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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.

Comments

A couple of questions. First, if the procedure outlined in PROMESA is Chapter 9 in all but name, then why bother to create a different architecture - why not just write Puerto Rico into Chapter 9 (perhaps this requires more political speculation then you'd care to participate in)?

Secondly, if Puerto Rico were written into Chapter 9, how exactly would it be done? Or in other words, 1) would Puerto Rico, the central state, be able to access Bankruptcy Court, 2) would Puerto Rico be able to authorize its municipalities or instrumentalities like PREPA to access Bankruptcy Court, or 3) would both Puerto Rico and its municipal units be able to access Chapter 9?

I ask in part because of a comment made by Prof. Gelpern: "The government borrowed too much using different agencies, different collateral, different contract and payment routing schemes. There is constitutional priority, statutory priority, contractual and structural priority. That structural variety strikes me as especially problematic because it operates by creating facts on the ground, such as payment streams that require laws and lawsuits to reroute. Similarly, two identical general obligation bonds, both of which have constitutional priority, may not be equal at all if one is governed by the law of Puerto Rico, and another by New York law. In other words, there is priority, and there is facts-on-the-ground priority."

Would Chapter 9 be equipped to unwind all of this under either of the three propositions stated above?

Maybe the expanded definition of affiliate: section 301(c) makes the central government and all the instrumentalities affiliates of each other, and section 305(f) authorizes the Board to file petitions, submit, modify plans of adjustments jointly if the debtors are affiliates.

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