45 posts categorized "Puerto Rico"

Aurelius v. The Control Board: What is Going On? (Part II)

posted by Mitu Gulati

First, thanks to all of you who emailed and commented with possible answers as to what the Aurelius strategy in challenging the constitutionality of the Puerto Rican Control Board might be (the subject of Part I).  My favorite answer was the simple: “Create Chaos”.  That was followed by another answer: “Once the sheep start panicking, they become easy pickings for the wolves.”  I’m not sure that I understand either strategy, but that’s why I’m not running a multi-billion dollar hedge fund (if I were an investor, I suspect that I’d be one of the sheep trying to avoid being eaten by the wolves).

Second, I want to ask the “What is going on?” question from a different direction this week.  I’ve read or skimmed almost all of the anti-Aurelius briefs in the Aurelius v. The Control Board case now (for background on this, see here). Two things puzzle me about them.  I should say at the outset though that my being puzzled may stem directly from not understanding how these fancy constitutional law cases play out.

  1. Puzzle One: None of the anti-Aurelius briefs provide a clear and coherent explanation of exactly what would be at stake for Puerto Rico, financially, if the Control Board were to be deemed unconstitutional. More crassly, they don’t answer the following question at the outset: How much is it going to cost Puerto Rico if Aurelius wins? 

I'm a realist in thinking about what courts do in tough cases (as contrasted with the “legalist” who thinks doctrine does the overwhelming majority of work in predicting outcomes in all cases).  To my reading, the research tends to show that courts care a great deal about the social costs or policy implications of their decisions.  Yes, of course, they care about doctrine too.  But judges care a great deal about the impact of their decisions on real people (and how their decisions will be viewed in hindsight).

So, if a decision ruling that the Control Board is unconstitutional would impose a huge additional cost on the people of Puerto Rico (who have already suffered so much), and the law isn’t crystal clear, would it not be good legal strategy for the anti-Aurelius lawyers to emphasize that?  Clearly, I’m wrong, since that’s not what the all-star group of lawyers on the anti-Aurelius side have done.  But it puzzles me.

My thinking on this borrows heavily from my brilliant political scientist colleague, Georg Vanberg (see "Financial Crises and Constitutional Compromise”).

  1. Puzzle Two: Isn’t it a high-risk strategy to base key parts of one’s argument (as some of the anti-Aurelius briefs do) on cases that are, for want of a better word, “odious”? The cases here are the Insular Cases, that are an embarrassment. My guess is that many lawyers would at least balk at, if not outright refuse, to cite cases like Plessy or Korematsu as their primary support. And most judges, I’d think, would be mortified at having to turn to those cases for support for their decisions (and would like to be shown less yucky ways to getting to the right outcome by the lawyers).

There is a cool article here on the “Anti-Canon” in constitutional law, by Jamal Greene. Getting more specific, in terms of judges who are likely to be faced with these the Aurelius case on appeal, Judge Torruella of the First Circuit has a wonderful set of articles on the yucky Insular cases (and a thundering speech delivered at Harvard Law, where the key ideas for these awful cases were developed in the early 1900s).  A little more distant: Judge Lynch of the First Circuit has a fascinating recent piece talking about Korematsu (a star member of the Anti-Canon).

Aurelius v. Puerto Rico's Control Board: What's the Game?

posted by Mitu Gulati

While most of the sovereign debt world is focused on Mr. Maduro’s shenanigans in Venezuela, a fascinating litigation is playing out in federal district court in Puerto Rico.  Aurelius, a hedge fund known to many of us because of the role it played in the legendary pari passu litigation against Argentina, is challenging the constitutionality of the Control Board that was put in place to run Puerto Rico’s debt restructuring (and, essentially, key aspects of its fiscal affairs). 

Elsewhere, Joseph Blocher and I have written about why this suit is exciting for us in the context of our other work on Puerto Rico’s problematic (okay, shameful) second-class status.  Specifically, this Aurelius case, has the potential to get the federal courts to confront the question of what the legal validity today is of a set of infamous cases from the early 1900s (the Insular Cases). We hope that the courts, when faced with arguments that derive their authority from these cases, will clearly say – and there is enough of a basis for them to do so – that the actions and developments of the past 100 years have effectively overruled these cases. These cases, for anyone unfamiliar, are a set of stunningly racist cases produced by many of the same judges who ruled in favor of “separate but equal” in Plessy v. Ferguson.  Oversimplifying, these cases ruled that Puerto Rico and its people, partly because they were not deemed to be civilized enough in the early 1900s, constituted an “unincorporated” territory (that is, so very foreign that they were not on their way to eventual statehood).

