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Differing Views of Puerto Rico’s Debt Crisis

 

 

 
 

June 30, 2015

 
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  NEWS AND ANALYSIS

DIFFERING VIEWS OF PUERTO RICO’S DEBT CRISIS

As Puerto Rico struggles under the weight of more than $70 billion in debt, a commentary in today's Wall Street Journal presented the view that the U.S. territory's economic crisis is as severe as it is because its leaders have not taken the difficult steps to defuse the situation. Alejandro García Padilla, the governor of the unincorporated American commonwealth, said this week that the debt is not payable and that there are no other options. However, Gov. Padilla has stuck to a pledge not to lay off government workers, even though more than two-thirds of the territory's budget is payroll, according to the commentary. The proposed budget -- supposed to be approved today -- for the fiscal year beginning July 1 contains no plans for head-count reductions. That budget still does not have enough votes to pass, despite the reality that the territory's leaders could run out of cash by mid-July. The prospect that Puerto Rico might not repay its debts has sparked debate in Congress over a bill, H.R. 870, that would allow some of the commonwealth’s subsidiaries, like its electric and water utility companies, to file for bankruptcy. Underlying the proposed legislation -- and the governor's comments -- is the assumption that Puerto Rico would repay less than the face value of its bonds. Under the Bankruptcy Code, however, the territory first would have to prove that its eligible subsidiaries are insolvent. Regardless of whether Puerto Rico can file for bankruptcy, any bankruptcy judge is going to demand that the territory engage in a program of fiscal consolidation that includes reducing payroll and eliminating superfluous expenses, according to the commentary. Read more. (Subscription required.)

A competing editorial from Bloomberg today said that Congress could help Puerto Rico overcome its debt crisis by pushing forward recent legislation that would make chapter 9 available to the U.S. territory. Extending chapter 9 protections does not represent a bailout, according to the editorial, as they would enable an orderly restructuring of Puerto Rico's debts. Congress would also need to create an independent financial control board with the power to approve the long-term fiscal plans that Puerto Rico needs, according to the editorial. Since 2000, Puerto Rico’s public debt has risen from 60 percent of gross domestic product to more than 100 percent. Little in the last decade of Puerto Rico's political and fiscal history suggests that it has the ability to make the painful choices it faces, according to the editorial. Read more.

SUPREME COURT PETITIONED IN DISPUTE OF UNUSED BORDERS GIFT CARDS

In a petition filed this month with the U.S. Supreme Court, attorney Clinton Krislov is making a last-ditch effort to recover some value for holders of gift cards sold by Borders Group, the book chain that went under four years ago, the Wall Street Journal reported yesterday. The petition is the last chapter in a long-running fight over whether the gift-card holders waited too long to try to turn their credits into cash. The rights of gift-card holders are being questioned in retail bankruptcies across the country, including through a recent lawsuit filed by the Texas attorney general's office in RadioShack Corp.'s chapter 11 case. Borders estimates that customers never redeemed 17.7 million gift cards worth $210.5 million by the time it shut its doors in September 2011. The Borders bankruptcy estate still has nearly $8 million left for professional fees and creditors. Krislov said that a ruling in his clients’ favor could tap into that money, and that he thinks he would be entitled to claw back some of the roughly $100 million already paid to unsecured creditors. Bruce Buechler, an attorney winding down what remains of Borders in bankruptcy, called the Supreme Court petition "meritless" and said that the estate will be objecting to it. Borders filed for bankruptcy in February 2011 with plans to find a buyer to keep the once-popular chain alive. When that plan failed, the company liquidated. Gift card-holders were given until June 1, 2011, to file a claim in the bankruptcy. Not a single card holder filed such a claim, which Krislov said is proof that not enough was done to notify them. By the time Krislov filed a request to allow late claims in January 2012, the court had already approved a liquidation plan laying out how Borders would divvy up its remaining cash. The district and appellate courts ruled against Krislov using the concept of "equitable mootness," which essentially means that it would be unfair to creditors benefiting from the existing plan to have it upended after the fact. Read more. (Subscription required.)

