Aaron M. Kaufman 2017-12-20 20:38:17
While Puerto Rico made headlines in 2017 following direct hits from Hurricanes Irma and Maria, the island has been headlining the bankruptcy news for quite some time. In May 2017, the commonwealth and several of its municipalities filed one of the largest municipal “bankruptcy” cases ever filed. Of course, the filings are not technically “bankruptcy cases” governed by the U.S. Bankruptcy Code—the U.S. Supreme Court ruled last year that Puerto Rico was not a state or municipality of a state that qualified for Chapter 9 bankruptcy relief.1 Thus, in response, Congress passed (and President Barack Obama signed into law) the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA. Under PROMESA, an oversight board was appointed and tasked with passing substantial austerity measures for the territory and its municipalities. The act further authorized the oversight board to negotiate with creditors and, ultimately, if necessary, commence proceedings under Title III of PROMESA, which established a bankruptcy-like procedure for restructuring Puerto Rico’s obligations. In May and July 2017, the oversight board filed five separate petitions under Title III of PROMESA, commencing some of the largest municipal “bankruptcy” cases in history, including cases for the Commonwealth of Puerto Rico, the Puerto Rico Sales Tax Financing Corporation, the Employees Retirement System for Puerto Rico’s government, the Puerto Rico Highways and Transportation Authority, and the Puerto Rico Electric Power Authority.2 While it remains unclear precisely what role the “bankruptcy” filings played in the recovery efforts, the austerity measures, coupled with the lack of liquidity available to the municipalities, have certainly hampered the island’s ability to recover at a rapid pace. On the mainland, the U.S. Supreme Court issued two decisions impacting consumer debt collection practices. First, in Midland Funding LLC v. Johnson,3 the court ruled that creditors may file “stale” claims in bankruptcy cases—i.e., a claim for a debt that is time-barred under non-bankruptcy law—without necessarily violating the Fair Debt Collection Practices Act, or FDCPA. In this 5-3 decision, Justice Stephen Breyer explained that the Alabama statute of limitations, while an affirmative defense, did not prohibit the creditor from otherwise receiving payments from the debtor. Second, in Henson v. Santander Consumer USA Inc.,4 Justice Neil Gorsuch penned the court’s unanimous decision holding that a debt buyer—i.e., a company that regularly purchases debt originated by someone else—was not necessarily a “debt collector” within the statutory definition and, thus, could not be held liable for any violations of the FDCPA. Still to be decided, though, was whether Santander could be considered a “debt collector” for other reasons—Gorsuch explained that those other reasons were not raised on the petition for certiorari. Finally, for the second year in a row, the Texas Supreme Court dabbled in bankruptcy in its decision in Noble Energy, Inc. v. ConocoPhillips Co.5 This time, the court construed a 2000 bankruptcy sale under which Noble assumed certain obligations. ConocoPhillips sued Noble for indemnification based on a pre-existing exchange agreement, but Noble argued that the exchange agreement was not among the list of contracts assumed under the bankruptcy sale. The Texas Supreme Court concluded that such obligations were important components of the rights and interests that Noble purchased and, more importantly, the sale order provided that any contracts not listed as rejected were deemed to be assumed. Thus, the court affirmed judgment in favor of ConocoPhillips and required Noble to continue indemnifying ConocoPhillips. Notes 1) Puerto Rico v. Franklin California Tax-Free Trust, U.S. , 136 S.Ct. 1938, 195 L.Ed.2d 298 (June 13, 2016). 2) Dockets available at https://cases.primeclerk.com/puertorico/Home-Index. 3) U.S. , 137, S. Ct. 1407, 197 L. Ed. 2d 790 (May 15, 2017). 4) U.S. , 137 S. Ct. 1718, 198 L. Ed. 2d 177 (June 12, 2017). 5) S.W.3d , 2017 Tex. LEXIS 598 (Tex. June 23, 2017). AARON M. KAUFMAN is a member in the Dallas office of Dykema Cox Smith, where he specializes in commercial bankruptcy and insolvency matters. His practice includes representation of debtors, committees, trustees, secured and unsecured creditors, buyers, and other stakeholders in a wide variety of bankruptcy issues. He also authors the “Benchnotes” column of the American Bankruptcy Institute Journal and frequently contributes to the institute’s VOLO Circuit Court Opinion First Responder.
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