Puerto Rico: The Recovery Act's Potential Second Wind

 

This post continues the long-running Credit Slips discussion of Puerto Rico's Recovery Act, now the subject of U.S. Supreme Court review in Puerto Rico v. Franklin California Tax-Free Trust, 15-233, as indicated in Lubben's recent post and in last week's preview. In the video above, posted with permission of the American Bankruptcy Institute, I interview Bill Rochelle, who was at the Supreme Court for oral argument and makes some intriguing predictions on the vote, timing of issuing the opinion, judicial selection, and other matters. A few more reflections below the break.

1. Express preemption and the rise and fall of section 903(1): Although other preemption theories seemed viable, I never could wrap my head around what many consider the central express preemption evidence, namely 11 U.S.C. 903(1). Many readers and colleagues have heard me say "preemption should not rise or fall on section 903(1)." So at least on this issue, that position left me roughly in Lubben's camp, who has studied and written on the issue in detail. Clay Gillette and David Skeel get to a similar place in their amicus brief: that section 903(1) cannot reasonably apply to Puerto Rico. Most recently, Drew Dawson has weighed in in a working paper (p. 49: "Understood within its broader context, section 903(1) can have no impact on state laws unless and until the state has authorized a municipal bankruptcy filing"). Tuesday's oral argument doubled down on express preemption. To the extent the Supreme Court does not engage with alternative theories, that alone should improve the odds it will reverse the First Circuit. As an aside, the composition proscription in section 903(1), supposedly added to overrule the Supreme Court's ruling in Faitoute, wouldn't have even applied to Faitoute because it didn't involve a composition (check out Dawson's discussion on pp. 31-32). Can this odd provision really be the barrier to Puerto Rico's attempt to build its own toolkit that is claimed? As Mitu Galati notes in this interview, surely Puerto Rico has some legal capacity to tackle its debt problems, which takes us to the second point below.  
2. Contract impairment: The justices really wanted to talk about Contracts Clause issues, which technically are still pending in the district court in Puerto Rico. As a recap, the bondholders' Contracts Clause challenge to the Recovery Act survived a motion to dismiss, even without a specific use of the Recovery Act. My prior posts have stressed the fact-intensive nature of the analysis necessary for Contracts Clause litigation without articulating a more fundamental problem with the district court's approach: how can a court determine whether the potential impairment is the least intrusive means if we don't know if the plan proposes to cut 5% or 50% and the circumstances? (For more on the Contracts Clause, check out this interview with Amy Monahan on underfunded public pensions). If the district court makes such a ruling, shouldn't Puerto Rico have a very strong appeal? And, upon reversal, they would put forth a specific proposal, prompting a challenge, and around we go.  

And to think that Congress could stop the madness and give chapter 9 access to some of Puerto Rico's debt issuers. Sure, some parties might raise legal challenges to that as well, but restructuring probably could charge ahead in the meantime and ultimately moot out those fights.