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!
President Biden has just signed the "Puerto Rico Recovery Accuracy in Disclosures Act of 2021’’ or ‘‘PRRADA’," which requires professionals to make chapter 11-style disclosures when they file fee applications in the PROMESA title III cases. Failure to comply not only can result in loss of fees in the Puerto Rico cases, but such failure to disclosure must also be disclosed in other chapter 11 cases going forward. Presumably the prior failure to comply with statutory disclosure requirements should factor into the decision to authorize retention in chapter 11.
It is Congress week on Slips. On Thursday I will be testifying in front of the Senate Committee on Energy and Natural Resources in support of S. 375, Puerto Rico Recovery Accuracy in Disclosures Act of 2021 or PRRADA. The bill, which has already passed the House, would supplement PROMESA's existing requirements that professionals file fee applications with various disclosure requirements that are familiar from chapter 11. My written testimony is here.
The President today announced he was appointing the following people to the PROMESA oversight board. It is not immediately clear which slots these people are filling (that is, who nominated these people). There are three open (presidential) slots at present, but one of the people below is already on the board:
The House of Representatives has just voted to make the District of Columbia a state. Obviously the Senate half of the process might have to wait until next year, at least.
What about Puerto Rico? Obviously there is the question of whether the people of the Commonwealth want statehood. But if at least a majority do want statehood, it would seem to make sense address the issue at the same time that DC goes up.
And of course, given that this is Credit Slips, we might also wonder what would happen to PROMESA, if statehood were to happen. Do we wait until the process is over, or end it "now," leaving the creditors to negotiate with a debtor that now has the benefit of the Eleventh Amendment? Interesting things to mull over, but potentially at issue as soon as early next year.
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).
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?"
Among other things, the Coronavirus and the near global shutdown, has gotten contracting parties scrambling to read their force majeure clauses. But what about if the parties in question didn’t explicitly contract for an “act of god” clause that covered unexpected pandemics? The question, as we’ve discussed on this blog before, would become one of whether such a clause was implicit in the contract (here). That, in turn, will in part be a function of the contract’s governing law (here). Puerto Rico, already mired in a debt crisis, is going to need even more relief now. Question is: Does the fact that its debt contracts are almost all governed by local Puerto Rican civil law embed a source of temporary relief for it?
My casual impression is that the leading common law jurisdictions for contract law, such as New York and England, would be reluctant to find an implied force majeure term in contracts among sophisticated parties. By contrast, civil law jurisdictions such as France, the Netherlands and Spain, sometimes have such a clause baked into the civil law and also appear more willing to find such a provision implicit (for discussions of the common law v. civil law approaches, see these memos from White & Case and Cleary Gottlieb memos, here and here).
Particularly intriguing in the context of a sovereign or quasi sovereign debt, is the possibility that an implication of the civil law jurisdiction in question having force majeure as part of the civil code means that the relevant government can, through legislation, make it clear that a particular event (Coronavirus) satisfies the conditions for force majeure (here). China has apparently done just that, even issuing force majeure certificates in some cases (here and here).
A reason I’ve been thinking about implied force majeure clauses is that my seminar with Guy Charles has been discussing Puerto Rico’s debt crisis. (Two of our recent guests to the seminar were David Skeel and Sam Erman, both of whom had fascinating papers on the topic of Puerto Rico). Puerto Rico is, unlike most of the US, a civil law jurisdiction. Better still, almost all of its debt is under local Puerto Rican law (now, in the case of anything redone under PROMESA, with an overlay of that federal law).
One has to concede up front that the Puerto Rican debt crisis is not the product of some exogenous event such as a hurricane or the coronavirus. But surely everyone would agree that the virus has the potential to push Puerto Rico (back) over the financial brink, just as its seems to be getting back its sea legs (see here). And, so the question is, does Puerto Rico, as part of the implicit terms of any debt contract made locally, have the right to temporary relief from having to perform as a result of the enormous economic slowdown that the virus is already causing. I haven’t been able to track down anything specific in the Puerto Rican civil code, but the Puerto Rican code has its origins in the Spanish civil code. And the Spanish code has force majeure baked in (for discussions, see here and here).
Hmmm . . . Some years ago, a wonderful group of students did find some promising avenues for Puerto Rican debt relief buried deep in its civil code (here).
