Puerto Rico; Act III
by | posted in: Bankruptcy Roundtable Updates, International and Comparative | 0

By Stephen J. Lubben (Seton Hall University School of Law)

Stephen J. Lubben

Since 2017, the Commonwealth of Puerto Rico (and certain of its affiliated entities) have been in “bankruptcy” under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”).  PROMESA is a bankruptcy law, with various other bells and whistles, although Congress purported to enact it under its Article IV territories powers.

These cases are pending in the United States District Court for the District of Puerto Rico; however, Judge Laura Taylor Swain, of the Southern District of New York, was appointed by the Chief Justice to preside over the cases.  My new paper – Puerto Rico; Act III – provides a concise overview of where things now stand in the PROMESA process, and where they might be heading.

In addition to its restructuring provisions, the law creates the Financial Oversight and Management Board for Puerto Rico.  The Board frequently states that “the purpose of the Oversight Board is to provide a method for Puerto Rico to achieve fiscal responsibility and access to the capital markets.”  In essence, the Board operates as a supra-governmental body for fiscal matters.

At present several members of the Board have stepped down, and President Trump bumped one member off the Board – former bankruptcy judge Arthur J. González – by appointing a new member to his slot.  Congress and the president will have to fill out the Board, or devise a new path for the Commonwealth.

In the face of hurricanes, earthquakes, and COVID-19, the Board has attempted to push forward with a reorganization under Title III.  The virus, however, might substantially delay the process and force a reconsideration of the present reorganization plan.  It thus represents the opening of a third act in Puerto Rico’s debt drama.

Even before recent events, I had argued that the Board was being far too timid in its efforts to revamp Puerto Rico’s economy, given that the PROMESA process was presumably a one-time opportunity.  In particular, the debt relief the Board was proposing was comparatively modest, and I worried that it might leave the Commonwealth with still too much debt to successfully restart its economy.

The problem is that the Board’s current plan has the support of almost nobody, making even “cramdown” of the plan extremely unlikely.  Pensioners might be the most likely ally with the Board, although the government of Puerto Rico, and presumably many of the pensioners, object to the current offer.  As Justice Sotomayor recently noted,

The Board’s decisions have affected the island’s entire population, particularly many of its most vulnerable citizens. The Board has ordered pensions to be reduced by as much as 8.5 percent… Other proposed cuts take aim at already depleted healthcare and educational services. It is under the yoke of such austerity measures that the island’s 3.2 million citizens now chafe.[1]

Indeed, Justice Sotomayor’s recent opinion also provides a kind of roadmap for a challenge to PROMESA.  She explains that she concurred in the Court’s result only because nobody had argued that Puerto Rico’s Commonwealth status was inconsistent with the creation of the Board.  As she sees it, Congress made certain commitments to Puerto Rico in the 1950s when it created the Commonwealth, and Congress may not “take back” those commitments.  Any litigation following her approach would presumably involve extensive appeals, but it looms as a threat to the PROMESA process.

At heart, the problem in Puerto Rico is not unlike the problem in many sovereign and municipal workouts.  The bondholders want to recover as much as possible, of course, and are leery of settling claims only to see the debtor rebound shortly thereafter.  The conundrum being that the rebound is unlikely to happen without serious debt reduction.  Debt reduction is often not the only requirement for a rebound, but it is fundamental.

Either the Board needs to lead Puerto Rico out of this feedback loop, or Puerto Rico needs to extract itself from the PROMESA process. If not, the drama will continue for many more acts.  Future acts could in theory include statehood for Puerto Rico, or some new restructuring process, or perhaps even both.  Or the parties may simply reach a deal on a plan.  At this point it is hard to say any particular outcome is more likely than another.

[1] Financial Oversight And Management Bd. For Puerto Rico v. Aurelius Investment, LLC, 590 U. S. ____ (2020), Sotomayor, J., concurring in judgment, slip opinion at page 7.

Notes from the Puerto Rico Oversight (Not Control) Board
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, Municipal Bankruptcy | 0

By David Skeel (University of Pennsylvania Law School)

David Skeel
David Skeel

On June 30, 2016, Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) in response to the economic crisis in Puerto Rico, which was already a decade old at that point and had left Puerto Rico with roughly $70 billion in overall debt and $50 billion of unfunded pension liabilities. PROMESA created a seven-member oversight board (the “Oversight Board”), and authorized the Oversight Board both to certify five (or more) year fiscal plans for Puerto Rico and its public corporations, and to initiate bankruptcy-like proceedings if necessary.

For over three years now, I’ve had the privilege of serving as one of the seven initial members of the Oversight Board.  It has been a rocky ride at times, and we have been criticized both from the right (by creditors unhappy with our conclusion the debt needs to be significantly restructured) and from the left (for our conclusion that government reform and right-sizing are needed).  The past year has finally brought at least some evidence of progress, although significant obstacles remain before anyone will be able to declare victory.

In this essay, I chronicle the Board’s efforts up to the beginning of last summer, shortly before widespread protests of the former governor led to his resignation. I begin with a brief sketch of the depth of Puerto Rico’s economic distress, which was made far worse by Hurricanes Irma and Maria in 2017, and of the principal responsibilities vested in the Oversight Board by PROMESA. I then survey the major decisions the Oversight Board has made—or in some cases, unsuccessfully tried to make—and the challenges that remain as the current Board members come to the end of our terms (which theoretically ended on August 31, three years after we were appointed, but continue until we are replaced with new members by the President and Congress).

The full article is available here.