So, in a sense, I find myself in the bizarre position that while I am not rooting for Aurelius to win, I hope that their lawsuit ends up getting the Insular Cases condemned, once and for all, as an awful relic of an ugly past.  That said, what puzzles me about this case though is its economics, particularly from the perspective of Aurelius.  What do they get by undermining the Control Board? My assumption here is that a ruling that the Control Board is unconstitutional and that all of the actions it has taken so far are void will be hugely expensive for Puerto Rico’s debt restructuring effort.  After all, one of the key aspects of the Control Board is that it has been given the power to solve the traditional collective action problem that bedevils every sovereign or quasi-sovereign debt restructuring.  Remove the Control Board, and we go back to square one where the creditors are fighting with each other about who has what level of priority and how to avoid giving the holdouts a disproportionate share of the pie. End result: Lawyers get paid a lot, but both the people of Puerto Rico and the creditors (including Aurelius) have a much smaller pie to divide up.

Continue reading "Aurelius v. Puerto Rico's Control Board: What's the Game?" »

Why Didn't Puerto Rico Use its "Local Law" Advantage to Reduce its Debt?

posted by Mitu Gulati

Good academic workshops are hard to run. I know, because this is a task that I have failed at, and continue to fail at, repeatedly.

For that reason though, it is a treat to see someone else run their workshop successfully. I was at one recently that was spectacularly run: Jill Hasday's Public Law workshop at the University of Minnesota. The setting is intimate: a small group of students and faculty gathers in the late afternoon (without wine -- which I usually think of as being key) and they take apart whatever paper is the focus of the discussion. Indeed, after about an hour, the paper that is being discussed almost becomes secondary to the idea that the participants have by then honed in on as being central.  My colleague, Joseph Blocher, and I were lucky enough to have our paper "Puerto Rico and the Right of Accession" be deconstructed last week and it was a special treat for the both of us.  We have a concrete measure for whether a workshop was good (taken from our dear friend, Steve Choi): Did it help generate ideas for a new paper?  This workshop gave us at least three.  That's more than any other workshop I've been to. I don't know how Jill inspires her students or what magic potion her colleagues who attend take, but I want the secret sauce to use next semester at my workshop series with Guy-Uriel Charles.

The one question that Jill, Daniel Schwarcz and at least two students asked that keeps bugging me is: Why didn't Puerto Rico use the fact that the overwhelming majority of its bonds were governed by its own local law to directly restructure it?  Couldn't Puerto Rico have passed a set of laws to enable it to engineer a sharp reduction of its debt?  Greece did precisely that in March 2012; and it faced constitutional protections of property and prohibitions on expropriation very similar to what Puerto Rico would have (as an aside, the challenges to the Greek restructuring of 2012 -- and there have been dozens of suits filed -- have failed so far).  Indeed, the US did something like this with the gold clauses in the 1930s, to jumpstart the economy and get it out of the depression (actions that withstood legal challenge in a set of famous cases such as U.S. v. Perry).

Continue reading "Why Didn't Puerto Rico Use its "Local Law" Advantage to Reduce its Debt?" »

Audio Recordings of Bankruptcy Court: News from Delaware

posted by Melissa Jacoby

DelawareSeveral Credit Slips posts from earlier this year (here and here) focused on the virtues of courts releasing digital audio recordings of hearings, and specified the Judicial Conference authority for doing so. Over the summer, I found about three dozen bankruptcy courts for which at least one audio recording had been posted on a court docket in the prior year, albeit with significant variation in frequency of posting. 

It is great to be able to report that the U.S. Bankruptcy Court for the District of Delaware has joined the group of bankruptcy courts using this technology  (announcement here with the details). Proceedings before Judge Carey are the first to be posted, with other judges' hearings potentially to follow. 

 

 

Puerto Rico, its Control Board and the "Two-Step Plan" Story

posted by Mitu Gulati

It is rare that the ideas in academic articles fundamentally change the world. A package of pieces by Clay Gillette and David Skeel (starting with "Governance Reform and the Judicial Role in Bankruptcy" in 2014, followed by a NY Times Op Ed in 2015,  and concluding with "A Two-Step Plan for Puerto Rico" in 2016) have arguably done just that though. The context, as many slipsters have written about, was the enormous financial crisis that Puerto Rico has been mired in for multiple years now. The three Gillette-Skeel articles were the foundation for the institution of a federal control board to displace the local elected authorities in the Commonwealth of Puerto Rico and, in their place, run Puerto Rico's debt restructuring.

Oversimplifying, the idea is that there are occasions when an electoral system becomes so dysfunctional in its running of the local government's operation that a more command-based system needs to be put in place temporarily. Clay has an aptly titled piece "Dictatorships for Democracy" that also explicates this idea. In political economy terms, the problem that Clay and David attack in their pieces is the one where the local competition among electoral candidates is, for whatever reason, consistently delivering severely sub-optimal local governance -- a consistently bad electoral equilibrium that eventually produces a severe government bankruptcy. And the way to get out of the bad equilibrium, they argue, is a temporary dictatorship (aka control board) that is not beholden to the kinds of political interests that were causing the dysfunction.