*Note (in response to the first few email comments - that I'm most grateful for): The question of what precise law the new agreements are governed by is thorny. Best I can tell, it seems to be PROMESA and, to the extent not inconsistent with PROMESA, Puerto Rican law. But what in the world does that mean with respect to what we care about: force majeure for pandemics such as coronavirus? I don't think there is any federal contract law on that matter; and, if so, that strikes me as pointing to Puerto Rican local law, which in turn might point us to the Spanish civil code. But maybe there is an argument there about how federal law has something to say about force majeure in the context of a pandemic that is escaping me. The actual language of the new governing law clauses is fascinating if you are as obsessed with governing law provisions as Mark W and I have been as of late. John Coyle of UNC is the leading scholar of governing law clauses in the whole wide world (see here). And he is a contracts guru as well. Maybe I can get him to opine. I will try to do so and report back.
I have long been a fan of both David Skeel's research and him as a person. Not only was his book Debt's Dominion key to some of the earliest research I did on Collective Action Clauses, but he was always willing to answer my stupid questions about basic concepts (something that fancy tenured professors at Ivy League schools do not often do). Over the years, as he has gotten fancier and fancier, I have continued to burden him with my stupid questions about bankruptcy and restructuring matters and he has never ceased to be generous; the proverbial gift that keeps on giving and never ever taking.
Last week, to penalize him yet further for his kindness over the years to me, I asked him to please come to talk to the students in my debt class about his work on the Puerto Rico oversight board (e.g., here). In our class, we read his work and it occurred to me that although it was a long shot, it would be cool to be able to talk to David in person. And he said yes -- and that was even though I warned him that some of our seminar questions would be a tad bit hostile, in terms of pressing him about all the things that the control board had done vis-a-vis pensions, the lack of accountability of the board, imperialism, insular cases, etc., etc.
The session was amazing. The students did not disappoint in terms of relentlessly asking him tough and incisive questions (I was so very proud of them). And he answered them in the way only he can do: in a generous and candid fashion. Alas, I cannot repeat the details of what he said, since we promised him that we would not report on any of that. But I can lay out what I think are some of the key questions that I hope David will address in the book that I hope he will write when this is all over.
First, why was the choice made to treat Puerto Rican debt as if it were domestic municipal debt instead of treating it more like sovereign debt? The fact that Puerto Rican debt circa 2012, when the @#@# hit the fan first, was all under local law meant that Puerto Rico could have used the "local law" advantage that Lee Buchheit's team used in both Greece and Barbados (on the latter, see Andrew Shutter's cool new article in the Capital Markets Law Journal, here). Yet, Puerto Rico and its advisers decided to go down the municipal bankruptcy route, only to get themselves tied up in expensive legal losses for years. My guess is that there was some political reason for the choices that were made to try and pretend that Puerto Rican debt was more like state debt than sovereign debt. But I want to know more.
Second, why was assistance from the IMF not used? As I understand it, the Oversight Board basically does the kind of job that the IMF does when it goes in to help over indebted countries. The IMF has developed a lot of expertise in this exercise over the years. Why aren't there are bunch of ex IMF stalwarts on the Oversight Board, helping out David and his colleagues?
Third, while I'm full of admiration for some of the aggressive moves that the Oversight Board took vis-a-vis the creditors in terms of, for example, questioning the validity of 2012 and 2014 issuances that were arguably done in violation of certain debt limits, what calculations were made about how much this strategy would impact Puerto Rico's future cost of borrowing? After all, one of the key objectives of the Oversight Board is supposed to be to return Puerto Rico to the capital markets. Someday, I'd love to see that the report that the financial advisers provided on this. (It probably pointed to the research showing that the sovereign and municipal debt markets have a notoriously short memory).
Fourth, what is the world is happening with the Aurelius case? I thought that we'd have a decision on that, in terms of the legality of the Oversight Board under the Appointments Clause, months ago. Does the delay mean that those of us who predicted -- based on what happened at oral argument -- that the court was going to rule quickly in favor of the Oversight Board were perhaps wrong? Maybe the delay means that the Court is indeed going to deal with the ugly legacy of the Insular cases, something that they did not seem to want to do in November at the argument? (Yes, I know that David does not have special insight into what the justices are thinking, but I'm curious anyway).
I can't wait for David's book to come out. I'll assign it in class and ask him to come back to talk to us again!
This post draws considerably from research on Puerto Rico and its current constitutional status with Joseph Blocher (see here).