The First Circuit Joins Several Other Circuit Courts in Finding That Creditors’ Committees Have an Unconditional Right to Intervene in Adversary Proceedings
by | posted in: Bankruptcy Administration and Jurisdiction | 0

By Todd E. Phillips, Kevin C. Mackley and Sally J. Sullivan (Caplin & Drysdale).

In September, the First Circuit Court of Appeals joined several other Circuits in holding that section 1109(b) of the Bankruptcy Code provides an official creditors’ committee with an “unconditional right to intervene” in an adversary proceeding related to a bankruptcy. The case, Promesa Financial Oversight and Management Board, was the appeal of an order from the District Court for the District of Puerto Rico, which had denied an intervention motion in a debt adjustment case brought under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). The First Circuit reversed the order, distinguishing the case from the First Circuit’s own precedent In re Thompson upon which the District Court had relied.  The Promesa Financial Oversight and Management Board decision aligns the First Circuit with the Second and Third Circuits and evidences a growing Circuit trend toward recognizing the unconditional right of a creditors’ committee to intervene, rejecting the Fifth Circuit’s contrary analysis in the Fuel Oil case, which had previously represented the prevailing view for many years.

The full paper can be found here.

 

Puerto Rico Files for Bankruptcy Under PROMESA Title III
by | posted in: Municipal Bankruptcy | 0

By Richard J. Cooper, Luke A. Barefoot, Jessica E. McBride, Daniel J. Soltman, and Antonio Pietrantoni (Cleary Gottlieb Steen & Hamilton LLP)

On May 3, 2017, the Commonwealth of Puerto Rico (the “Commonwealth”) and the Oversight Board established by Congress pursuant to the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) filed for bankruptcy under Title III of PROMESA in what is poised to become one of the largest bankruptcies in American history.

Drawing on first-hand experience[1] to provide unique background on the unprecedented fiscal crisis confronting Puerto Rico, lawyers from Cleary Gottlieb Steen & Hamilton LLP (“Cleary Gottlieb”) are preparing a series of articles to inform readers on some of the key challenges and strategic considerations that Puerto Rico and the Oversight Board face in implementing a restructuring under PROMESA.  To date, four articles have been published.

“Why Puerto Rico Will Likely Rely On PROMESA Title III,” published before the recent Title III filing, discusses PROMESA’s two restructuring frameworks: Title III (broad-based, in-court proceeding) and Title VI (voluntary negotiations, similar to collective action clauses).  It focuses on some of the challenges that a Title VI proceeding would present and why, as opposed to Title III, it is likely not a viable forum for restructuring the Commonwealth’s obligations.

“Issues To Expect In A Title III Puerto Rico Restructuring” surveys some of the difficult choices that the Commonwealth and the Oversight Board will need to make in order to implement a debt restructuring and delves into some of the novel issues likely to arise in a Commonwealth restructuring proceeding under Title III.

“What Should Puerto Rico Offer Its Creditors?” considers restructuring currencies that the Commonwealth and the Oversight Board could offer creditors as part of a PROMESA restructuring. It focuses on four important elements that could facilitate a debt adjustment under PROMESA and create a stronger foundation for Puerto Rico to regain access to the capital markets and attract new investment.

“Disarming Puerto Rico’s Pension Time Bomb” provides an overview of the key strategic drivers in reforming Puerto Rico’s underfunded public pension systems. This article identifies the two legal pension reform mechanisms available to the Commonwealth — legislative action or implementation of reforms through one or more Title III proceeding(s) under PROMESA — and provides an overview of the most important factors likely to shape the ultimate outcome.

[1] Cleary Gottlieb assisted the Commonwealth of Puerto Rico and its instrumentalities with their financial challenges prior to the recent change in government. The firm also currently represents the Government Development Bank for Puerto Rico on a legacy matter.

 

Puerto Rico and the Netherworld of Sovereign Debt Restructuring
by | posted in: Bankruptcy Roundtable Updates, International and Comparative, Municipal Bankruptcy | 0

By G. Mitu Gulati (Duke Law School) and Robert K. Rasmussen (University of Southern California Gould School of Law)

Puerto Rico has incurred debt well beyond its ability to repay. It attempted to address its fiscal woes through legislation allowing the restructuring of some its debt. The Supreme Court put a stop to this effort, holding that Congress in the Bankruptcy Code barred the Commonwealth from enacting its own restructuring regime. Yet all agreed that the Bankruptcy Code did not provide anything in its place. Congress quickly passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in an attempt to address Puerto Rico’s fiscal ills by enacting a special proceeding to deal with Puerto Rico’s financial woes. The price Puerto Rico paid, however, was steep—the imposition of a control board to direct, in effect, the Commonwealth’s finances and any insolvency proceedings. In light of the conditions that gave rise to PROMESA, we explore whether, in the first place, Congress has the power to bar Puerto Rico from enacting a restructuring mechanism without offering an alternative. We submit that the answer is no. When it comes to a state, the Supreme Court has held the power to issue debt necessarily implies the power to restructure that debt. Congress can preempt that power so long as it puts something in its place. To preempt and leave nothing runs afoul of our federal system. The same reasoning, with even greater force, applies to Puerto Rico. The federal government entered into a compact with the citizens of Puerto Rico, granting them, among other things, the power to issue debt. Puerto Rico implicitly received the power to restructure this debt. Congress could offer a substitute to any regime that Puerto Rico might enact, but it cannot leave the Commonwealth without any means to address its fiscal affairs.

The full paper is available here.

For previous Roundtable coverage of Puerto Rico’s debt crisis, see “Puerto Rico Update: White House Weighs in with a Proposal,” “Puerto Rico Public Corporation Debt Enforcement and Recovery Act,” and “U.S. District Court Holds that Puerto Rico’s Recovery Act Is Unconstitutional.”