Unjust Debts on the Road

First, thanks to Bob Lawless for his post about my new book. It has been great to engage with people about Unjust Debts so far, and especially appreciated the book making a new Financial Times best books list (links to that and other coverage here). Wanted to note a few upcoming book events for Credit Slips readers:

• June 27 (TONIGHT): Greenlight Bookstore, Brooklyn NY, in conversation with Zephyr Teachout. Information and RSVP here. 
• July 1 (VIRTUAL): Commonwealth Club World Affairs, in conversation with Senator Elizabeth Warren. Information and registration here. 
• July 8: Politics & Prose, Washington DC, in conversation with Vicki Shabo. Information here. 

Just posted: Other Judges' Cases

This article has been in the works a long time. During the Detroit bankruptcy, I wrestled with some of its topics on Credit Slips.  

The case studies involve bankruptcy. The mediators in those cases are life-tenured judges.

The footnotes make it long; the text is short.  

Other Judges' Cases remains in the edits stage and is scheduled to be published later this year.  

Please read it. Thank you!

Puerto Rico and the Oversight Board

The Supreme Court's opinion is out today, and the short answer is that the Board's appointment did not violate the Appointments Clause of the Constitution (Article II, Section 2, Clause 2), and thus the First Circuit is reversed.

But take a look at Justice Sotomayor's concurrence. She is all but inviting the Commonwealth to argue that Congress had no power to enact PROMESA in the first instance, given that it had arguably given up much of its power over Puerto Rico back in the 1950s. It is an argument I had hoped the Court would take up in connection with the Recovery Act.

In short, more interesting legal questions to come (maybe).

State Bankruptcy

So Senate Majority Leader Mitch McConnell says States should be able to file for bankruptcy, to get out of their pension obligations. He'd rather that than give them a federal bailout, given current conditions.

I have long argued that States don't need bankruptcy, because they have stronger sovereign immunity (under the Eleventh Amendment) than most actual sovereigns. But put that to one side.

Why does McConnell think that such a bankruptcy will be limited to single class of creditors? Indeed, I doubt such a bankruptcy system would be consistent with the Bankruptcy Clause.

And quite frankly, I suspect bondholders understand this (even if anti-union activists don't). That is why you never see the municipal bond managers advocating for "State bankruptcy." The bankruptcy of any of the 50 states would look more like Puerto Rico's, where haircuts to bondholders are most definitely on the table. The only question is "how much?"

Biden's Involvement in the Detroit Bankruptcy?

In the Democratic Primary debate last night, former Vice-President Joe Biden claimed to have been deeply involved in the Detroit bankruptcy: 

Q (Tapper): What do you say to progressives who worry that your proposals are not ambitious enough to energize the progressive wing of your party, which you will need to beat Donald Trump?

A (Biden): ... Number three, number three, I also was asked, as the mayor of Detroit can tell you, by the president of the United States to help Detroit get out of bankruptcy and get back on its feet. I spent better part of two years out here working to make sure that it did exactly that.

What on earth is Joe Biden talking about? I followed the Detroit bankruptcy case fairly closely and never once heard of any involvement from Biden. A google search for "Biden Detroit bankruptcy" shows an involvement consisting of all of one lunch with the Mayor of Detroit.  Maybe Biden was deeply involved behind the scenes, but I doubt it, as the federal government simply didn’t do anything to help out Detroit. Perhaps he was referring to the GM/Chrysler bankruptcies? If so, there was important federal involvement as a lender, but Joe Biden was not an important player in those cases either as far as I know.

If others know more, it would be interesting to hear, but as far as I can tell, Biden is claiming credit for things that he had no involvement in.  

PROMESA heads to the U.S. Supreme Court?

In February 2019, the United States Court of Appeals for First Circuit held that the selection process of the Oversight Board in PROMESA, the rather bipartisan Puerto Rico debt restructuring law (and more), is unconstitutional. The reason: its members were not selected with advice and consent of the Senate, in violation of the Appointments Clause. In other words, it held that the Appointments Clause applies even when Congress created the positions through plenary power over territories, and that Oversight Board members constitute "Officers of the United States." The First Circuit also used the de facto officer doctrine to avoid a complete do-over; it did not dismiss the Title III petition of Puerto Rico (parallel to the filing of a bankruptcy petition), it did not invalidate the already-taken acts of the Board, and the Board could continue to act, at least until the court's stay runs out (originally 90 days, then extended to July 15). 

