Puerto Rico and the Netherworld of Sovereign Debt Restructuring

Puerto Rico has incurred debt well beyond its ability to repay. It attempted to address its fiscal woes through legislation allowing the restructuring of some its debt. The Supreme Court put a stop to this effort, holding that Congress in the Bankruptcy Code barred the Commonwealth from enacting its own restructuring regime. Yet all agreed that the Bankruptcy Code did not provide anything in its place. While Congress quickly enacted PROMESA in an attempt to address the Puerto Rico’s fiscal ills, we explore in this paper whether Congress has the power to bar Puerto Rico from enacting a restructuring mechanism and not offer an alternative. We submit that the answer is no. When it comes to a state, the Supreme Court has held that the power to issue debt necessarily implies the power to restructure that debt. Congress can preempt that power, so long as it puts something in its place. To preempt and leave nothing, however, runs afoul of our federal system. The same reasoning, with greater force, applies to Puerto Rico. The federal government entered into a compact with the citizens of Puerto Rico, granting them, among other things, the power to issue debt. Puerto Rico implicitly received the power to restructure this debt. Congress could offer a substitute to any regime that Puerto Rico might enact, but it cannot leave the Commonwealth without any means to address its fiscal affairs

Coalition Formation and the Presumption of Reviewability: A Response to Rodriguez

Professor Dan Rodriguez\u27s paper The Presumption of Reviewability: A Study in Canonical Construction and Its Consequences\u27 makes several important contributions to the literature on statutory interpretation in the modern regulatory state. It provides a coherent explanation for the curious review provisions of the Administrative Procedure Act (APA), and analyzes the continuing battle over judicial review of agency action as part of a continuing dialogue among Congress, the courts, and the President. Rodriguez recognizes that those who study statutory interpretation must take account of both the existence of administrative agencies and the fact that interpretive practices have the potential to affect future action by Congress. These points are too often overlooked by modern theories of statutory interpretation. Indeed, the latter point-that interpretive practices may affect future legislation-is one of the unexplored areas in the current literature on statutory interpretation. Despite these laudable points, I think that ultimately Rodriguez fails to perform the task which he sets for himself. He asserts that his Article in large part is designed to explore the effects which one particular canon of statutory construction may have on future legislation. Specifically, Rodriguez attempts to delineate the ex ante effects of the canon which creates a presumption of judicial review of agency action. To the extent that Rodriguez traces the historical development of this canon, I have little to add to Rodriguez\u27s account. Rodriguez carefully examines the enactment of the APA, the change in judicial and legislative attitudes toward the administrative state which led the Supreme Court to create the presumption of reviewability in Abbott Laboratories v. Gardner, and the continuing change which has led the Supreme Court to be somewhat less enthusiastic in its application of this canon of construction. Rodriguez, however, also attempts to specify the manner in which the existence of this canon may affect Congress\u27s deliberation over future legislation. Rodriguez\u27s account of this impact is less convincing than his analysis of the creation of the canon. Rodriguez ultimately concludes that the presumption of judicial review may lead to the passage of less legislation than if the courts simply addressed the issue of reviewability on a case-by-case basis without putting the judicial thumb on the scales either in favor of reviewability or against it. Rodriguez asserts that this state of affairs exists because the presumption of reviewability may prevent the formation of a coalition in favor of a given bill where such a coalition would have formed had the presumption not existed. When one examines the dynamics of coalition formation and how the presumption of reviewability affects these dynamics, however, it becomes clear that Rodriguez\u27s claim cannot be supported

Introductory Remarks and a Comment on Civil RICO\u27s Remedial Provisions

This Symposium comes at a very opportune time. RICO seems to be on everyone\u27s mind. The attention that RICO has garnered in the last few years in the courts, the press, and the legal academy has in-creased steadily, and the cries for change, at least from some quarters,have become deafening. Judge David Sentelle of the D.C. Circuit Courtof Appeals recently labeled RICO The Monster That Ate Jurisprudence; Chief Justice William Rehnquist has repeatedly called for a defederalization of RICO; and groups as diverse as the Wall Street Journal, the Washington Post, and the American Civil Liberties Union have argued vociferously for a curtailment of the present statute.Four years ago the Supreme Court in Sedima, S.P.R.L. v. Imrex Co. pointedly told Congress that the remedy for the perceived over-breadth of RICO lies with the legislative branch. Despite this open invitation and a variety of legislative proposals, Congress has yet to address these problems. In each legislative session RICO opponents bravely predict that the days of the extant version of RICO are numbered. Every session to date, including the latest one however, has failed to produce the promised amendment. In addition to the movement for statutory amendment, the current version of RICO now faces Justice Antonin Scalia\u27s not so veiled threat last term in H.J. Inc. v. Northwestern Bell Telephone Co., that the Court would find the statute unconstitutionally vague when presented with the appropriate case. Three other Justices joined Justice Scalia in raising the possibility that the Constitution may limit RICO\u27s future.Despite this outcry for change, RICO is not without its defenders.Few would contest the proposition that RICO has enabled the United States Attorneys, with guidance from the Criminal Division of the Department of Justice, to secure a number of important convictions. Federal prosecutors readily admit that RICO has become one of the government\u27s more effective tools for attacking drug trafficking and official corruption. Any proposed change in RICO must be measured not only in terms of its purported benefits in decreasing the statute\u27s perceived abuses, but also in terms of the costs that it may impose on desirable law enforcement efforts.With this uncertainty surrounding RICO, the Vanderbilt Law Re-view Symposium attempts to assess the current state of RICO, and to set forth the arguments over its appropriate future course. It has fallen to me to preface this enterprise, and I think that the proper place to begin this Symposium is with a short description of RICO\u27s statutory framework. It is this framework that RICO opponents cite as the root of the problem

