Posts by: Lorraine McGowen

The Impact of PROMESA on Creditors

Posted on

 

On June 30, 2016, the United States Senate passed the “Puerto Rico Oversight, Management and Economic Stability Act” (“PROMESA”) and it was quickly signed into law by President Obama.[1] PROMESA enables the Commonwealth of Puerto Rico and its public corporations and other instrumentalities in financial distress to restructure their debt.[2] The goal of PROMESA is to “bring solvency to Puerto Rico, build a foundation for future growth and ensure the island regains access to capital markets”.[3] PROMESA, though, is not limited to restructuring and enforcement of debt obligations or securities.  If you lent money or extended other forms of credit, or provided goods or services, to Puerto Rico or any of its instrumentalities, PROMESA may affect you. READ MORE →

Monoline Insurer Challenges Puerto Rico’s Moratorium Law

Posted on

On June 15, 2016, National Public Finance Guarantee Corporation, an indirect subsidiary of MBIA Inc. (“NPFG”) commenced an action in the United States District Court for the District of Puerto Rico against the Governor of Puerto Rico and certain other officials in an action styled under the caption National Public Finance Guarantee Corporation v. Alejandro Gracia Padilla et. al, No. 16-CV-2101 (FAB), seeking a declaratory judgment that Puerto Rico’s Emergency Moratorium and Financial Rehabilitation Act (the “Moratorium Act”) adopted by Puerto Rico is preempted by the Bankruptcy Code and violates the United States Constitution. READ MORE →

US Supreme Court Issues Two Significant Cases on Puerto Rico’s Sovereignty

Posted on

In the first decision, on June 9, 2016, the United States Supreme Court affirmed the judgment of the Supreme Court of Puerto Rico that Puerto Rico and the United States are not separate sovereigns for purposes of the Double Jeopardy Clause contained in the Fifth Amendment of the U.S. Constitution in the appeal styled under the caption Commonwealth of Puerto Rico v. Sanchez Valle, No. 15-108. Opinion. Sanchez Valle was the first of two appeals heard by the U.S. Supreme Court this term involving Puerto Rico.

On June 13, 2016, the US Supreme Court also confirmed the decisions by the Court of Appeals for the First Circuit and by the United States District Court for the District of Puerto Rico that Puerto Rico’s Debt Enforcement & Recovery Act (DERA) was unconstitutional in the appeals styled under the caption Puerto Rico v. Franklin California Tax-Free Trust, 15-233, and Acosta-Febo v. Franklin California Tax-Free Trust, 15-255 (the “Franklin Fund Appeals”). Opinion. We previously covered the First Circuit’s decision here. READ MORE →

Supreme Court to Decide Extent of Puerto Rico’s Sovereign Powers

Posted on

On Wednesday, January 13, 2016, the U.S. Supreme Court will hear arguments in the appeal styled under the caption Commonwealth of Puerto Rico v. Sanchez Valle, No. 15-108. In this case, the Supreme Court is asked to determine whether Puerto Rico and the United States are separate sovereigns for purposes of the Double Jeopardy Clause contained in the Fifth Amendment of the U.S. Constitution. Puerto Rico wants to be able to prosecute crimes in its courts even though the federal government had already prosecuted respondents for those same crimes. In order to do that, Puerto Rico and the United States must be treated as separate “sovereigns.”

On December 23, 2015, the United States Solicitor General filed an amicus brief on behalf of the United States taking the position that Puerto Rico and the United States are not separate sovereigns for purposes of the Double Jeopardy Clause. The United States asserts that U.S. territories, such as Puerto Rico, are not sovereigns.[1] This position is contrary to the position taken by Puerto Rico. Instead, the United States asserts that territories are under the sovereignty of the United States and subject to the plenary authority of Congress. (Brief for the United States as Amicus Curiae Supporting Respondents (“U.S. Amicus Brief”) filed in Commonwealth of Puerto Rico v. Sanchez Valle, No. 15-108, at 7.) The United States argued that “In the Territories of the United States, Congress has the entire dominion and sovereignty, national and local, Federal and state, and has full legislative power over all subjects upon which the legislature of a State might legislate within the State.” (Id. at 16.) The United States further argued that “Puerto Rico’s transition to self-government did not change its constitutional status as a U.S. territory. The United States did not cede its sovereignty over Puerto Rico, and Puerto Rico did not become a State or an independent nation.” (Id. at 21). As stated previously, Puerto Rico takes the position that it is a separate sovereign and, as such, it is able to separately prosecute crimes in its courts even if the federal government has already prosecuted for the same crimes.

