Puerto Rico Symposium: Of Wills and Ways

Debt 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

Comments

[John E. Mudd]

Question is, what happens to debt payment during the mediation? If there is a stay, this could be considered a taking without just compensation under the 5th Amendment. If there is no stay, creditors could argue for ever. Also, it is kind of late for mediation when PR only met with creditors for the first time on January 29, 2016 as admitted by Melba Acosta during the Wal-Mart trial (I attended). Finally, is this a good precedent to be later invoked by Chicago or Illinois or Kentucky?

[MBJ]

To John - Not endorsing idea & there are certainly costs - just suggesting that, as a practical matter, Congress isn't the only road as a practical matter even if it would be the most appropriate road. Also, consider "mediation" in quotes; the term gets used for a wide range of settlement talks, including those forced by a govt actor. Those in latter category may be more likely to lead to a deal for reasons beyond ADR theory.

[T&L]

From a 30,000 foot view, creditors would likely show up to the mediation if for no other reason than to see if they could benefit from it. Zooming in more closely, however, the lack of legal authority for a good faith requirement could be problematic. After all, creditors have very few (often no) obligations to a debtor and a court may be reluctant to set precedent (especially in a federal court) that says differently. Of course, in ilght of Judge Griesa's various decisions in the Argetina case, one cannot say that it is impossible that a judge will take the 'no-one-believed-this-could-happen-route.'

But, even so there is a second problem: if one imposes a good faith requirement on creditors in the context of an exchange offer, it is likely to create a conflict for the trustees of the public bonds, as such trustees have a duty toward the bondholders under the Trust Indenture Act (and bondholders' interests are likely very far away from the debtor's). Perhaps this latter problem could be worked around by imposing the good faith requirement vis-a-vis other creditors instead? That could potentially bring creditors to the table while creating a defense against possible holdouts. Of course, I might be over-stating the conflicts and/or the Trust Indenture Act's applicability - any thoughts on the matter out there?