The question of why the local government system in Puerto Rico produced such immense fiscal mismanagement is a complicated one.  I am inclined to put a big portion of the blame for bad governance on the fact that Puerto Rico has not been allowed to meaningfully govern itself in the same fashion as the states for over a century ("foreign in a domestic sense" and all that). That said, it is hard to argue with the observation that, whatever the reason, Puerto Rico seems to be stuck in a bad governance equilibrium that it needs to be pushed out of. And Clay and David have provided one solution that might just work. (My preferred solution would be that Puerto Rico be allowed meaningful governance rights at the federal level, but no one in Washington DC seems to be willing to give them that).

Two things got me thinking about their idea over the past few days, and induced me to write this post.  First, the hearing on the legal challenge to the constitutionality of the control board is coming up soon (based on a challenge from a NY hedge fund).  Second, there was an interesting article Simon Davis-Cohen of The Nation (a lengthy piece about Clay and David and their ideas) that appeared about a week or so ago. Davis-Cohen's article, to my mind, manages to be both admiring of the ideas and goals that Clay and David have and also question the whether they are appropriate in the Puerto Rican context.

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Could Puerto Rico be Expelled for its "Tremendous" Debt?

posted by Mitu Gulati

From Joseph Blocher & Mitu Gulati

We would not exactly call ourselves avid readers of the US Navy blogs. But there is an interesting post on the U.S. Naval Institute Blog today on Puerto Rico and debt by Commander George Capen (retired).

The context that inspired his blog post was the behavior of our president toward the current crisis in Puerto Rico. To quote: 

“Ultimately, the government of Puerto Rico will have to work with us to determine how this massive rebuilding effort—will end up being one of the biggest ever—will be funded and organized, and what we will do with the tremendous amount of existing debt already on the island.” – President Donald J. Trump, 29 September 2017:

Commander Capen, whose post is worth reading in its entirety, writes:

Puerto Rico didn’t ask to become a U.S. territory in 1898; nor do they get to vote in U.S. elections; nor do they have voting representation in Congress. But they are Americans. And they also voted to become a state (over 97 percent) earlier this year.

As an unincorporated commonwealth, our Congress holds the fate of Puerto Rico in their hands. Following their vote for statehood, our Congress can make Puerto Rico a state. Congress could also vote to cast Puerto Rico aside as an independent nation.

That final statement raises a question that we have been fascinated by (and have struggled with). Could Congress really “cast Puerto Rico aside as an independent nation,” even stripping Puerto Ricans of their US citizenship, because they have a “tremendous debt”?

Continue reading "Could Puerto Rico be Expelled for its "Tremendous" Debt?" »

Puerto Rico Bankruptcy: More on Audio

posted by Melissa Jacoby

Standing Order 8As my last post mentioned, release of hearing audio recordings does not appear to be standard practice in the District of Puerto Rico district court. But that isn't for lack of authority within that court. Standing Order 8, adopted in 2011, expressed with some pride that the District of Puerto Rico would be the "first in the entire Nation" after the pilot program (discussed in prior post) to make audio files available through PACER. The order makes clear that the recording is not the official record, preserving the role of court reporters. The use of the technology is left to the discretion of the presiding judge. The court's website indicates this order remains in effect.

Ideally recordings of the Puerto Rico hearings would be released for free on the court's website. But even if posted only on PACER for a flat fee, opting into this practice would increase accessibility. 

Puerto Rico Bankruptcy: Audio Recordings?

posted by Melissa Jacoby

As noted as an update in the prior post, May 17 is the first hearing in Puerto Rico's PROMESA restructuring cases (which also have new case numbers). However much interest these cases hold for the professional bankruptcy world, they are of critical importance to Puerto Rico residents. The idea of a government unit being bankrupt is frightening, with the anxiety heightened when the extent to which one's elected officials remain in charge is unclear. Sensitive to the number of stakeholders and high public interest, the courthouse has overflow space reserved for the first hearing. But even a capacious courthouse imposes natural limits on the in-person population.

If the court released audio recordings of hearings for free on its website, as happened in the Detroit bankruptcy, that would provide a window into the federal court process that could help build trust and legitimacy. Ordering and using hearing transcripts is critical to many parties and their lawyers, but that process is not a feasible form of education and access for others. In addition to being prohibitively expensive for residents to acquire, especially on an expedited basis, written transcripts provide insufficient contextual cues for those less familiar with federal courts and lawyers.

Releasing digital recordings does not appear to be standard practice in the District of Puerto Rico. Might this be an opportune moment for an experiment, or at least an exception?*

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Puerto Rico Bankruptcy: Week One

posted by Melissa Jacoby

[May 10 update: a hearing has now been scheduled for May 17] 

It is nearing the one-week anniversary of the biggest government bankruptcy in U.S. history: the Commonwealth of Puerto Rico.