Tuesday was oral argument day at the Supreme Court in the battle between the Puerto Rican Control Board and a big bad hedge fund, Aurelius. Aurelius, zealous defender of the constitution that it is, had brought a challenge to the constitutionality of the Control Board. The claim being that the failure of President Obama and the then Congress to follow the strictures of the Constitution for the appointment of principal officers of the federal government (nomination by the President, followed by Senate confirmation) made the Board and all its actions invalid.
I am not a constitutional scholar and don’t have any desire to be one. Still, the basic issue here seems fairly simple: Are the members of the Control Board principal federal officers?
Continue reading "Aurelius v. Puerto Rican Control Board (or "Do Activist Hedgies Add Value?")" »
Coen, Andrew. The Bond Buyer; New York, N.Y., 30 Sep 2019:
Assured Guaranty, which insures a large amount of Puerto Rico debt, came out against the plan.
“Assured Guaranty does not support this plan of adjustment as it is premised on a number of terms that violate Puerto Rico law, its constitution and PROMESA," said Assured spokesperson Ashweeta Durani.
Are we sure the first and second "violations" are relevant for these purposes?
So the debt restructuring plan is out. The New York Times indicates that the Oversight Board aimed to put the Commonwealth's debt at "less than" the average of the ten most indebted states. Not exactly a "fresh start" there, is it? Why not peg the debt to that of the average state?
Nonetheless, we can expect the bondholders to complain about even the relatively modest haircut they are slated to take, and they will surely note that the pensioners are taking less of a cut. Of course, the pensioners are in some sense funding the bondholder's recovery, since they are a key factor in keeping the Commonwealth's economy alive.
Normally we say that the liquidation baseline does not work in chapter 9 cases, because there is no real way to "liquidate" a municipality. But if the bondholders push too hard, they may test that assumption with regard to Puerto Rico. Lightly populated Caribbean islands do not support large debt loads, or even 63% recoveries to bondholders.
(This post draws directly from ideas from co authored work with Joseph Blocher; and particularly the numerous discussions we have had about the incentives that a market for sovereign control might create for nations to take better care of their minority populations in outlying areas (e.g., the US and Puerto Rico). Mistakes in the discussion below, however, are solely mine).
It seems like forever ago, but it has only been a few weeks since the news came out that our esteemed chief executive wanted the US to purchase Greenland. The notion was widely ridiculed in the press and provided wonderful fodder for comics around the globe. But as people looked beneath the surface, it quickly became apparent that there was nothing in international law that prohibited the purchase and sale of sovereign control over a territory. Where Trump was wrong was in his assumption that he needed to purchase Greenland from the Danes. Under post World War II international law, however, a former colony such as Greenland has the right of self determination. To quote the Danish prime minister, responding to Trump, “Greenland is not Danish. Greenland belongs to Greenland.”
The Danish PM also said “I strongly hope that this is not meant seriously.” And, from her perspective of apparently wanting to keep the status quo of Greenland being part of Denmark, it makes sense that that’s what she hopes. But let us focus on the words “Greenland is not Danish. Greenland belongs to Greenland.” If one thinks about those words just a little, they mean that Trump’s purchase (and maybe he should start calling this a “merger”, since that seems more polite) is perhaps a lot easier to execute than he initially thought.
Trump and any other suitors that Greenland might have (Canada, China, Iceland, Russia, etc.) need to only focus their attention on making the Greenlanders happy; they don’t need to worry about the Danes. No need for Trump to do diplomatic trips to Copenhagen. Trips should be to Nuuk instead. After all, it is the approval of the 55,000 Greenlanders that he needs.
How many Greenlander votes, specifically? (assuming that there would need to be a referendum first). International law doesn’t clearly say; but surely more than a majority – and ideally with a voting mechanism designed in such a way that the rights of the minority that might not want to be part of the merger being appropriately protected.
The point is that if DJT and his supporters remain committed to the Greenland strategy – and it appears they do (see here) – the next step is will be to persuade the people of Greenland that this merger is in their interest. That way, the next time Trump offers a merger deal to the roughly 55,000 Greenlanders, they will react with enthusiasm rather than horror. One would expect, therefore, to see the US taking steps to mount the charm offensive in Greenland. And, as it turns out, preliminary steps in this direction have already been announced with the US planning to open a consulate in Greenland and engage in various outreach programs as part of its broader arctic charm strategy (here).
Continue reading "Trump, Denmark and Greenland: What Next?" »
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.
