Puerto Rico Update: White House Weighs in with a Proposal

posted in: Municipal Bankruptcy | 0

With over $70 billion in debt and little cash to fund its ongoing operations, Puerto Rico remains in a state of fiscal crisis. After this summer’s decision by the First Circuit affirming that Puerto Rico’s attempt at legislative self-help, the so-called “Recovery Act,” was unconstitutional, the Commonwealth was left to negotiate with its many creditors or else seek relief from the federal government.

On October 21, the White House introduced a plan urging Congress to address the situation in Puerto Rico, claiming that it “could become a humanitarian crisis” absent federal intervention.

The heart of the Obama administration’s plan is a robust legislative framework for extending bankruptcy protection to Puerto Rico’s public organs. In addition to supporting currently pending legislation that would extend Chapter 9 to Puerto Rico – allowing Puerto Rico’s municipalities to file for bankruptcy – the plan also proposes “a broader legal framework that goes beyond Chapter 9 to allow for a comprehensive restructuring of Puerto Rico’s liabilities.” The plan conditions access to this new territorial bankruptcy regime on the establishment of a fiscal oversight body to ensure that Puerto Rico “adheres to its recovery plan and fully implements proposed reforms.” The plan also encouraged Congress to reform Puerto Rico’s Medicaid program and to provide Puerto Ricans with access to the Earned Income Tax Credit.

The plan, described by the White House as A Roadmap for Congressional Action, received a “chilly” reception at a Senate committee hearing on Thursday, largely due to its lack of detail and the limited amount of information available.

For our previous posts on the situation in Puerto Rico, see here and here.

(This post was drafted by Bankruptcy Roundtable Managing Editor Robert Niles, J.D./M.B.A. ’16.)

A New Fulcrum Point for City Survival

posted in: Municipal Bankruptcy | 0

By Samir D. Parikh, Lewis & Clark Law School

ParikhMunicipalities face daunting fiscal challenges that threaten debt repayment and undermine basic service delivery.  Policymakers and scholars have struggled to formulate meaningful restructuring options.  Up to this point, the literature has focused on federal bankruptcy law and the options available under Chapter 9.  But this resource-draining process is not the fulcrum point for any meaningful solution.  Indeed, for the vast majority of distressed municipalities, the lever of municipal recovery will not turn based on the solutions that have to date been offered.

In an article forthcoming in the 2015 William & Mary Law Review, I attempt to radically shift the municipal recovery debate by arguing that state law is the centralized point at which officials can exert the necessary amount of pressure to gain concessions from key creditor constituencies.  I propose a comprehensive system that (i) identifies pressured municipalities at a time where measured adjustments are sufficient to create sustainable viability, and (ii) shepherds distressed municipalities through a dynamic negotiation structure in an effort to capture Chapter 9’s primary benefits without the costs, inefficiencies, and constitutional quandaries.  Animating this proposal is a more nuanced understanding of the Contracts Clause that allows a municipality to explore unilateral contract modification in an effort to facilitate consensual agreements with creditor constituencies.

My proposal offers systemic rehabilitation at a time when a new approach is desperately needed.  The full version of the article is available here.

For previous posts on Municipal Bankruptcy see here and here.

From Chrysler and General Motors to Detroit

By David A. Skeel, Jr., University of Pennsylvania Law School

dskeel

In the past five years, three of the most remarkable bankruptcy cases in American history have come out of Detroit: the bankruptcies of Chrysler and General Motors in 2009, and of Detroit itself in 2013. The principal objective of this Article is simply to show that the Grand Bargain at the heart of the Detroit bankruptcy is the direct offspring of the bankruptcy sale transactions that were used to restructure Chrysler and GM. The proponents of Detroit’s “Grand Bargain” never would have dreamed up the transaction were it not for the federal government-engineered carmaker bankruptcies. The Article’s second objective, based the comparison of the Detroit cases, is to make a very brief case for reform of bankruptcy sales.

