and reactions coming this way.  

Puzzle photo courtesy of Shutterstock.com

Credit Slips Presents: A Virtual Symposium on Puerto Rico

posted by Melissa Jacoby

TablePuerto Rico debt restructuring legislation is flying fast and furious around Congress. But the air contains more than a whiff of defeatism regarding the prospects of passage. Bills vary greatly in substance and scope, and yet apparently the response of powerful creditors is consistent: they want to retain the right to be holdouts and are making that position perfectly clear to our elected representatives.

Credit Slips contributors are no strangers to anti-restructuring advocacy, whether framed as moral hazard or otherwise. To that end, we embark on a virtual symposium inspired by the following question: What could the Executive Branch do to facilitate the restructuring of government debt in Puerto Rico absent Congressional action? 

On tap to brainstorm around this theme in the next two weeks are (in alphabetical order): Anna Gelpern, Melissa Jacoby, Bob Lawless, Adam Levitin, Stephen Lubben, Katherine Porter, John Pottow, Mark Weidemaier, and Jay Westbrook.

Continue reading "Credit Slips Presents: A Virtual Symposium on Puerto Rico" »

Who "Presides" over Chapter 13 Plan Confirmation Hearings?

posted by Melissa Jacoby

Shutterstock_329900393Temple Law Review will soon publish a volume honoring Bill Whitford, based on a conference from last fall. That event was particularly special for an additional reason: it turned out to be the last opportunity, for many of us, to spend time with another inspiring leader in our field, Jean Braucher

My own short contribution, on judicial oversight in chapter 13 bankruptcies, has just been posted here. We will share the word when the entire volume is available - including, I believe, a piece from Jean.

Gavel image courtesy of Shutterstock

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