The Ex Ante Effects of Bankruptcy Reform on Investment Incentives

To assess the ex ante costs of bankruptcy reform, Part I of this Article begins with an examination of the literature on the agency costs in corporations. The costs arise both with the division of ownership among different claimholders and with the separation of ownership and control. Implicit in this literature is the assumption that bankruptcy law respects the contractual priority among the various claimants of the firm. It is well known, however, that bankruptcy law in practice deviates from contractual priority. Shareholders generally receive payouts even though the firm is insolvent. Part II examines the way in which this deviation affects the decisions of those charged with running the firm prior to the filing for bankruptcy. Part III compares these effects with the effects associated with the various proposed replacements for current law. Part IV sets forth the implications of these results for bankruptcy reform

Behavioral Economics, the Economic Analysis of Bankruptcy Law and the Pricing of Credit

Bankruptcy has been a fertile ground for the economic analysis of law. A significant portion of bankruptcy scholarship during the past fifteen years applies the basic assumptions of standard economic theory to the problems caused by financial distress. This scholarship begins with the premise that people make choices in a rational manner in order to maximize their individual utility. It applies this axiom to questions ranging from when do individuals file for bankruptcy to how bankruptcy laws affect firms\u27 investment decisions. As it has in most other areas of law (especially private law), law and economics has both reshaped our understanding of extant bankruptcy law and generated numerous proposals for reform. As illustrated by this symposium, scholars studying the way people make decisions have demonstrated that decision making routinely departs from the ideal posited by standard economic analysis. In various and systematic ways, people make choices which depart from the rational actor model that is the basis of much economic analysis of law. They dislike losses more than they like gains of the same amount, prefer the status quo, do not update beliefs in a rational manner, and otherwise fail to fit the model of Homo economus. These insights could be used to enrich the study of bankruptcy law in various ways. One such way would be to examine the workings of current law. For example, the extant reorganization process of Chapter 11 is predicated on bargaining among the affected parties, and the literature on behavioral economics suggests that people at times bargain in ways that are more fair than they are rational.\u27 Similarly, Congress is currently considering major reform to bankruptcy law as it applies to individuals, based largely on a perception that some individuals use these laws opportunistically. In this Essay, however, I begin the project of re-examining the strand of bankruptcy scholarship that attempts to specify optimal bankruptcy rules for firms in financial distress. This Essay first identifies the ways in which the normative prescriptions of the economic analysis of bankruptcy law rely on assumptions of individual rationality, and then examines one of these assumptions-namely, the assumption that creditors pass on the cost of an inefficient bankruptcy regime to the debtors to whom they ex- tend credit. This is not to say that the other ways in which the economic analysis of bankruptcy law is driven by the rational actor model are uninteresting or unimportant. Rather, I only hope to show that behavioral economics can enrich the economic analysis of bankruptcy law

Resolving Transnational Insolvencies Through Private Ordering

There is no international bankruptcy law. No question, there are international insolvencies. Transnational firms, just like domestic ones, often cannot generate sufficient revenue to satisfy their debt obligations. Their financial distress creates a situation where assets and claimants are scattered across more than one country. But there is no international law that provides a set of rules for resolving the financial distress of these firms. The absence of any significant free-standing international bankruptcy treaty means that a domestic court confronted with the domestic part of a transnational enterprise has to decide which nation\u27s domestic bankruptcy law will apply to which assets. To the extent that one wants to talk about an international bankruptcy law, it is nothing more than the question of when, as a matter of domestic law, a court will resolve a dispute according to the law of another country rather than its own nation\u27s bankruptcy law. International bankruptcy law as it currently exists is thus, in reality, domestic bankruptcy law. The challenge for each nation\u27s domestic law in this area is to mediate the tensions that arise because the firm and its creditors are spread across more than one jurisdiction. This question becomes difficult in large measure because each country\u27s domestic bankruptcy laws diverge. Such divergence is not surprising. Bankruptcy laws address a myriad of discrete questions. At a minimum, the bankruptcy laws of each nation must specify who will decide the future deployment of the insolvent firm\u27s assets, who will own these assets after the proceeding ends, and who will run the firm while all these matters are being sorted out. Scholars exploring the best way to address these questions have provided a number of conceptually coherent theories, yet they have not come to a consensus on the correct bankruptcy law - and, even if they had, there is little reason to think that the actual political process would embrace this consensus