Part I of the Article briefly surveys the increased use of bankruptcy sales and related shifts in Chapter 11 practice over the past several decades. Part II describes the Chrysler and General Motors bankruptcies, which built on but radically expanded the scope of a bankruptcy sale. Part III turns to the Detroit bankruptcy, focusing primarily on the “Grand Bargain,” while also exploring the city’s use of another recent bankruptcy strategy, known as “gifting.” The Article concludes, in a brief final part, that the Detroit cases have pushed recent bankruptcy innovations to their logical extremes — and beyond — exposing the need to update the oversight of bankruptcy sales.

The full version of this article is available here.

 

U.S. District Court Holds that Puerto Rico’s Recovery Act is Unconstitutional

posted in: Municipal Bankruptcy | 0

By Mark Ellenberg, Howard Hawkins, Lary Stromfeld, Ivan Loncar, and Thomas Curtin of Cadwalader Wickersham & Taft LLP

On February 6, 2015, in Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, the U.S. District Court for the District of Puerto Rico held that the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) is expressly preempted by section 903 of the Bankruptcy Code. Section 903 of the Bankruptcy Code expressly prohibits all states, including Puerto Rico, from enacting laws that prescribe a “method of composition” that discharges debts. The Recovery Act, which was loosely based on chapter 9 of the Bankruptcy Code, would have permitted Puerto Rico’s power authority (PREPA), highway authority (HTA) and water authority (PRASA) to adjust their debts without the consent of all creditors. The court concluded that this scheme ran afoul of section 903, even though municipal entities in Puerto Rico are expressly excluded from the coverage of Chapter 9. The decision is among the first to explicitly hold that section 903 expressly preempts the states, including Puerto Rico, from enacting any debt adjustment scheme that results in the discharge of indebtedness, even if the affected entities have no remedy under the Bankruptcy Code. The court also denied the Commonwealth’s motion to dismiss the plaintiffs’ claims under the Contracts Clause and certain of the plaintiffs’ claims under the Takings Clause.

To read further, click here.

Puerto Rico Public Corporation Debt Enforcement and Recovery Act

posted in: Municipal Bankruptcy | 0

Puerto Rico is facing the most critical fiscal situation in its history. Its public corporations are especially compromised, overwhelmed by growing deficits and unsustainable debt loads but barred from reorganizing under federal law. Last June, Puerto Rico enacted the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which allows eligible public corporations to restructure their debt burdens.

The Recovery Act is likely preempted by federal bankruptcy law. Although the Recovery Act was justified as a valid exercise of the Commonwealth’s police power, the statute is likely unconstitutional under the Supremacy Clause. Where state law conflicts with federal law — as does the Recovery Act with section 903 of the Bankruptcy Code — the state law is preempted. On February 6, 2015 Judge Francisco Besosa of the U.S. District Court for the District of Puerto Rico held this was the case in Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico and Blue Mountain Capital Management v. Governor Alejandro Garcia-Padilla.

Yet despite the Recovery Act’s probable constitutional infirmity, the threat of potential public corporation default nonetheless exerted sufficient pressure to motivate temporary consensual relief. In choosing this approach, Puerto Rico risks weakening outside investor interest in future securities offerings. But perhaps such high-stakes federalism will prompt Congress to reconsider the basis for and desirability of Puerto Rico’s idiosyncratic treatment under Chapter 9 of the Bankruptcy Code, and elsewhere in federal law.

This article was published in the Harvard Law Review, February 2015. To read the full article, click here.

This post comes from Robert Niles (J.D./M.B.A. ’16), a member of the Bankruptcy Roundtable team

Fair and Unfair Discrimination in Municipal Bankruptcy

posted in: Municipal Bankruptcy | 0

By Richard M. Hynes and Steven D. Walt, University of Virginia School of Law

hynes_0915 walt_lowresSome bankrupt municipalities have proposed plans of reorganization that offer substantially greater recoveries to their active workers and retirees than those offered to other creditors.  Because these greater recoveries are not mandated by a priority enjoyed by the active workers and retirees, a judge can only approve such a plan if it does not “discriminate unfairly” against a class of disfavored creditors that votes against the plan.  This Article describes the law defining the unfair discrimination standard, identifies the categories of circumstances in which discrimination between co-equal classes is permitted, and argues that the claims of retirees and active workers do not fall into any of these categories.  The Article concludes that current law does not allow a judge to approve a reorganization plan that provides retirees and active workers with a greater recovery.

The full version of the article can be found here.

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