  1. The debtor(s) and cases: So far, Puerto Rico's Oversight Board has filed the equivalent of a bankruptcy petition for the Commonwealth (17-1578) and COFINA (17-1599). Bond insurers have filed the equivalent of an adversary proceeding (17-1584). The Oversight Board has retained Prime Clerk, so dockets will be available to those who don't have access to PACER, Bloomberg Law, etc. In Detroit's bankruptcy, digital recordings of nearly all hearings were posted for the public, usually within 24 hours; I hope the same will be true for Puerto Rico, but so far I have not seen an indication either way on the District of Puerto Rico's PROMESA web page.
  2. Presiding judge: PROMESA greatly restricted Chief Justice Roberts' choice of presiding judge by excluding bankruptcy judges. Thus, it is especially a relief that a wonderful district judge with bankruptcy court experience has accepted Chief Justice Roberts' request to preside. Judge Swain will sit by designation in the District of Puerto Rico
  3. Venue: The Oversight Board filed in the District of Puerto Rico, rather than New York, which was also a venue option. Filing in San Juan makes hearings accessible for more residents (creditors or not) who are deeply affected by the Commonwealth's financial situation. Curiously, a New York Times story attributes to the Oversight Board's outside counsel the proposition that the presiding judge "has the option of holding proceedings" in Manhattan as well as in San Juan. I don't read the Judicial Code and Federal Rules of Bankruptcy Procedure, particularly 5001, to be so flexible (PROMESA makes the Federal Rules of Bankruptcy Procedure applicable to these actions). Absent venue transfer or an emergency, it is reasonable to expect hearings to take place in Puerto Rico.
  4. Eligibility: PROMESA did not adopt the municipal bankruptcy eligibility test wholesale, although it incorporated parts. It sounds like some creditors may challenge eligibility and/or whether the Oversight Board satisfied the restructuring duties set forth in PROMESA. It is hard to imagine these cases getting dismissed on such grounds, but we will get a better sense from the parties' pleadings when and if they are filed.
  5. What else is formally pending: The docket does not yet reflect the magnitude of the case to come. As in municipal bankruptcy, Puerto Rico's filings created no bankruptcy estate and the debtors do not need federal court approval for decisions and expenditures to the same extent as, say, chapter 11 debtors. Thus far, the court docket is populated primarily by requests for notice and pro hac vice admission by lawyers. Also pending is a motion for the appointment of a retiree committee. Retiree committees have been common in municipal bankruptcies, but there remains the question of who will pay the committee's expenses in this case. Another twist is that the motion asks the court to restrict the member appointment discretion of the United States Trustee, requiring that the committee be constituted from a preexisting ad hoc committee. Yet another indication, perhaps, that this case will be a challenge from top to bottom.

Judge Selection in Municipal Bankruptcy and PROMESA

posted by Melissa Jacoby

In light of the timeline on the Puerto Rico debt situation, I have just posted on SSRN a contribution to the ABLJ/ABA symposium last fall. The paper examines PROMESA's judicial selection requirements applicable to a Puerto Rico Title III filing (the equivalent of a bankruptcy), and puts them in the context of municipal bankruptcy history.  This paper can be downloaded here.

Brooklyn Law School Conference on Public Debt

posted by Melissa Jacoby

AboutthesymposiumOn March 1, 2016, Credit Slips commenced a virtual symposium on Puerto Rico's financial crisis. Where do things stand today, a year later? And what governance lessons can be learned from municipal bankruptcy cases like Detroit for the public debt problems of tomorrow? Thanks to a fortuitously timed conference at Brooklyn Law School, a subset of Slipsters will be considering these very questions on Friday March 3, 2017. Check out the agenda and join us in Brooklyn - register here today.

Puerto Rico’s Oversight Panel is Here

posted by Stephen Lubben

Or rather, you can read about it here. Members include Professor David Skeel, whom many Slips readers will be familiar with.

Further Thoughts on Puerto Rico v. Franklin California Tax-Free Trust

posted by Stephen Lubben

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.

The Demise of the Recovery Act

posted by Stephen Lubben

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).

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" »

PROMESA and the Recovery Act

posted by Stephen Lubben

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 ...

PROMESA Observations

posted by Stephen Lubben

After taking a look at titles III and VI of the new draft, some quick observations:

  • After some waffling between drafts, it is now clear that title III cases will be heard by district court judges. The judge for a case involving a territory (as opposed to a sub-entity) will be chosen by the Chief Justice. Venue will either be in the territory, or in another place where the oversight board has an office. As I've previously noted, that clearly opens up the possibility of New York.
  • One draft of the bill had incorporated sections 327 et al. regarding professional retention and compensation. I noted that was inconsistent with chapter 9, and incorporation of those sections disappeared in the next draft. Now the new draft has its own professional compensation provision in proposed section 316 (see also section 317).
  • Title VI continues to be a provision that is rather obviously stapled onto the larger bill:  see, for example, section 601, which redefines "Oversight Board" as "Administrative Supervisor" for purposes of Title VI alone.  I have a suggestion:  there is a "find and replace" function in Word ...
  • I continue to worry that title VI's process for splitting bondholders up into various "pools" is a morass waiting to happen, especially given the possibility of competing workout proposals under title VI.
  • That said, much of the "gating" features of the previous versions of title VI are now gone (i.e., it seems it would now be possible to go directly to title III, subject to the oversight board's 5 out of 7 vote).
  • The composition of the oversight board gets more convoluted with each iteration of the bill.