Given that last remedial twist, even the prevailing parties found reasons to dislike the First Circuit's ruling. Like the Jevic case, the PROMESA dispute invites unlikely bedfellows. Joining Aurelius Capital Management in challenging the First Circuit's ruling on the remedy is the labor union UTIER. They likely have little in common other than wanting a new Oversight Board, or, even better, no Oversight Board. A full bouquet of certiorari petitions followed, including one by the United States/Solicitor General predicting dire consequences if the Appointment Clause ruling stands. On June 20, 2019, the Supreme Court consolidated and granted certiorari on the various petitions. Argument is to take place in October.

Puerto Rico, the Board, and the Appointments Clause

As many will have seen in the press, the First Circuit has said that PROMESA's Oversight Board was appointed in violation of the Appointments Clause. In short, while PROMESA allowed President Obama to appoint members of the Board without Senate confirmation, the Court says such confirmation was required.

The Board has decided to appeal to the Supreme Court, and the First Circuit's decision is on hold for 90 days. But what happens in 90 days?

In short, chaos. The title III "bankruptcy" cases for Puerto Rico and its affiliates are all run by the Board. Without the Board, the cases would seem to grind to a halt. If they remain that way for an extended period of time – and who really thinks this Congress and this President are going to get their act together in 90 days? – the District Court may have little choice but to dismiss the cases.

The appeal was brought by old-friend Aurelius. They presumably assume that they will get better treatment outside of title III.

But is that right? Maybe Congress will decide to enact a streamlined insolvency process for Puerto Rico, one that "cuts to the chase." After all, even the current President (hardly a friend to the Commonwealth) once suggested it might be necessary to simply cancel Puerto Rico's debt. 

Congress has a lot of power under the Bankruptcy Clause – and perhaps even more under the Territories Clause. Be careful what you wish for, and all that.

The Commonwealth and the GOs, part 2

In my last post, I noted that the joint committee-Board objection to the 2012 and 2014 Puerto Rico GOs was at least plausible, and thus is likely headed for more extensive litigation. As Mark and Mitu have also noted, it also matters a good deal that the objectors also have arguments for why the claim on the bonds is not replaced by a similar claim for unjust enrichment or the like (although we might wonder if such a claim would enjoy the special constitutional priority the GOs do, if we think that priority really matters in a sovereign/muni bankruptcy process).

This past weekend, the FT's John Dizard quoted a hedge fund type as saying that the objectors' argument about the Building Authority's leases (see my prior post) was "nonsense." Not a lot of deep analysis there, but it does confirm there is a fight ahead. And we can assume that the Commonwealth's words will be used against it – after all, at the time of issuance, Puerto Rico and its agents undoubtedly said lots about how assuredly valid these bonds were.

The obvious conclusion is that the objectors have made this move as an opening shot in a broader play to negotiate a haircut with the GOs. After all, they look like they are almost done dealing with the COFINA debt, the other big chunk outstanding.

Sure. But what I find really interesting is the more subtle point that with this move, the objectors have also opened up some space between the GOs as a class. That is, presumably the non-challenged GOs will not have to take as severe of a haircut if $6 billion has already been knocked off the GO total. If I'm a holder of 2011 GOs (which I'm not, btw), I might then start to think that I don't really mind if the objectors win. And thus intra-GO warfare might break out.

Some asset managers are also going to face challenges if they have 2011 GOs in one fund, and 2014 GOs in another. And then there is Assured Guaranty Municipal Corp., which insured both the 2011 and 2012 (but not the 2014) ... 

The Commonwealth and the GOs, part 1

While there has been some press coverage of the recent attempts to annul some $6 billion of Puerto Rican general obligation bonds – essentially all such debt issued starting in 2012 onward – the move has not received much deep coverage. Yesterday I took some time to read the claims objection filed in the Commonwealth's article III case, and in this post I'm going to consider the arguments against the bonds' validity. In a further post, I will consider what is going on here from a strategic perspective.