Sanchez Valle will be the first of two appeals to be heard by the U.S. Supreme Court this term involving Puerto Rico. As we had previously reported, by order dated December 4, 2015, the Supreme Court also agreed to consider the appeals by the Commonwealth and the Government Development Bank regarding the constitutionality of the Commonwealth’s Debt Enforcement & Recovery Act (DERA) in the appeals styled under the caption Puerto Rico v. Franklin California Tax-Free Trust, 15-233, and Acosta-Febo v. Franklin California Tax-Free Trust, 15-255 (the “Franklin Fund Appeals”).

The Supreme Court’s decision in Sanchez Valle could have an impact on the Supreme Court’s decision regarding the constitutionality of the DERA. In filing its amicus brief, the United States asserted that “The Court’s decision [in Sanchez Valle] . . . may affect the federal government’s defense of federal legislation and policies related to Puerto Rico across a broad range of substantive areas, including congressional representation, federal benefits, federal income taxes, bankruptcy, and defense.” (Id. at 1). The hearing on the Franklin Fund Appeals has not yet been scheduled, but briefs by the parties will be filed in the coming weeks.

READ MORE →

Update on Puerto Rico

Posted on

Supreme Court to Determine Constitutionality of DERA

By order dated December 4, 2015, the US Supreme Court has agreed to consider the appeal by the Commonwealth and the Government Development Bank regarding the constitutionality of the Commonwealth’s Debt Enforcement & Recovery Act (DERA). In requesting the Supreme Court to consider its appeal, the Commonwealth stated that this case “presents a question of extraordinary importance and urgency and that the lack of a bankruptcy framework is hindering negotiations to reach a restructuring agreement.

For additional Puerto Rico updates, including information on the proposed Supervisory Oversight Board, continue below.

READ MORE →

First Circuit Rules Bankruptcy Code Preempts Puerto Rico’s Recovery Act

Posted on

On Monday, July 6, the Court of Appeals for the First Circuit affirmed the February 6, 2015 order and injunction of the Puerto Rico District Court and held that section 903(1) of the Bankruptcy Code preempts the Puerto Rico Debt Enforcement and Recovery Act (the “Recovery Act”).  Franklin Cal. Tax Free Trust, et al. v. Commonwealth of Puerto Rico, et al., (1st Cir. July 6, 2015) (Case No. 15-1218): On February 10, 2015, we reported on the district court’s decision holding that the Recovery Act was unconstitutional.

As a result of amendments to the Bankruptcy Code in 1984, Puerto Rico, unlike states, may not authorize its municipalities, including its public utilities like PREPA or PRASA, to seek federal bankruptcy relief under chapter 9 of the Bankruptcy Code. In considering the appeal of the district court’s order, the Court first confirmed that it had jurisdiction to consider the bondholders’ claims of preemption, that those claims were ripe and that they had become ripe immediately upon adoption of the Recovery Act. The Court then ruled that the Commonwealth’s effort to allow its public corporations to restructure their debt by enacting the Recovery Act is expressly preempted by the federal Bankruptcy Code. Rejecting the Commonwealth’s arguments that the 1984 amendments made the preemption provisions of section 903(1) of the Bankruptcy Code inapplicable, the Court stated that “§ 903(1) has applied to Puerto Rico since the predecessor of that section’s enactment in 1946. The statute does not currently read, nor does anything about the 1984 amendment suggest, that Puerto Rico is outside the reach of § 903(1)’s prohibition. Op. at 4. Because the Court affirmed the district court’s order and injunction, the Court declined to consider the Commonwealth’s appeal of the district court’s order denying motions to dismiss the bondholders’ Contracts Clause and Takings Claims. Op. at 21.

READ MORE →

Supreme Court Says Underwater Junior Liens Survive Bankruptcy

Posted on

On March 30, we reported on two cases pending before the U.S. Supreme Court: Bank of America v. Caulkett[1] and Bank of America v. Toledo-Cardona[2].  Each involved chapter 7 bankruptcy cases in which the debtors had no equity in their homes because the houses were worth less than the amount outstanding on the senior mortgage loans—that is, the second lien-lenders were “unsecured” or totally “underwater”.   

In a chapter 7 case, an individual debtor is able to obtain a discharge of his or her debts, but the debtor’s non-exempt assets are liquidated by a bankruptcy trustee, who then distributes the proceeds to creditors. In Dewsnup v. Timm[3], the Supreme Court held that Bankruptcy Code § 506 does not permit an individual chapter 7 debtor to reduce (or “strip down”) a first-lien mortgage loan to the value of the real property where the amount owed ($119,000) is greater than the property value ($39,000).  Caulkett and its companion case addressed whether the outcome should be different where the debtor seeks to void (or “strip off”) a second lien mortgage that is wholly underwater.

