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. 

• Preemption of Puerto Rico's Recovery Act: Section 303 of PROMESA, if adopted, would expressly preempt Puerto Rico's Recovery Act and moot the pending Supreme Court case discussed last week.
• Eligibility and order for relief: The appointment of and decisions of an Oversight Board are conditions of eligibility for  relief, as is a desire to effect a plan to adjust debts (section 302). Who could be a debtor? A territory with an Oversight Board (raising the possibility of modifying obligations that would be out of reach in regular chapter 9 or the Recovery Act) as well as its instrumentalities (section 302). The list of substantive eligibility criteria is shorter than in chapter 9 (lacking the insolvency requirement and the requirement to negotiate in good faith in advance, among other things). And unlike in chapter 9, commencement of the case would itself constitute an order for relief (section 304), reducing the consequences of a delayed eligibility ruling. For example, a creditors' committee could be appointed right away.
• Who would preside, and where?: Under section 307(1) and (2), the case ordinarily would be in the district court containing the territory or territorial instrumentality. But, under placeholder language marked with brackets in section 307(3), the Oversight Board would have the power to to determine that such a district "will not provide for proper case management" and go instead to "the district court for the jurisdiction in which the Oversight Board maintains an office that is located outside the territory." By case management, presumably they mean what I discussed in my Detroit study (penultimate draft now posted). Or is this an open invitation for the Oversight Board to keep the case out of Puerto Rico and establish an office where it wants the case to be heard? [UPDATE: in comments, Lubben reminds us that the bill requires the Oversight Board to have an office in DC as well as Puerto Rico (sec 102); yet, not sure the language precludes setting up an office elsewhere]. We should not go down this path. The chief judge of the First Circuit would be able to get a better sense of which judge would handle the case efficiently than the Oversight Board. The current judicial selection rule from chapter 9 is best. Case management is likely to differ more by judge than by district in any event. 
• Joint plans and plan confirmation: The requirement that there be an impaired accepting class to proceed to cramdown is to be applied separately for each debt issuer/instrumentality (section 313). That ensures that the level of creditor support necessary for plan confirmation is not unduly watered down. PROMESA retains the "best interest of creditors and is feasible" language from chapter 9's section 943, plus the sometimes elusive but nonetheless well known cramdown protections of chapter 11 that also apply to chapter 9. 
• Discharge of debt: by incorporating section 944 of the Bankruptcy Code, PROMESA enables the debtor to discharge debt upon plan confirmation. By incorporating parts of 524(a), it imposes a discharge injunction, barring attempts to collect debts addressed in the case and plan.

Part IV of PROMESA also contains some provisions relevant to the bankruptcy world. I'll mention two here.

1. Puzzling over section 404: After Title III creates a restructuring regime and incorporates a discharge of debt, Title IV contains a provision that could be read to undo it all. Section 404 includes the following language: "Nothing in this Act may be construed -- (1) to relieve any obligations existing as of the date of the enactment... to repay any individual or entity from whom Puerto Rico has borrowed funds, whether through the issuance of bonds or otherwise." What does it mean?
2. Oversight-Board-initiated injunction: Although drafters appear to have some trepidation about this provision, section 413 creates a breathing spell from creditor action upon creation of an Oversight Board for Puerto Rico.  Section 413(f) establishes an irreparable damage standard for lifting the stay, which sounds like a higher standard than the Bankruptcy Code (e.g., for cause, including lack of adequate protection). The goal is to bring everyone to the bargaining table and avoid a PROMESAnkruptcy.

Some inconsistencies and reservations in Titles III and IV may relate to threats of Takings Clause challenges. More on that soon, but in the meantime, check out Charles Tabb's scholarly article on the Bankruptcy Clause/Takings Clause intersection.