The judge overseeing Puerto Rico’s Title III bankruptcy process named five judges to help mediate disputes over island government and sales tax bonds in the biggest municipal restructuring in U.S. history.
Judge Laura Taylor Swain said Wednesday that Barbara Houser of the Bankruptcy Court of the Northern District of Texas should lead the mediation team. She also named Christopher Klein, a bankruptcy judge in the Eastern District of California, who oversaw the Stockton, Calif., Chapter 9 bankruptcy; Thomas Ambro, of the U.S. Court of Appeals for the 3rd Circuit; Nancy Atlas of U.S. District Court for the Southern District of Texas; and Victor Marrero of U.S. District Court for the Southern District of New York.
Holders of about $13 billion Puerto Rico general obligation bonds and $17.9 billion of Puerto Rico Sales Tax Financing Corp. (COFINA) bonds are at odds over which bonds should be given higher priority for repayment. Currently, the case just oversees these bonds, though it could be expanded to include other classes of Puerto Rico debt.
“A courtroom is often not the best place to strike agreements and compromises,” said Ballard Spahr partner Bill Rhodes. Mediation sessions can be better places to explore ideas with confidentiality.
Swain said participation in any mediation will be voluntary and confidential. Swain said she won't participate in mediation sessions and mediators won't provide information about the parties’ positions or the substance of the mediation process to Swain. The mediation process is to be held concurrently with Swain’s oversight of the Title III case.
Parties who wish to object to any of the preliminary designated mediators can do so confidentially by sending an email to email@example.com no later than June 20.
Swain said she plans to make final appointments prior to the June 28 Title III hearing in San Juan, where she will further explain the mediation process.
After the hearing the team will identify the issues to be addressed and the sequences in which the issues will be dealt.
A mediation process can be the best way to get consenting classes of creditors, Rhodes said. The first step is to get just one class.
Chapman Strategic Advisors managing director James Spiotto also thought the use of mediators was a good idea.
While mediation was part of the Title VI phase, only a few weeks were allowed for the talks before the litigation stay was to elapse, and people spent more time arguing than reaching common ground, Spiotto said. Mediators were used in the Lehman Brothers and Detroit bankruptcies, he said.
The hallmark of all big municipal bankruptcies is that people come together at the end, according to Spiotto. He said reinvestment in Puerto Rico will be the key to a viable long-term solution.
Swain has named “good and smart” people to be the mediators, Spiotto said.
Swain may use the voting mechanism found in Title VI of the Puerto Rico Oversight, Management, and Economic Stability Act to bind creditors to negotiated debt plans, Spiotto said. In this, creditors vote and at least two thirds of the votes by par value and at least more than half of all par value outstanding must be in favor of the restructuring deal for it to be adopted.