Continue reading "PROMESA heads to the U.S. Supreme Court? " »
The First Circuit responds to the Oversight Board's request for a stay until the Supreme Court can rule on their cert. petition, with regard to the Constitutionality of the Board's appointment (emphasis added):
ORDER entered by Juan R. Torruella, Appellate Judge; Rogeriee Thompson, Appellate Judge and William J. Kayatta, Jr., Appellate Judge: In accordance with Federal Rule of Appellate Procedure 41(b), this Court ordered the withholding of its mandate in this case for a period of 90 days so as to allow the President and the Senate to appoint members of the Financial Oversight and Management Board for Puerto Rico in accordance with the Appointments Clause. With that 90-day stay set to expire on May 16, 2019, the Board informs us that the President has announced his intent to nominate the current members to serve out their terms, but that the nominations have not yet gone to the Senate. The Board has also filed, apparently with no sense of any urgency, a petition for certiorari. The Board seeks a further stay of our mandate, this time under Federal Rule of Appellate Procedure 41(d)(1), which would stay the mandate indefinitely until the Supreme Court's final disposition of the case. That request is denied. Instead, the stay of our mandate is extended sixty (60) days, until July 15, 2019.
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.
Long ago I warned that the growth the of the CDS (credit default swap) market represented a threat to traditional understandings of how workouts and restructurings are supposed to happen. The recent Windstream decision from the SDNY shows that these basic issues are still around, notwithstanding an intervening financial crisis and resulting regulatory reform.
Windstream is a corporate group in the telecommunications sector. In 2013 it issued some senior unsecured notes due in 2023. Under the indenture for those notes, specific legal entities in the Windstream group agreed not to engage in any sale-leaseback transactions, presumably to maintain legal title to the groups’ assets available for the noteholders to collect against.
But the indenture did not prohibit the creation of new affiliated entities, nor did it bind such new entities to the prohibition on sale-leasebacks. Windstream did exactly that – popping up a new holding company to enter into the lease, and dropping down a new REIT subsidiary to be the owner of the leased assets. A clear end-run around the probable “intent” of the parties (whatever that means in the context of a bond indenture), but not against the express terms of the indenture, which legions of New York Court of Appeals decisions suggest is the only place to look for intent when reading an indenture.
Nonetheless, Aurelius Capital Master, Ltd., a fund managed by Aurelius Capital Management, LP and its affiliates, instructed the indenture trustee to bring suit against Windstream for breaching the terms of the indenture. As the holder of more than 25% of the notes, the Aurelius fund was entitled to give the trustee such instructions.
As many Slips readers will already appreciate, Aurelius is well-known in the restructuring community for its fondness for a robust sort of litigation. To put it mildly. And it is alleged that Aurelius has fully hedged its Windstream position with CDS, meaning that it can afford to be quite aggressive, because damage to Windstream will actually increase the value of the CDS position.
I’ll try to condense this as much as possible, but readers can see that we are headed into one of my longest posts in a while …
Continue reading "CDS Strikes Again (Aurelius and Windstream)" »
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) ...
Mitu Gulati & Mark Weidemaier
Last week, the Government of Puerto Rico, acting through the Financial Oversight and Management Board (and in conjunction with the creditors’ committee), filed a claims objection seeking to invalidate roughly $6 billion of its General Obligation debt. The reason is that the government allegedly borrowed in violation of the Debt Service Limit and the Balanced Budget Clause of the Puerto Rican constitution. Stephen’s recent post on this subject discusses the merits of this argument in some detail. In this post, we are especially interested in the question of restitution. The Commonwealth doesn’t get much benefit from invalidating loans unless it also avoids the obligation to pay restitution (i.e., return the purchase price). So the objectors make the additional argument that bondholders have no equitable right to restitution under a theory of unjust enrichment.
There is some precedent for the objectors’ arguments in similar contexts, although not a lot of it. Some of the important cases, such as Litchfield v. Ballou (1885), are also very old. However, at least one law review article—a student note in the North Carolina Banking Institute journal (here)—squarely addresses Puerto Rico’s argument, ultimately concluding:
How can Puerto Rico’s penalty for illegally borrowing above its means be that it is allowed to declare the debts void and keep the money for itself? Despite the manifest unfairness of such a result, the applicable law indicates that this is likely the proper legal result.
Continue reading "Puerto Rico’s Audacious Move: Can it Cut its Debt by $6 bn?" »
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.
Last Monday, December 3, the First Circuit heard an oral argument that I have been looking forward to for ages. The case involves an infamously aggressive hedge fund making an audacious challenge to the constitutionality of the Puerto Rican Control Board—an argument that is framed (hilariously, I think) as rescuing the Puerto Rican people from tyranny. The events that followed did not disappoint in terms of drama.