On its decision announced on June 1, the Supreme Court found the question effectively controlled by its prior holding in Dewsnup.  Noting that the debtors had not asked it to overrule Dewsnup, the Court held by unanimous decision[4] that a debtor in a chapter 7 bankruptcy case may not void second mortgage liens under Bankruptcy Code section 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral.  The Court rejected respondents’ attempts to limit Dewsnup’s interpretation to partially underwater mortgages, concluding that there was no principled way to distinguish those from wholly underwater mortgages within the terms of the Bankruptcy Code.  In Dewsnup, the Court defined an “allowed secured claim” under section 506(d) as “claim supported by a security interest in property, regardless of whether the value of that collateral would be sufficient to cover the claim”.  Thus, section 506(d) voids underwater liens only where the underlying debt is invalid under applicable law.

READ MORE →

Should Underwater Junior Liens Survive Bankruptcy?

and Posted on

This article is an excerpt written for the Distressed Download.  The full article is available here.

Introduction

On March 24th, the Supreme Court heard oral argument on the consolidated appeals of two decisions from the Eleventh Circuit Court of Appeals, Bank of America v. Caulkett[1] and Bank of America v. Toledo-Cardona.[2]  The appeals address an issue left unresolved by the Supreme Court’s decision in Dewsnup v. Timm:[3] that is, does section 506 of the Bankruptcy Code void, i.e., “strip off” a valid junior mortgage lien in a chapter 7 case if the mortgage loan is completely underwater.  These cases involve the treatment in chapter 7 bankruptcy cases of “undersecured” or “underwater” second-lien home mortgages.  Debtors who have granted such mortgages have no equity in their houses because the houses are worth less than the amount outstanding on the mortgage loans.

In a chapter 7 case, an individual debtor is able to obtain a discharge of his or her debts following the liquidation of the debtor’s non-exempt assets by a bankruptcy trustee, who then distributes the proceeds to creditors.  In Dewsnup, the Supreme Court held that section 506 does not permit an individual chapter 7 debtor to reduce (or “strip down”) a first-lien mortgage loan to the value of the real property where the amount owed is greater than the property value.  Relying on Dewsnup, every circuit court to consider the issue except the Eleventh Circuit has determined that section 506 also does not permit individual debtors to void completely underwater junior mortgage.[4]

Although the housing market has been rebounding in many jurisdictions, there are numerous properties subject to multiple mortgage liens that are worth less than the amount of the first-priority mortgage.  The Supreme Court’s resolution of the Caulkett and Toledo-Cardona cases will either ratify the trend of other circuits, which would benefit junior lenders, or overturn it, which would favor homeowners and first-lien mortgagees. A ruling prohibiting lien stripping also could severely impair the ability of business and individual debtors to use the statutory power to restructure and avoid liens in chapters 11, 12 and 13. Regardless of the outcome, the decision will have widespread ramifications through the secondary housing market.

READ MORE →

Overview and Analysis of Select Provisions of the ABI Chapter 11 Reform Commission Final Report and Recommendations

and Posted on

Part Two of Three

Last month, Orrick’s Restructuring team began a three-part look at the American Bankruptcy Institute’s Chapter 11 Reform Report. In part one we looked at issues related to confirmation, valuation, financing and asset sales. This second part focuses on modifications to the Bankruptcy Code’s “safe harbors” for derivatives and other complex financial transactions. The final part will focus on professional compensation, treatment of executory contracts and other interesting topics.

To view the full article, please click here.

Rep. Pierluisi Introduces Bankruptcy Code Amendment to Permit P.R. Municipalities to File Under Chapter 9

and Posted on

Just days after the United States District Court for the District of Puerto Rico struck down the Commonwealth’s efforts to pass its own insolvency regime, Resident Commissioner Pedro Pierluisi introduced the “Puerto Rico Chapter 9 Uniformity Act of 2015” into the U.S. House of Representatives last week.  The bill, which is substantively similar to one introduced in 2014, would allow the Commonwealth of Puerto Rico to authorize its insolvent public corporations to file a chapter 9 petition; they currently are not able to do so.  The bill, H.R. 870, has been assigned to the House Judiciary Committee and is scheduled for a hearing before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law on February 26th.  H.R. 870, 114th Cong. (1st Sess. 2015)

READ MORE →