The objection was jointly filed by the creditors' committee and the Financial Oversight and Management Board for Puerto Rico, but the Board only joined in one of the two main arguments that are put forth. (There is a third argument in the objection – about OID and unmatured interest under section 502 fo the Code – that I'm not going to talk about because its rather pedestrian by comparison).

In sum, the committee argues that GO bonds issued in 2012 and 2014 violated two provisions of Puerto Rico's constitution, and thus the bonds should be deemed void. The Board joins in the objection with regard to the first constitutional provision, but not the second. If successful, this objection would eliminate $6 billion of the $13 billion in GO bonds currently outstanding.

More details after the break.

File This Under Calling BS on Bankruptcy Fearmongering

As anyone familiar with bankruptcy would have predicted, the dire predictions of disaster for municipalities seeking bankruptcy protection have proven to be ... let's just say exaggerated. Bloomberg is out with a notable story this morning on Jefferson County's healthy return to the bond market, carrying an investment-grade rating of AA-  within five years of emerging from municipal bankruptcy. This squares with similar accounts of consumers rehabilitating their credit within two to four years of a chapter 7 liquidation-and-discharge (see, for example, here and here). Let's all file this in our "lying liars and their bankruptcy impact lies" file and be prepared to continue to counter this, among the many, many other, bankruptcy scare myths to be debunked.

Junk Cities: Insolvency Crises in Overlapping Municipalities

I have a new paper out on municipal insolvency. It's called "Junk Cities:  Resolving Insolvency Crises in Overlapping Municipalities," 107 Cal. L. Rev (forthcoming 2019).  The paper is co-authored with Aurelia Chaudhury and David Schleicher. The launching point for the paper is the observation that there are frequently overlapping local government jurisdictions--cities, counties, school districts, water districts, park districts, hospital districts, sewer and sanitary districts, forest preserves, etc. These overlapping jurisdictions share a common revenue source--the same set of taxpayers. This means that they have correlated exposure to economic downturns or population declines. It also means that they face a common pool problem in terms of revenue generation, and they frequently lack coordination mechanisms whether formal or informal (such as political "machines").

The correlated economic exposure plus the common pool problem for revenues increases the likelihood of simultaneous financial crises for these overlapping jurisdictions. Chapter 9 bankruptcy, unfortunately lacks the tools to deal with the inter-governmental coordination problem. The techniques used for handling multi-entity debtors in Chapter 11--joint administration, deemed consolidation for voting and distribution purposes, and (in the extreme) full substantive consolidation do not work for municipalities that lack common corporate control and have much clearer separation of assets and liabilities.  Chapter 9 does not currently have the capacity for considering a shared revenue source that is not an asset per se.  Our paper identifies the nature of the overlapping municipal financial crisis problem, discusses why Chapter 9 is inadequate, and proposes a number of solutions ranging from incremental doctrinal improvements in Chapter 9 to the adoption of a "Big MAC Combo" (or perhaps a "supersize Big MAC") mechanism for coordinating the finances of overlapping municipalities. The abstract is below the break. 

Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation

The lives of Puerto Rico residents remain profoundly disrupted by the aftermath of Hurricane Maria measured by metrics such as electricity, clean water, and health care access, with death tolls mounting. This week, though, in a federal court hearing on January 10, 2018, Puerto Rico has the extra burden of confronting Hurricane Aurelius.

Tax "Reform"

Key takeaways for Slips readers from a Moody's report, dated today:

The legislation is credit negative to the US sovereign, owing to the reality that the cuts do not pay for themselves, and Moody's estimates the cuts will add $1.5 trillion to the national deficit over ten years. Higher deficits will put further pressure on the federal government's finances, which are already facing prospects of increased costs of entitlements. Unless fiscal policy reverses course, Moody's estimates that the federal government's debt-to-GDP ratio will rise by over 25 percentage points over the next decade, to above 100%. Combined with rising interest rates, debt affordability for the US will weaken significantly.