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.

PROMESA Amusement

posted by Stephen Lubben

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?

Puerto Rico: Legislative Update

posted by Stephen Lubben

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.

 

Puerto Rico Restructuring Options That Don't Rely on Congress

posted by Mark Weidemaier

The revised draft PROMESA bill (available here) is now under debate in Congress. The bill appears to respond to some early criticisms, although its length and complexity obscures answers to some important questions. Under the circumstances, it seems sensible for the Commonwealth to consider all of its options, including those that do not require Congressional action. These include, as Mitu Gulati and I write in the Financial Times (here, subscription required), changing Puerto Rico's own law in ways that might facilitate a restructuring. 

We asked law students in a class we taught jointly at the University of North Carolina and Duke to consider ways the Commonwealth could restructure without Congressional authorization. Working in groups, they came up with some answers that are both creative and plausible. That doesn't necessarily mean easy or agreeable from the perspective of Commonwealth politicians. Some proposals envision amending Puerto Rico's constitution, while others rely on provisions of Puerto Rico law that authorize collectively binding debt modifications but that haven't been previously applied in this context. The important point, however, is that Puerto Rico may have a wider range of options than many think. The attractiveness of these options is relative. If Congress cannot provide an effective restructuring mechanism that respects the Commonwealth's right to democratic governance, other lawful options will begin to seem more attractive. Two of the student groups have made their work available on-line; their short papers can be found at the links above.

Puerto Rico: PROMESA draft bill, title III revised

posted by Stephen Lubben

I again offer some initial thoughts on the revised draft bill, now subject to much debate in Congress:

  • The bill now clearly provides for reference of cases from the district court to the bankruptcy court
  • There is no longer a requirement that the oversight board have an office in D.C. But the board can have offices outside of the territory it is overseeing. As Jacoby has previously noted, this opens up the possibility that cases could be filed outside of the territory, which for present purposes of course means Puerto Rico. The most obvious locale would be New York, where an board office might make sense for negotiations with bondholders.
  • I don't see a provision comparable to §921(b), which would allow for the selection of a specific judge to preside over the case.
  • The provisions regarding professional compensation and retention are no longer incorporated into title III, so title III becomes more like chapter 9 in this respect.
  • Those parts of chapter 9 that are not incorporated into title III are largely set forth within title III itself – e.g., §§929, 941, 943. Title III is chapter 9+ in all but name. The bill expressly provides that it will not be codified in title 11, however.
  • I wonder if all the implications of the definition of "trustee" in title III to mean "the board" have been thought through. For example, do they intend this to apply with regard to section 926, which is incorporated into title III?
  • The relationship between the board and the debtor during the case generally seems like it will be quite confusing. Under proposed section 315, the board will act on behalf of the debtor throughout the case, but in other instances the bill speaks as though the debtor itself will be taking action in the case.

Puerto Rico: The Commonwealth Plays Hardball

posted by Stephen Lubben

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.

Puerto Rico: PROMESA draft bill, title III (initial thoughts)

posted by Stephen Lubben

Some quick thoughts on the "bankruptcy" part of the proposed bill:

  • If we read Ry. Labor Execs.’ Ass’n v. Gibbons, 455 U.S. 457 (1982) carefully, especially its discussion of the Commerce Clause, I'm not sure it really matters that this is proposed under Congress' territories powers, rather than the Bankruptcy Clause.
  • Proposed title III incorporates all of the same provisions that section 901 of the Code incorporates into chapter 9, other than section 301.
  • The proposed title also incorporates section 327 to 331, so apparently the court will have oversight of professionals under the procedure.
  • Speaking of courts, I see no provisions to move cases under title III to the local bankruptcy court. In short, these cases will stay with the district judges. It's unclear which district, as Jacoby notes.
  • Presumably the lack of a reference concept is driven by the same considerations that keeps the district courts involved in the various proposed "chapter 14" procedures for financial institutions. On the other hand, the district judges in almost every district tend to be from public law backgrounds, and largely have no experience with insolvency law.

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.

