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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


I listened to the podcast and read Professor Tabb’s note on Bankruptcy and the Takings Clause.

Thanks for both.

I would like to rank some axioms I believe to be true.

1. Bankruptcy powers are broad but not unlimited.
2. Elected officials are more reluctant to take property without just compensation than the unelected courts.
3. The right to enforce a contract is a constitutionally protected “species of property” which may not be enjoined without just compensation, although the value of a claim for the breach of an executory contract is unsecured and might be meager.

Applying these axioms establishes -

A. The Bankruptcy Power to impair contracts is not synonymous with a power to extinguish contracts.
B. It is “just” (equitable) to allow rejection of executory contracts because both parties are relieved of duties while both parties forego benefits. That is why and how rejection passes 5th Amendment scrutiny.
C. Non-executory contracts which are fully performed by the non-debtor party can not be enjoined (discharged) without adequate protection.
D. It is only a confirmed plan that forgives all constitutional infirmities by waiver and consent.

Reasonable minds may differ.

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