The net impact to state and local governments is negative. While the new $10,000 limit on state and local tax (SALT) deductions does not directly impact state or local tax receipts, it will blunt the effect of lower federal rates for many taxpayers. Because the state and local provisions raise the effective tax cost for many taxpayers, public resistance to tax increases will likely rise, and that in turn will constrain local governments' future revenue flexibility. In addition, if larger federal deficits caused by the tax cuts result in attempts to cut entitlement spending, states will be pressured to backfill cuts to federal funds from their own budgets.

The SALT change, combined with the higher standard deduction and tighter limit on the mortgage interest deduction, also reduces the tax incentive for home ownership, which is likely to slow home construction and sales, and moderately suppress home values and property tax growth in higher-price markets.

 

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

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.

Puerto Rico Bankruptcy: More on Audio

As 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?

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?*

Puerto Rico Bankruptcy: Week One

[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

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

On 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.

Chapter 9's Cabinet of Constitutional Curiosities: Ongoing Constitutional Violations

Just a handful of modern big-city bankruptcies have revealed foundational questions about chapter 9's fit within federal courts and constitutional jurisprudence. Given that chapter 9 no longer is simply an adjustment of bond debt, bankrupt cities restructure a wide range of claims in their plans, including those arising from long-lingering disputes; to this point, a Ninth Circuit panel just heard oral argument on a dispute from Stockton's exercise of its eminent domain power twelve years before Stockton filed its chapter 9 petition, only to put the case on hold pending rehearing en banc of a chapter 11 equitable mootness dispute. But my commentary today focuses on the impact of events and decisions during a bankruptcy case. If cases no longer must be prepackaged, a city's decisionmakers have a longer period of automatic stay protection during which to act in ways that might generate controversy, causes of action, or both.

Recall, for example, Detroit's headline-making residential water shutoff policies and practices. The bankruptcy court used informal control to coax the city into increasing protections for low-income residents. In response to an adversary proceeding requesting more formal intervention, the bankruptcy court held it did not have the power to enter an order enjoining the policy or directing changes. But Judge Rhodes' analysis included a significant caveat: in a follow-up written ruling, Judge Rhodes held that section 904 of the Bankruptcy Code does not shield a municipal debtor from injunctions of ongoing constitutional violations:

The Court concludes that § 904 does not protect the City from the bankruptcy court's jurisdiction over the plaintiffs' constitutional claims because the City does not have the "governmental power" to violate the due process and equal protection mandates of the Constitution [citations omitted]. The City must comply with those constitutional mandates [citation omitted]. Accordingly, the Court concludes that those claims, unlike the plaintiffs' other claims, do survive the City's § 904 challenge.

Lyda v. City of Detroit, 2014 WL 6474081 at *5 (Bankr. E.D. Mich., Nov. 19, 2014). That holding did not get the Lyda plaintiffs far because, according to the court, the allegations failed to state a constitutional claim on which relief could be granted. The adversary proceeding was dismissed. Judge Rhodes' decision rightly signaled, though, that a municipal bankruptcy petition is not a license to engage in constitutional violations without consequence. The district court had affirmed the ruling. Lyda v. City of Detroit, 2015 WL 5461463 (E.D. Mich. Sept. 16, 2015).

Last week, the Sixth Circuit reversed the portion of the bankruptcy court's decision on the relationship between section 904 and alleged ongoing constitutional harms. The reversal did not change the outcome for the parties, but generates a troubling question: can municipal bankruptcy allow a city to continue to violate constitutional rights with no redress? Surely the answer must be "no"?

Police Misconduct in Bankrupt Cities: Ninth Circuit Update

"But Chapter 9 has awakened, and we do not presume further disputes over its interpretive and practical complexities will remain long at rest."

So says a panel of the U.S. Court of Appeals for the Ninth Circuit in Deocampo v. Potts (14-16192), filed since the last Credit Slips posting about civil rights debts in municipal bankruptcy. My working paper is newly revised to discuss the Ninth Circuit's ruling. Just a few points here.

The Ninth Circuit reached the right result in holding that the Vallejo bankruptcy did not relieve the police officer defendants of their individual liability for 1983 violations (excessive force). The court also held that Vallejo's state law obligation to indemnify the police officer defendants was not discharged by the city's bankruptcy, arising as it did after the city received its discharge.