Though complex to answer, question in the case is easily put: Did the process by which the Puerto Rican Control Board was put in place violate the Appointments Clause of the US constitution?
The lawyering was superb, which was not surprising, given that two legendary former SGs, Ted Olson and Don Verrilli, were at the lectern. But the First Circuit judges were ready and raring to go, and it barely took a minute before they launched into tough questions. Judge Juan Torruella was especially on target; he knows the intricacies of the history and case law relating to Puerto Rico’s status better than almost anyone else and it was a treat to listen to his exchanges with the superstar lawyers. (There were other lawyers making arguments as well, but the First Circuit panel was primarily interested in the Olson-Verrilli positions.)The audio file is available here, and is well worth a listen.
For those of you, who like me have been following the Puerto Rican debt drama, this wonderful new book by Sam Erman of USC might be of interest. There are many wonderful and insightful stories in this book that I was altogether unaware of, despite having spent a lot of time reading about Puerto Rico's bizarre constitutional status. Ultimately though, the most intriguing and insightful aspect of the book, to me, was the connection that Sam draws between the strange "foreign in a domestic sense" status of Puerto Rico and the events surrounding Reconstruction from the same period of time.
Sam was supposed to come to Duke last year to present this to the seminar that I run on Race, Law & Politics with Guy Charles, but we got hit by a snow storm on the day of his talk. My initial thought had been to cancel the discussion and move on to the next paper. But the students in the seminar (and Guy) had liked the draft of the book so much that they asked whether we might have a session to discuss it despite the fact that Sam was not going to be able to make it to Durham any longer. We ended up having a fun discussion with my two wonderful con law colleagues, Walter Dellinger and Joseph Blocher. Indeed, that was perhaps our best session of the term (notwithstanding my general distaste for con law discussions).
Next week, I hope to -- after talking to Walter and Joseph more -- do a little post on the recent oral argument in the first circuit about the constitutionality of the Puerto Rican Control Board. That case, if it comes out the way I think it might, could turn the apple cart upside down. But I need to listen to that oral argument tape again.
Here is the official book blurb for Sam's book:
"Almost Citizens lays out the tragic story of how the United States denied Puerto Ricans full citizenship following annexation of the island in 1898. As America became an overseas empire, a handful of remarkable Puerto Ricans debated with U.S. legislators, presidents, judges, and others over who was a citizen and what citizenship meant. This struggle caused a fundamental shift in constitutional jurisprudence: away from the post-Civil War regime of citizenship, rights, and statehood and toward doctrines that accommodated racist imperial governance. Erman’s gripping account shows how, in the wake of the Spanish–American War, administrators, lawmakers, and presidents, together with judges, deployed creativity and ambiguity to transform constitutional law and interpretation over a quarter century of debate and litigation. The result is a history in which the United States and Latin America, Reconstruction and empire, and law and bureaucracy intertwine."
In January I wrote about Aurelius seeking a do-over. In a carefully reasoned thirty-five page decision, the district court has denied the do-over. Put more legally, the court held that PROMESA's method of establishing the Puerto Rico Oversight Board did not run afoul of the Constitution's Appointments Clause. The Oversight Board is an instrumentality of Puerto Rico, concluded the court, not officers of the United States.
In June 2018, the U.S. Supreme Court decided Sveen v. Melin, a case applying Contracts Clause* jurisprudence to a state revocation-on-divorce statute and preexisting insurance contract. It isn't like the Supreme Court hears a Contracts Clause case every week, every term, or even every decade. Given its relevance to many Credit Slips topics, such as a financially distressed government unit without bankruptcy access or mortgage/foreclosure crises, it seems worth fostering a conversation about the case here.
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.
Continue reading "Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation" »
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.
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”).
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).
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?" »
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?" »
Several 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.
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.
Continue reading "Puerto Rico, its Control Board and the "Two-Step Plan" Story" »
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?" »
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.
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?*
Continue reading "Puerto Rico Bankruptcy: Audio Recordings? " »
[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.
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.
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.
Or rather, you can read about it here. Members include Professor David Skeel, whom many Slips readers will be familiar with.
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.
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).
H.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" »
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 ...
After taking a look at titles III and VI of the new draft, some quick observations:
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.
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?
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.
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.
I again offer some initial thoughts on the revised draft bill, now subject to much debate in Congress:
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.
Some quick thoughts on the "bankruptcy" part of the proposed bill:
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.
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
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.
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