Over at Dealb%k. (BTW, I don't pick the pictures).
The new Executive Order is out. At heart, it says nothing. The press will probably make it into a big deal.
Update: I should clarify that I have no doubt the administration plans to gut Dodd-Frank. The order simply says "we plan to gut Dodd-Frank," and thus I don't find it particularly interesting.
For Slips readers that might not otherwise see it, I wanted to highlight this post on the Delaware Corporate & Commercial Litigation Blog, about a recent state supreme court decision on the distinction between setoff and recoupment, and the applicability of the statute of limitations to the former.
N.C. Gen. Stat. § 23-46:
It shall be unlawful for any individual, corporation, or firm or other association of persons, to solicit of any creditor any claim of such creditor in order that such individual, corporation, firm or association may represent such creditor or present or vote such claim, in any bankruptcy or insolvency proceeding, or in any action or proceeding for or growing out of the appointment of a receiver, or in any matter involving an assignment for the benefit of creditors.
John Dizard has a useful, and clearly written, piece on the lay of the land in this morning's FT. What puzzles me is why PDVSA, the national oil company, has not done a UK scheme of arrangement or a US prepack to exchange the bonds, instead of messing around with an exchange offer. But the entire situation is rather opaque.
Perhaps as a result of GM, I've been thinking about notice issues in connection with insolvency. Thus, I was a bit surprised to see these three notices, all related to Lehman cases pending in Hong Kong (and schemes of arrangement in those cases), which appeared in this morning's Financial Times.
Note that in the title the notice is addressed to the "Scheme Creditors," as "defined below." Yet below, we are told that Scheme Creditors are "as defined in the Scheme." So unless you are an insolvency fanatic – I plead guilty – and going to run down the documents and read them, this published notice has told you absolutely nothing.
They might as well run an add that says "A company is insolvent. You might be a creditor. Or maybe not. Good luck."
Or rather, you can read about it here. Members include Professor David Skeel, whom many Slips readers will be familiar with.
My take on the Second Circuit's opinion – which Levitin has also written about (and I agree with him that the used car analysis is a bit "off") – is over on Dealb%k. In short, I think that GM mostly has itself to blame for the inability to "discharge" these claims in its chapter 11 case. But the basic point that the federal Bankruptcy Code can override state law successor liability claims remains, despite what some state (and federal) courts have previously held.
The opinion is a good reminder that oral argument impressions don't always carry over to the final written product. In short, both the majority and dissent approach this as a simple matter of statutory construction, and in that regard the majority opinion is simply a more clearly articulated version of the First Circuit's opinion.
Neither the majority or dissent address the 10th Amendment implications of saying that states have to use chapter 9 if they want to reorganize their municipalities. After this opinion, there is no other option. This might suggest that the 10th Amendment concerns that once hovered around chapter 9 are effectively gone.
I find the majority's approach to the placement of the 1946 addendum to section 903 unconvincing, but of course I've already written that I saw section 903 as only coming into force when a state accepts the chapter 9 "bargain."
Is there any other provision of the Code in one of the operative chapters (7 and onward) that applies even when there is no eligible debtor? Here we have Justice Thomas telling us that part of section 903 applies to Puerto Rico right now, while the opening paragraph of the section is apparently hanging around "just in case."
The end result is that Puerto Rico now faces the unattractive choice of attempting an Argentina/Greece style workout (with likely lesser sovereign immunity than either of those debtors had) or swallowing PROMESA, along with its oversight board.
The composition of the former is an issue that Puerto Ricans might understandably worry about, especially since the board, and not the Commonwealth, has final say on what a reorganization plan looks like. Indeed, it is not so much a matter of "final say," as whether the oversight board will listen to Puerto Rico at all. There is no formal requirement in PROMESA that they do so. Nonetheless, given the alternatives, Puerto Rico might decide it has to hold its nose and take PROMESA.
The only thing we know for sure is that Puerto Rico is headed for a default on July 1. One branch of the decision tree has been taken away.
I'm still digesting the opinion, but the obvious conclusion is that impressions from oral argument may be misleading. It also suggests that states that do not use chapter 9, have no ability to come up with a state law alternative. It is chapter 9 or nothing, which may suggest that the 10th Amendment is no longer a serious concern with regard to chapter 9. And early in the opinion Thomas says that City of Ashbury Park was indeed overruled by the 1946 Amendments to 903, despite some actual doubt on that point (and nobody really addressing it in this case).
It has become something like conventional wisdom that the pending SCOTUS case involving the Recovery Act is no longer relevant. After all, the giant interest payment due July 1 is largely attributable to GO bonds, and the Commonwealth itself is not even subject to the Recovery Act. And the pending PROMESA bill would expressly override the Recovery Act.
Taking the last point first, we should not assume that PROMESA will be enacted before the Supreme Court rules. Indeed, there are many political reasons why Congress – the Senate in particular – might want to wait until the Supreme Court acts before advancing PROMESA.
Moreover, what the Supreme Court says with regard to the Recovery Act matters. For example, what if they rule that the 1984 addition of section 101's definition of "State" was impermissible, in the way that it treated the Commonwealth? That might render the Recovery Act subject to section 903 preemption, while at the same time allowing Puerto Rico the ability to authorize its municipal entities to file under chapter 9.