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: Reading the SCOTUS Tea Leaves

posted by John Pottow

I, too, join the cohort of surprised observers from this week's argument.  For me, the biggest takeaway is not so much that the Justices were engaging in textual sport, it's that they wanted to engage in those gymnastics.  That is, everyone seemed to get how unjustifiable the legal status quo is: it's clear the law is dumb, it's probable that Congress made a mistake, and so the Court had a very roll-up-their-sleeves attitude that struck me as, "What can we do to mitigate matters while being able to sleep at night that we are following an at-least-plausible reading of the text?"  The subtext to that is that they were not searching for the most natural reading of the text but the reading that did the least harm that could fix a problem.  (Surely a different colloquy would have ensued had the Late Justice Scalia been present!)

Note this is not "judicial activism" in my mind, because if it were true activism, they would just make up a doctrinal canon saying they can ignore the text when "manifestly unsound," or maybe open up the absurdity doctrine so wide you could drive a Jones Act tanker through it.  I see this as remarkably pragmatic.  We have to follow the text.  If you can get us a reading that we can live with, we'll do it.  That's why they kept pressing on what is the justification for this law.  Their lack of enthusiasm to any proffered makeweight (treat triple tax-exempt bonds differently from PR vs USVI?!) was telling.  If you're a judge, especially a Justice, I suspect you don't feel bad interpreting a law in a creative way if everyone but the self-serving litigants seems to suggest it's pointless.  In fact, you probably feel good.

All this said, don't get too excited for reversal yet.  The bondholders had some good textual counters in their briefs that didn't make oral argument.  But the irritation of the engaging Justices with the law, coupled with the simmering undercurrent of subjugation inherent in the territory's second-class status, suggests this really could be an interesting opinion.

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 " »

Lessons for Puerto Rico from ... Arkansas?

posted by Jason Kilborn

I did not realize that a US state had defaulted on its bonds, offering a historical comparative example of the difficulties facing Puerto Rico, its creditors, and mostly its citizens if the mess there is not subjected to an orderly, judicially supervised debt cleanup process of some kind. In a new working paper from the Cleveland Fed, O. Emre Ergungor tells the interesting story of the Depression-era default by Arkansas on various road construction bonds and its messy and politically charged path to a workout. A couple of apparent lessons are troubling. First, reaffirming the aphorism that $#!@ rolls downhill, most of the pain was suffered by Arkansas citizens and ordinary creditors, with bondholders pulling every available lever to ensure a soft landing for themselves. Ergungor sums up this lesson nicely: "in the absence of a dedicated judicial process for preserving the governmental functions of a state in debt renegotiations, sovereignty offers meager protections for the interests of the general public." Second, in a prophetic warning about bailouts, Ergungor describes the intervention of the federal Reconstruction Finance Corporation to provide liquidity for a refinancing of the workout bonds years later. As one would expect, a Chicago Tribune article took the feds to task for helping Arkansas in this way, insisting that the RFC chief "ought to be willing to to do as much for Illinois, Indiana, Michigan, Iowa, and all the rest of the states." I know Illinois would surely appreciate some federal support for its current behemoth pension burden. If the Executive intervenes in the Puerto Rico situation today, will we see another Tribune article like the one that criticized selective federal intervention for Arkansas? Does it matter that, technically, it is Puerto Rico's sub-units that are in distress, not the Territory itself? I struggle to understand even what all the issues are in the Puerto Rico debate, but Ergungor's paper helps me to put at least the financial problems in some useful context.

Puerto Rico: Further Supreme Court Thoughts

posted by Stephen Lubben

So Noah Feldman has a column up on Bloomberg that suggests that section 903(1) of the Code should clearly apply to the Commonwealth. It's a sensible argument, if you read that section entirely in isolation and know nothing about the overall structure of the Bankruptcy Code.

And while I say that intending a bit of the obvious snark – what else could be expected, he’s suggesting that my analysis is essentially daft – it is important to remember that the Supreme Court is not made up of bankruptcy experts. Thus, his column provides a fairly clear analysis of how Puerto Rico might still lose, despite the apparent leanings of the Justices in yesterday’s oral argument.

So if there is a non-frivolous argument for preemption of the Recovery Act, why do I think the Court might still overturn the First Circuit? It could happen one of two ways.

Continue reading "Puerto Rico: Further Supreme Court Thoughts" »

Puerto Rico: Supreme Court Argument

posted by Stephen Lubben

The transcript can be found here.  Based on my initial read, it seems like the First Circuit might be reversed, which opens up all the issues Jacoby noted earlier (namely, will the statute pass Contracts Clause review – assuming the Clause even applies to the Commonwealth).

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" »

Lessons on Puerto Rico Bonds from the Financial Crisis

posted by Katie Porter

With a fiasco as big as the financial crisis, one of the only positive outcomes is there are a lot of lessons for the future. As Credit Slips thinks about how the administration might influence the resolution of Puerto Rico's bond problems, I think there are a few points from the financial crisis to consider.