Another element of the opinion should alarm civil rights advocates, however. For example, although it does not decide the issue, the panel suggests a surprising (especially for the Ninth Circuit) level of openness to explicit non-debtor releases of police officers in municipal bankruptcy restructuring plans. Surely everyone involved with the pending San Bernardino case is paying close attention.

Police Misconduct in Bankrupt Cities

Bankruptcy filings by major cities have reinvigorated attention to municipal bankruptcy. As chapter 9 and its application have become more like chapter 11, a wide range of creditors are being swept into the process. As written before, city cases now have classes of general unsecured creditors. Those classes also have been including plaintiffs in civil rights lawsuits alleging unconstitutional police conduct. The proposed payouts vary.  San Bernardino's bankruptcy plan, which seeks to release the liability of non-debtor officers as well as the debtor, has been proposing a 1% payout. The confirmation hearing is currently set for October 2016.  Some cities with systemic police practice problems - Ferguson, Chicago - also are known to have pervasive financial difficulties. I am not suggesting or predicting they will end up in bankruptcy, but it is another reminder that civil rights advocates need to be up to speed on the impact of chapter 9, if only to be able to bargain in its shadow as other types of creditors do.

I have just posted a paper on this topic (revised and updated from a version posted earlier this summer). It walks through the issues and gives three brief case studies. Feedback from the Credit Slips readership would be very welcome, and/but please also pass along the link to civil rights lawyers who do § 1983 litigation. Here is the brief abstract:

When a financially distressed city files for bankruptcy, recovery for civil rights violations is at risk. This article examines the impact of bankruptcy on civil rights claims, with an emphasis on allegations of police misconduct resulting in lawsuits under 42 U.S.C. § 1983. We walk through how a bankruptcy filing affects civil rights plaintiffs, starting with the immediate injunction against litigation and debt collection activity, and ending with the legal release of debt and a restructuring plan. Using primary source materials, we offer three brief case studies: Detroit, Vallejo, and San Bernardino. We conclude with suggestions on where to go from here in research and advocacy.

PROMESA and the Recovery Act

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

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

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

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

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

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

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)

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

Per 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

The 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. 

Puerto Rico: The Recovery Act's Potential Second Wind

 

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.

Lessons for Puerto Rico from ... Arkansas?

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

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.

Puerto Rico: Supreme Court Argument

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

For 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. 

Lessons on Puerto Rico Bonds from the Financial Crisis

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.

Puerto Rico Bondholders: Fact and Fantasy

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?

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

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.

Puerto Rico: LoPucki's Virtual Bankruptcy Proposal

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:  

 

 

 

 

 

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

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 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

Puerto Rico: Facilitate an Exchange Offer, Now

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

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.  

Puerto Rico And (Very) Soft Executive Power

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. 

Credit Slips Presents: A Virtual Symposium on Puerto Rico

Puerto 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.

Chicago Public Schools Bankruptcy?

The local press has been abuzz the last two days with talk of Illinois Republicans' plans to take over Chicago Public Schools (CPS) and allow/force it to file for municipal bankruptcy. I immediately wondered whether this was just political rhetoric, part of Governor Rauner's quite clear plan to undermine public union power, especially in the school system, or if bankruptcy was the right tool for what ails CPS. As my image here suggests, it seems to me ... not so much; that is, CPS isn't quite "bankrupt" in the sense that Chapter 9 might help.  Not yet, and maybe not ever.

Puerto Rico's Recovery Act to be Considered by Supremes

In a somewhat surprising move, the Supreme Court has granted cert. to consider if Puerto Rico's Recovery Act is preempted by section 903 of the Code. I have previously argued it is not, but the First Circuit disagreed. We will now see who wins.

What? (Puerto Rico Edition)

So former Senator Judd Gregg has an op-ed in The Hill opposing the administration's plan for a territorial version of chapter 9. In the piece, he tells us "[a]ny bankruptcy bill for Puerto Rico would punish retirees whose pension funds invested in these bonds because they were tax-free."

Tax free retirement funds investing in tax free bonds?  Now we are just making stuff up.