Oversight board member explains how Puerto Rico's Title III differs from Chapter 9

PHILADELPHIA -- Title III, which Puerto Rico invoked in filing the largest municipal bankruptcy ever, differs from Chapter 9 insolvency in some respects, said a member of the island’s oversight board.

“It incorporates a lot of Chapter 9. The entrance requirements are a little bit different than Chapter 9 and the confirmation requirements are a little different, although very similar,” University of Pennsylvania law professor David Skeel, a bankruptcy expert, said at Wednesday’s meeting of the Philadelphia Area Municipal Analyst Society.

Skeel spoke, though measuredly, shortly after Puerto Rico announced it would file under Title III.

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“It’s kind of set up so both the existing government and the oversight board have important roles in the process,” Skeel told about 60 municipal finance professionals at Public Financial Management's Market Street headquarters.

“It’s different than, say, Detroit, but was Detroit was different because of the emergency manager. In Detroit, the emergency manager [Kevyn Orr] stepped in and he took complete control. He had all the authority of the government.

“That’s not true in Title III, generally. There are roles both for the government and for the oversight board.”

Skeel has written several books, including The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, and Debt’s Dominion: A History of Bankruptcy Law in America.

Under the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, which Puerto Rico invoked in its filing, U.S. Supreme Court Chief Justice John Roberts will select the judge. It will be a federal district court judge, not a bankruptcy judge.

The jurist’s role similar to that in Chapter 9, said Skeel.

“In the bankruptcy code, the role of the judge is meant to be reactive. Chief Justice Roberts likes to talk about how the judges are like umpires, they just call balls and strikes. That’s really true of bankruptcy judges in theory.

“In recent years judges have been more active, so the judge in the Detroit case [Steven Rhodes] was pretty active.”

PROMESA also created the oversight panel.

“Puerto Rico is different than the states,” said Skeel. “Congress, and this is important, very carefully framed PROMESA as a law about territories, not about states.”

Congress, he added, used the so-called territory clause in Article 4 in the U.S. Constitution as a basis for PROMESA.

“It is quite clear that Congress has more authority with respect to its territories than they do with the states,” he said. “This is very controversial in Puerto Rico. There is a fierce political debate about the relationship between Puerto Rico and the United States, but everybody agrees that it’s currently different between the U.S. and the states.”

Discussing municipal bankruptcies in general, Skeel said any recovery plan must rectify governance problems.

“If all you’re doing is writing down your debt, you’re not solving your problems because invariably when a city’s in such bad financial distress, that it’s considering bankruptcy, you have some serious problems with government dysfunction. The bankruptcy process needs to address those.

“I don’t think the Detroit bankruptcy did enough to reform the underlying governance structure. There’s some problems with governance in Detroit that were not fixed.”

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