First, and foremost, is the importance of explaining the issue. Particularly in times of crisis, the explanation/education end of things tends to be pushed to the back of policymakers. "Action" is favored over explanation, but ultimately if the public does not understand what is at stake and the administration's goals, the White House and others quickly have to waste time on the defensive or retreat into silence. Neither strategy helps the problem. One need only look at all the calls to audit or disband the Federal Reserve Board in the wake of the crisis actions around Bear Stearns to see the long-term problems that come from policy without a good public relations campaign. If you need another example, read this great and short piece by William Sage, called Brand New Law! The Need to Market Health Care Reform.

Second, lawyers are fairly lousy at administration. They negotiate hard but the practicability of getting relief is not their strength. We can take a lot of blame for this as law school professors, in that we should teach skills in organizational behavior, project management, etc, especially for those interested in policy. With the financial crisis, the problem was not that the HAMP loan modification term was too stingy or bad on its substance. The problem was severe delays and tangles in rolling out the relief. Jean Braucher has an excellent piece--the title, Humpty Dumpty and the Foreclosure Crisis, gives away the punchline. Whatever is done with respect to Puerto Rico needs to be efficiently administered. In this regard, I think the involvement of seasoned chapter 11 bankruptcy lawyers is a great development. These lawyers are used to being keenly focused on administrative costs in an insolvency situation, and provide a much needed counter-perspective to traditional Washington policymakers. I think if more consumer bankruptcy lawyers had been consulted during the design of HAMP and similar Making Homes Affordable programs, those programs could have been more consumer-friendly, using where people stumble in bankruptcy to identify likely obstacles in obtaining a loan modification (such as submitting paperwork and describing one's own financial situation accurately).

Third, and finally I think the financial crisis reminds us not to get lost in the billions of dollars at stake and the high finance concepts. Behind every bond, there are real people--investors, Puerto Rican residents, taxpayers, and others. The quality of a solution to Puerto Rico's financial problems is not a Wall Street issue; it is a Main Street issue.

And Now for Something Nutty on Puerto Rico

posted by John Pottow

I know nothing about the statutes delegating "home rule" authority to the Commonwealth, but do they have any reversionary clauses?  For example, if there's crisis, war, etc., can the federal government revest in any power?  Leaving aside the political unpalatability, wouldn't that leave the executive branch with a freer hand?  Building, can the President (temporarily) draft the island's residents, then issue an order taking (for fair/discounted value) any debts related to providing services for this vital military installation?  Or how about declaring it a giant national monument?  OK, feel free to go back to common sense if you want now.  (Hey, we were supposed to think creatively...)

Puerto Rico Bondholders: Fact and Fantasy

posted by Katie Porter

When I think about "bondholders," I tend to think about their lawyers. (That probably says a lot about the crowds that I run in). In the case of Puerto Rico, we've seen affable, whip smart, expensively dressed New York lawyers make cogent arguments against many of the bond restructuring proposals. But these lawyers are not the bondholders themselves, who are a much more diverse lot. While the hedge funds may be voicing many of the arguments via their fancy attorneys, there is a large, and and largely silent, bondholder community of Puerto Rican residents. The number that I've seen for the share of bond debt held by residents is 40%, although it is difficult to validate this, and it almost surely varies depending on the bond issuer, bond vintage, and other factors. Thomas Mayer estimated to Congress that $15 billion in PR bonds are held by Puerto Ricans (this works out to a lower figure than the 40% share it's still hefty).

In the public debate about Puerto Rico's fiscal crisis, people have noted that the debt is widely held across the country--that this is not "just" a Puerto Rico issue. PR bonds were given tax-advantaged status, regardless of the bondholder's place of residence. But that  does not mean that residents of Puerto Rico themselves--for either fiscal or civic reasons--are not an important group of bondholders. Their concerns about a bond default and willingness to restructure may be quite different than hedge funds or institutional investors. Why? And how might this affect the Administration's interest--or taxpayers' interest generally--in a workout for bondholders?

Continue reading "Puerto Rico Bondholders: Fact and Fantasy" »

Puerto Rico: Colonial Chickens, Structural Priority, and Contingent Debt

posted by Anna Gelpern

It has been a humbling torrent of creativity, and I am honored to chip in a tuppence at the eleventh hour. After an existential preface, I consider how one might use (or resist using) federal credit enhancement in the inevitable debt exchange.

Continue reading "Puerto Rico: Colonial Chickens, Structural Priority, and Contingent Debt" »

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: The Multiple Issuer Problem

posted by Adam Levitin

One problem complicating any resolution of Puerto Rico's financial distress is that there are a multiplicity of issuers. There are separate claims on separate issuers, and it won't work to resolve just some of them, as they are all ultimately drawing on the same set of economic resources.  While there are claims on different assets, they value of those assets derive from Puerto Rico's overall economic production.  This multiple debtor problem makes Puerto Rico materially different from, say Detroit, where there was one primary debtor (the City of Detroit). (I don't know the legal status of Detroit Public Schools--is it separate from the City, the way the Chicago Public Schools are?) As far as I'm aware, Chapter 9 filings have almost always been single entity filings, rather than filings of multiple associated cases, as occurs with Chapter 11. 

