July 15, 2019

July 15, 2019

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July 12, 2019

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Que Certa, Certa: Supreme Court’s Review of Puerto Rico Recovery Act May Hinder Creditor Negotiations

It is said that muddy water is best cleared by leaving it be.  The Supreme Court’s December 4 decision to review the legality of Puerto Rico’s local bankruptcy law, the Recovery Act, despite a well-reasoned First Circuit Court of Appeals opinion affirming the U.S. District Court in San Juan’s decision voiding the Recovery Act on the grounds that it conflicts with Section 903 of the U.S. Bankruptcy Code, suggests, at a minimum, that at least four of the Justices deemed the questions raised too interesting to let the First Circuit have the last word. This discretionary granting of Puerto Rico’s certiorari petition further muddies the already roiling Puerto Rican waters.

As a result of the Supreme Court’s granting of the Commonwealth’s petition for a writ of certiorari, eight Justices will hear the case (Justice Alito has recused himself), with oral arguments likely in March, 2016.  A decision would then be expected in June, 2016, coinciding with the Commonwealth’s fiscal year end.  At first glance, the decision to grant “cert” appears to be a victory for the Commonwealth (according to SCOTUSblog, over the past three terms the Supreme Court has reversed approximately 72% of cases it has accepted for review).  Of course, the Supreme Court could weigh-in in a manner or on a topic that does not fully resolve the status of the Recovery Act.  At the very least, the review may hinder creditor negotiations and the chances of a consensual resolution.  And a consensual resolution may be Puerto Rico’s best hope.

Even as Puerto Rico legislators laud the Supreme Court’s decision, their pleas for alternate solutions—namely, Chapter 9 eligibility and/or a voluntary debt exchange—continue.  They argue that, absent these solutions, the territory will reach its breaking point before the Supreme Court rules.  The reappearance of the Recovery Act as an arguable solution to Puerto Rico’s quest for a debt restructuring process will likely only contribute to the gridlock in Congress regarding Puerto Rico’s campaign for Chapter 9 eligibility or for “Super Chapter 9” legislation that would enable it to restructure its general obligation debt.  Consensual creditor resolutions may be the Commonwealth’s most realistic option; indeed, the Commonwealth was hopeful it could implement a voluntary debt exchange by May, 2016.  But that was before cert was granted.

Creditors may now be even more wary of negotiating given the greater uncertainty the Supreme Court’s review engenders.  Parties striking deals with the Commonwealth and its entities are going to want to make sure the arrangements reached are “Recovery Act remote”, “Chapter 9 remote”, “Super Chapter 9 Remote” and “Whatever the heck Congress, the courts or the Puerto Rico legislators do remote”.  Given the uncertainties regarding Recovery Act implementation (if/when/how), creditors may be unwilling to bear these risks and may choose to leave the muddy water be, for now.  That could be disastrous for Puerto Rico.

Finally, even if the Supreme Court reinstates the Recovery Act, the Recovery Act may still be an ineffectual vehicle for debt restructuring.  Because it is not enacted by the federal government, any plan confirmed under its provisions will be subject to a variety of constitutional challenges under the contracts clause and the takings clause of the U.S. Constitution.

The future’s not ours to see.

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About this Author

Leonard Weiser-Varon, Mintz Levin Law Firm, Corporate and Finance Law Attorney
Member

Len is active in both municipal finance and corporate finance, with an emphasis on financings for 501(c)(3) institutions, project finance, secured lending, structured finance transactions, workouts and restructurings, corporate debt, and Section 529 college savings programs.

His practice includes service as bond counsel, issuer’s counsel, underwriters’ counsel, and counsel to institutional purchasers and borrowers in connection with public offerings and private placements of, and defaults and bankruptcies involving, tax-exempt and taxable debt for public, nonprofit, and corporate...

617-348-1758
William W. Kannel, Bankruptcy Attorney, Mintz Levin Law Firm
Member

Bill’s practice focuses primarily on commercial law, workouts, and corporate reorganization. He has represented various institutional lenders, indenture trustees, bondholders, and other creditors, debtors, and trustees in all manner of insolvency proceedings in courts throughout the United States.

His industry experience encompasses municipalities, airlines, hospitals and other health care facilities, retail, telecom, energy and clean tech, waste disposal, military housing, hotels, and educational institutions.

He has substantial experience in all phases of bankruptcy litigation, practice, and case management from both the debtor’s and creditor’s perspective, including relief from stay, adequate protection, valuation, preference, fraudulent transfer, subordination, competing plan, and appellate litigation. One of his specialty areas is in negotiating sales of troubled companies and assets, both in and out of bankruptcy. His practice also includes addressing bankruptcy and documentation issues in securitizations, receivable sales, bond transactions, and structured financings generally.

Bill is also experienced in the growing area of municipal bankruptcies, and recently was quoted in stories in the Wall Street JournalThe Deal, BloombergLaw360, and Dow Jones Daily Bankruptcy Review.

617-348-1665
Eric Blythe, Bankruptcy, Restructuring, Commercial Law Group, Mintz Levin
Associate

Prior to joining the firm, Eric served as legal counsel at the Massachusetts State House. While there, he worked for the state representative for Marshfield and Scituate, and he researched and reported on issues such as affordable housing, end-of-life health care, court-appointed attorney regulations, the tax-expenditure budget and pension reform. He also drafted legislation regarding issues ranging from freedom of speech rights to nuclear power plant regulation. He was a Summer Associate at Mintz Levin in 2009.

(617) 348-4913