COMMENTARY: CALIFORNIA'S PENSION ARMAGEDDON

Early this month, a bipartisan group of current and former local officials filed the "Voter Empowerment Act of 2016," a statewide ballot measure aimed at reforming the politics of public pensions, according to an editorial in this week's edition of The Weekly Standard. Its passage would forbid politicians in California from lavishing expensive retirement benefits on workers without explicit voter approval. The effort is being led by Carl DeMaio, a Republican former member of the San Diego city council, and Chuck Reed, a Democrat and former mayor of San Jose. California's pension struggles first gained national notoriety between 2009 and 2012. The financial crisis sent pension funds into steep decline, and the broader economic slump hammered public revenues from income, property and sales taxes. Thus, short on cash with which to backfill their rapidly expanding pension deficits, the state government and all manner of municipalities were forced to slash services and raise tax rates. Today, the main pension plans for state workers and teachers in California are about $190 billion short of what workers have been promised in benefits, despite the Dow Jones Industrial Average having nearly tripled in value since March 2009. The cost of government has not declined, nor have continuing budget imbalances made cities, counties and school districts any more efficient, according to the commentary. Rising pension expenditures have left taxpayers in the position of having to, in effect, pay more for past government services while getting less and less in the way of current services. Read the full commentary.

ANALYSTS DO NOT SEE DEFAULT IN CREDIT SWAPS BY GREEK FAILURE TO PAY IMF

Analysts and traders see little chance that Greece’s failure to pay $1.7 billion to the International Monetary Fund will trigger payouts on credit-default swaps, Bloomberg News reported today. The derivatives insuring Greek sovereign debt won't cause a failure-to-pay credit event because the IMF loan is a bilateral agreement and doesn't prompt cross defaults on government bonds, according to Royal Bank of Scotland Group Plc. The IMF loan is also excluded from swaps coverage because it predates a 2012 cutoff, according to JPMorgan Chase & Co. and Barclays Plc. Greece's government said that it won’t make the payment owed to the IMF today and that it's preparing to exit the protection of Europe's bailout regime at midnight. Investors are more concerned that the country may leave the euro following a July 5 vote on whether to accept the demands of its creditors and that it will be unable to make its bond payments due later that month. Read more.

NEW FRAUD AND FORENSICS BOOK AVAILABLE FOR PRE-ORDER IN ABI'S BOOKSTORE!

Now available for pre-order in the ABI Bookstore is Fraud and Forensics: Piercing Through the Deception in a Commercial Fraud Case. Cases such as Madoff and Enron have hinged on the ability of talented investigators to uncover the truth amidst layers of fraud, and this book highlights the areas of specialty, challenge and reward for forensic accountants and the professionals who work with them in commercial fraud cases. Written by members of ABI's Commercial Fraud Committee among other noted professionals, Fraud and Forensics provides a broad and deep look at the challenges faced in the course of a commercial fraud matter, as well as the tools available to help identify, unwind and prove fraudulent transactions. This book will also assist both forensic accountants and the professionals who work with them to sift through the fine details while creatively considering all of the possibilities to fit together the pieces of a fraud puzzle. Click here to pre-order. (Book to be shipped in mid- to late July; make sure to log in to obtain the ABI member price).

NEXT WEDNESDAY: ABI LIVE WEBINAR ON JULY 8 TO EXAMINE CHAPTER 11 REFORM COMMISSION'S RECOMMENDATIONS ON PROFESSIONAL FEES AND EXPENSES

Don't miss the abiLIVE webinar on July 8 examining the Chapter 11 Reform Commission's recommendations on professional fees and expenses. The panel will discuss the recommended reforms that provide for more effective oversight, as well as alternative fee structures consistent with professionals’ ethical obligations under the Code of Professional Responsibility. Click here to register.

ABI WORKSHOP TO FEATURE BANKRUPTCY JUDGES EXAMINING COMMISSION RECOMMENDATIONS ON RESOLVING COURT SPLITS

The 2015 Bankruptcy Judges Roundtable, an ABI Workshop, will take place at ABI headquarters on Aug. 4 to examine the Chapter 11 Reform Commission's recommendations on resolving court splits. The Commission identified more than 30 splits in case law on important bankruptcy issues. Attend the program from 3:00-4:30 p.m. ET in person or via live webstream to hear five bankruptcy judges discuss the recommendations and issues surrounding the court splits. Speakers on the program are Bankruptcy Judges Dennis R. Dow (D. Mo.), Bruce A. Harwood (D. N.H.), Barbara J. Houser (N.D. Texas), C. Ray Mullins (N.D. Ga.) and Eugene R. Wedoff (N.D. Ill.). ABI will seek 1.5 hours of general CLE credit in 60-minute-hour states and 1.5 hours of credit in 50-minute-hour states for the program. A networking reception will follow from 5-7 p.m. ET for in-person attendees, and registration for just the reception is also available. Click here to register.