So what can be done to deal with the multiple issuer problem? Even if Puerto Rico were allowed to file for bankruptcy (or its various sub-territorial entities were allowed to file), it doesn't solve the problem. While there can be multiple bankruptcy filings and the different cases can be administratively consolidated, that is a very different thing that actual consolidation of debtors, and the inability to resolve claims on one debtor can hold the other cases hostage.  It doesn't do any good to resolve the general obligation debt if creditors can force the electric utility to raise prices through the roof.  With this sort of multiple entity case, the hostage value held by creditors increases significantly.

Puerto Rico's division of governmental authority into various government units is a form of asset partitioning.  This asset partitioning might have helped Puerto Rico get more credit than it should have on cheaper terms ex ante (for a model, see here), but ex post this sort of asset partitioning can blow up in a debtor's face if there is no way to reconsolidate in order to restructure. (Consider, for example, the value of the LA Dodgers without their stadium and without the parking lots by the stadium.) Partitioning via devolution of authority to multiple local government units and authorities is a more permanently binding form of asset partitioning than corporate subsidiaries or even than some securitization arrangements.

Below I present three ideas for how to resolve the multiple issuer problem: consolidation via exchange offer; consolidation via merger; and consolidation via the creation of a common co-issuer entity that is bankruptcy eligible.  

Continue reading "Puerto Rico: The Multiple Issuer Problem" »

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

Puerto Rico: Facilitate an Exchange Offer, Now

posted by Stephen Lubben

Jacoby asks what can the Executive Branch do to help out Puerto Rico.  The most practical thing it could do, right now, is to facilitate an exchange offer.  Whether the Treasury itself can act as a mediator, or at least facilitate mediation by some outsider, this seems like the quickest way to a real solution to the near-term problems the Commonwealth faces.  Treasury might also act as an overseer of reforms and a (comparatively) neutral voice with regard to Puerto Rico’s financial information.

Yes, it would be great to resolve the Commonwealth’s awkward legal status – and maybe, just maybe the Supreme Court will do that this term.  Or at least start the process.  But long before that can happen, Puerto Rico is facing potential defaults.  Those need to be addressed right now.  If the Executive Branch can facilitate the negotiation of a comprehensive exchange offer, the Commonwealth will gain time to solve those bigger, long term issues.

Puerto Rico: Eminent Domain, Greenbacks, and the Exchange Stabilization Fund--Some Outside-the-Box Musings

posted by Adam Levitin
The Puerto Rico situation feels a little like a McGuyver episode.  How do we get out of a locked room with only a rubber band and a toothpick?  Here are some half-baked thoughts, first on the nature of the problems and then some ideas for solutions.  

Continue reading "Puerto Rico: Eminent Domain, Greenbacks, and the Exchange Stabilization Fund--Some Outside-the-Box Musings" »

Puerto Rico And (Very) Soft Executive Power

posted by Mark Weidemaier

Melissa's post asked what the executive branch could do to facilitate restructuring of Puerto Rico's debt. I'll get to that, but I first want to talk about Puerto Rico itself. At first glance, the Commonwealth seems to be in a uniquely terrible position. It has the disadvantages of a sovereign (e.g., no bankruptcy) but lacks the advantages (e.g., legal and/or practical immunity from legal enforcement). In fact, it lacks only most of the advantages. One advantage of sovereignty it does enjoy--and that many "true" sovereign borrowers are obliged to forego when they borrow--is that much of its debt is governed by its own law. That law can be changed (subject to constraints in the U.S. constitution) or interpreted in ways that give the Commonwealth needed restructuring flexibility. 

Continue reading "Puerto Rico And (Very) Soft Executive Power" »

Puerto Rico: Blame and the Debt of "the Other"

posted by Bob Lawless

Recently, I have been spending a lot of time thinking about the psychology of other people's indebtedness. I see parallels from this work and the way we think about Puerto Rican government debt. This thinking then tends to stand in the way of solutions.

An example is the psychological idea of the fundamental attribution error. This heuristic means we over-attribute other people's behavior to their personality rather than their circumstance. The guy speeding past me on the highway is a jerk instead of late for a meeting. Our neighbor who has filed bankruptcy is irresponsible rather than the victim of a job layoff. It is not that some people aren't jerks or irresponsible. Rather, we over-attribute behavior to personality rather than circumstance. If you don't see my point, there is probably something wrong with you. (Get it?)

Continue reading "Puerto Rico: Blame and the Debt of "the Other"" »

PR: Let's start with financing...

posted by John Pottow

OK, so I start from the premise that holdouts don't want to restructure debt but others do.  Thus, the goal should be incentivize restructuring in a way that beats up on holdouts.  Could the Feds say they'll offer financing (e.g., underwrite new bonds) for people who exchange bonds/debt?

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" »

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