That could possibly force some rethinking of PROMESA, although I think we will still see some legislation. The details might change, however, if SCOTUS effectively amends the current Bankruptcy Code.
On the other hand, if the Recovery Act is upheld, what would stop Puerto Rico from expanding it to cover much more of the overall capital structure at issue? And the Recovery Act might serve as a model for a statue that could apply to the Commonwealth itself.
That, of course, might provide further incentives to pass PROMESA. Quickly.
In short, the Recovery Act is still important, just not in its present form. The current Recovery Act is too narrow to solve very much of the Commonwealth's problems. But what the Supreme Court has to say with regard to the Recovery Act might be very important.
To mention one final point in this regard, what if SCOTUS says that the Commonwealth is unlike other territories? PROMESA purports to be grounded in Congress' power over territories under Article IV, section 3 ...
After taking a look at titles III and VI of the new draft, some quick observations:
Overall, although the bill is not necessarily "ideal" or "optimal," it seems to at least be making forward progress. Of course, the Senate has not weighed in at all on this ... at least not publicly. And we should probably expect that even when enacted the bill is apt to be hit with a Recovery Act style Constitutional challenge.
I'm still working through the new draft of the PROMESA bill, which readers will recall provides new restructuring options for US territories (including Puerto Rico, of course). But I have to say I got a chuckle out of proposed section 303(3), which provides:
unlawful executive orders that alter, amend, or modify rights of holders of any debt of the territory or territorial instrumentality, or that divert funds from one territorial instrumentality to another or to the territory, shall be preempted by this Act.
If the orders are unlawful, do we really need a federal statute to preempt them?
The following post comes to us from Professor Rasmussen at USC:
Nortel Bankruptcy Sets a Dangerous Precedent For the Future of Lending
Lenders are no fools. They care deeply about the promises they receive in return for the money they hand over to the borrower. And if a 2015 ruling in the long-running Nortel Networks bankruptcy case is allowed to stand, it could lead to more restrictive lending to borrowers in the future.
For decades, our commercial law has allowed enterprises to divvy up promises as they see fit. Companies often conduct business through multiple, related entities. This allows lenders to extend credit knowing they’ll receive repayment for their loans from particularly asset-rich subsidiaries, that are not on the hook for all of the debts of the business. This adroit use of the corporate structure allows borrowers to get funds at a lower cost and, in the extreme, can mean securing a loan or not — which can be the difference in a business being able to operate.
Until recently, a lender taking a promise from a subsidiary of a business could rest assured that its only other competition to the subsidiary’s assets would be the other creditors. A recent case, however, threatens to overturn this accepted wisdom and bring uncertainty to financing of large enterprises.
It appears that the House legislation has bogged down. Two or three issues keep coming up, none of which make a whole lot of sense:
First, "bailouts." I'm not sure if people making this argument actually believe it or are just using a convenient, politically toxic buzzword. But the claim that extending chapter 9 to include some or all of Puerto Rico constitutes a "bailout" can't really be taken seriously. A bailout involves (a) the use of taxpayer money to (b) help investors avoid realizing risks they voluntarily agreed to take.
Neither is applicable here. Instead, this is the basic insolvency process doing its thing. Namely, losses will be allocated pro rata if bankruptcy applies. But no taxpayer money is involved, and in no case are investors being saved from their own poor investment choices.
Second, expanding chapter 9 does not raise takings or other scary "retroactivity" problems. If it did, then Congress could never have enacted chapter 9 in the first place. After all, there was no chapter 9 until there was a chapter 9.
More generally, it is quite clear that unsecured bondholders do not have a valid takings claim (under the Fifth Amendment) as a result of the enactment of a new bankruptcy law, in any context. For example, if a secured creditor is owed $1,000 and has a lien on a house worth $400, a new bankruptcy law that discharges the $600 unsecured portion of the claim raises no constitutional issues. That's Congress' power under the Bankruptcy Clause in action. A law that resulted in the creditor obtaining substantially less than $400 on the secured portion might raise a constitutional question, because the secured portion of a claim is "property" for these purposes. But that still does not prevent the rescheduling of secured debt, just the complete elimination of it.
And finally, no, no, no this does not open the door to Illinois filing for chapter 9. Illinois is a state, with full 11th Amendment and 10th Amendment powers. Puerto Rico is a territory of uncertain legal status. Apples ≠ Oranges.
I again offer some initial thoughts on the revised draft bill, now subject to much debate in Congress:
The question is whether it is playing against the House of Representatives, and its heavy handed PROMESA draft bill, or its creditors.
In any event, according to the Financial Times, Puerto Rico's legislature has passed a law giving its governor "the power to declare a state of emergency and halt payments to creditors until January 2017."
There is a long history of these sorts of laws in the United States, most from the Nineteenth Century, although there were a few in the Great Depression too. Most were eventually struck down as violations of the Contracts Clause, but collection against Puerto Rico itself might run up against whatever sovereign immunity the Commonwealth might posses.
Some quick thoughts on the "bankruptcy" part of the proposed bill:
So this will be a chapter 9 preceding in all but name, with the oversight board acting for the debtor, whether the debtor likes it or not, in front of district judge who will be reading up on chapter 9 on the fly. In short, we are reinventing the wheel in a new, more complicated way.
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