NEW CASE SUMMARY ON VOLO: ROSS V. GARCIA (IN RE GARCIA; 1ST CIR.)

Summarized by Sarah Smegal of Bartlett Hackett Feinberg PC

Regarding the order denying motion for reconsideration, the First Circuit BAP found that the creditor-appellant "failed to show exceptional circumstances justifying Rule 60(b)(6) relief" and further found no error in the bankruptcy court declining to conduct an evidentiary hearing on the motion for reconsideration. Regarding the order granting the amended lien-avoidance motion, the First Circuit BAP found that the bankruptcy court's conclusion of value of the property was not clearly erroneous, the bankruptcy court was not required to conduct an evidentiary hearing, and the court's findings and conclusions of law articulated from the bench left no doubt about the basis for its decisions and did not warrant reversal and remand due to a purported lack of findings and conclusions of law.

There are more than 1,700 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.

NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: BANKS AND BITCOIN EXCHANGES

A recent blog post concluded that a hypothetical U.S.-based bitcoin exchange likely would not constitute a stockbroker or a commodity broker under the Bankruptcy Code. Therefore, according to the post, unless the bitcoin exchange is a certain type of bank, it is probably eligible for chapter 11 relief.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

INSOL INTERNATIONAL

INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 23 member associations worldwide with more than 9,800 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.

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NEXT EVENT:

abiLIVE Webinar:
"Ethics - Chapter 11 Commission Recommendations on Professional Fees and Expenses"

July 8, 2015
Register Today!

UPCOMING EVENTS:

22nd Annual Northeast Bankruptcy Conference
July 9-12, 2015
Register Today!

10th Annual Northeast Consumer Forum
July 9-11, 2015
Register Today!

20th Annual Southeast Bankruptcy Workshop
July 23-26, 2015
Register Today!

ABI Workshop: 2015 Bankruptcy Judges Roundtable
Aug. 4, 2015
Register Today!

11th Annual Mid-Atlantic Bankruptcy Workshop
Aug. 6-8, 2015
Register Today!

23rd Annual Southwest Bankruptcy Conference
Sept. 10-12, 2015
Register Today!

41st Lawrence P. King & Charles Seligson Workshop on Bankruptcy and Business Reorganization
Sept. 16-17, 2015
Register Today!

20th Annual Views from the Bench Conference
Oct. 9, 2015
Register Today!

7th Circuit Consumer Bankruptcy Conference
Oct. 12, 2015
Register Today!

35th Annual Midwestern Bankruptcy Institute
Oct. 15-16, 2015
Register Today!

11th Annual Detroit Consumer Bankruptcy Conference
Nov. 11, 2015
Register Today!

 
   
  CALENDAR OF EVENTS
 

2015

July
- abiLIVE Webinar: "Ethics - Chapter 11 Commission Recommendations on Professional Fees and Expenses"
July 8, 2015
- Northeast Bankruptcy Conference
July 9-12, 2015 | North Falmouth, Mass.
- Northeast Consumer Bankruptcy Forum
July 9-11, 2015 | North Falmouth, Mass.
- Southeast Bankruptcy Workshop
July 23-26, 2015 | Amelia Island, Fla.

August
- Mid-Atlantic Bankruptcy Workshop
Aug. 6-8, 2015 | Hershey, Pa.
- ABI Workshop: Bankruptcy Judges Roundtable
Aug. 4, 2015 | Alexandria, Va.

September
- Southwest Bankruptcy Conference
Sept. 10-12, 2015 | Las Vegas, Nev.

 

 


- Lawrence P. King & Charles Seligson Workshop on Bankruptcy and Business Reorganization
Sept. 16-17, 2015 | New York, N.Y.

October
- Views from the Bench Conference
Oct. 9, 2015 | Washington, D.C.
- 7th Circuit Consumer Bankruptcy Conference
Oct. 12, 2015 | Chicago, Ill.
- Midwestern Bankruptcy Institute
Oct. 15-16, 2015 | Kansas City, Mo.

November
- Detroit Consumer Bankruptcy Conference
Nov. 11, 2015 | Detroit, Mich.

 

 
 
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