HI. I’M BETH WIGGINS. WHEN WE HELD A WORKSHOP AT
THE FJC ON CHAPTER 9 BANKRUPTCY IN LATE 2016, MANY OF
THE PARTICIPANTS HIGHLIGHTED THE NEED FOR JUDGES
HANDLING CHAPTER 9 CASES TO UNDERSTAND THE INTRICACIES
OF MUNICIPAL FINANCE. WE’RE FORTUNATE TO HAVE ONE
OF THOSE PARTICIPANTS, LAWRENCE LAROSE, TO GUIDE US THROUGH THE IMPORTANT
ISSUES TODAY. LAWRENCE IS A PARTNER IN
NORTON ROSE FULBRIGHT, BASED IN NEW YORK CITY,
AND LEADS THEIR MUNICIPAL
RESTRUCTURING PRACTICE. HE’S PLAYED A MAJOR ROLE IN
NEARLY EVERY SIGNIFICANT CHAPTER 9 CASE
IN RECENT MEMORY, INCLUDING DETROIT;
JEFFERSON COUNTY, ALABAMA; STOCKTON; SAN BERNARDINO;
AND VALLEJO. AND HE’S BEEN NAMED
A LEADING LAWYER IN THIS AREA BY
THE LEGAL 500 EVERY YEAR FOR THE PAST 5 YEARS. LARRY, WELCOME,
AND THANK YOU FOR BEING HERE. LAROSE: THANK YOU, BETH.
THRILLED TO BE HERE. WIGGINS: THANKS.
SO TO START, CAN YOU TELL ME WHAT THE MOST SIGNIFICANT
DIFFERENCE BETWEEN CORPORATE FINANCE
AND MUNICIPAL FINANCE IS IN THE BANKRUPTCY WORLD? LAROSE: SURE. IN MY VIEW, BETH,
THE MOST SIGNIFICANT DISTINCTION IS BETWEEN SECURED OBLIGATIONS
AND UNSECURED OBLIGATIONS. IN THE CORPORATE WORLD
AND IN THE CHAPTER 11 WORLD, THAT DISTINCTION
IS FAIRLY CLEAR, WELL-DEVELOPED, AND UNDERSTOOD. UNFORTUNATELY,
IN THE MUNICIPAL FINANCE WORLD, THE DISTINCTION IS MUCH MURKIER. NOW, FOR DECADES THE GOLD
STANDARD IN MUNI FINANCE– THAT IS THE OBLIGATION
THAT’S CONSIDERED THE SAFEST AND MOST SECURE– HAS BEEN CALLED
THE GENERAL OBLIGATION BOND, SOMETIMES THE G.O. BOND. WITH A G.O. BOND, A MUNICIPALITY PLEDGES
ITS FULL FAITH AND CREDIT AND FULL TAXING POWER TO
THE REPAYMENT OF THE OBLIGATION. THUS, IT’S ARGUED THAT
THOSE BONDS HAVE A FIRST CALL ON ALL THE TAX RECEIPTS OF
THE MUNICIPALITY AND THEREFORE SHOULD BE SENIOR
TO OTHER MUNICIPAL OBLIGATIONS IN BANKRUPTCY. NOW, CHAPTER 9 INCORPORATES THE PRIORITY AND SECURITY
PROVISIONS OF CHAPTER 11. SO THE QUESTION IS WHETHER
A G.O. PLEDGE OF FULL FAITH AND CREDIT
AND TAXING POWER CREATES A LIEN UNDER THE CODE. WIGGINS: SO WHAT DOES THE CODE
AND THE CASE LAW TELL US ABOUT THAT? LAROSE: WELL, THE DEFINITION OF
LIEN, WHICH IS FOUND IN SECTION 101(37) OF THE CODE,
IS INCORPORATED INTO CHAPTER 9. AND IT STATES IN GENERAL TERMS THAT A LIEN IS A CHARGE AGAINST
OR AN INTEREST IN PROPERTY TO SECURE REPAYMENT OF A DEBT
OR PERFORMANCE OF AN OBLIGATION. NOW, JUST GOING TO BASICS,
“BLACK’S LAW DICTIONARY” TELLS US THAT A PLEDGE
IS DEFINED AS THE ACT OF PROVIDING
SOMETHING AS SECURITY FOR A DEBT OR OBLIGATION. SO THE ARGUMENT GOES
THAT A G.O. PLEDGE IS INTENDED TO PROVIDE SECURITY FOR
THE REPAYMENT OF THE G.O. BOND AND THEREFORE CONSTITUTES
A LIEN UNDER 101(37). WIGGINS: SO WHAT’S
A COUNTERARGUMENT TO THAT? LAROSE: WELL, ON THE OTHER SIDE,
IT’S ARGUED THAT BECAUSE THE G.O. PLEDGE OF
FULL FAITH AND CREDIT AND TAXING POWER
DOESN’T RELATE TO PROPERTY BECAUSE THAT PROPERTY DOESN’T
EXIST WHEN THE PLEDGE IS MADE, IT DOESN’T SATISFY
THE DEFINITION OF 101(37), AND THEREFORE A G.O. PLEDGE IS
JUST AN UNSECURED OBLIGATION OF THE MUNICIPALITY. NOW, THESE ISSUES HAVE BEEN
FULLY BRIEFED BUT NEVER DECIDED. THEY WERE VERY CONTENTIOUS
IN THE DETROIT CASE. THERE WAS ORAL ARGUMENT HEARD,
BRIEFS WERE FILED, BUT THE ISSUE WAS
ULTIMATELY SETTLED WITHOUT A JUDICIAL DECISION. SO WE HAVE A FUNDAMENTAL
ASPECT OF MUNICIPAL FINANCE– THAT’S THE PRIORITY
OF G.O. BONDS– THAT HAS NOT BEEN
DEFINITIVELY SETTLED WITH JUDICIAL PRECEDENT. WIGGINS: OK. SO ARE THERE
DIFFERENT TYPES OF G.O. BONDS, AND DO THE INTRICACIES
OF THE DIFFERENT ISSUANCES HAVE AN IMPACT FOR BANKRUPTCY? LAROSE: YEAH, THERE SURE ARE. BETH, THERE ARE A NUMBER
OF FLAVORS OF G.O. BONDS. SOME G.O. BONDS PLEDGE THE FULL
AND UNLIMITED TAXING POWER OF THE MUNICIPALITY. THOSE ARE CALLED
UNLIMITED G.O. BONDS. SOME PLEDGES ARE LIMITED TO
RATES OR AMOUNTS. AND THOSE ARE CALLED LIMITED
GENERAL OBLIGATION BONDS, AND THEY’RE GENERALLY CONSIDERED
TO BE SUBORDINATE TO GENERAL OBLIGATION BONDS, THE UNLIMITED GENERAL
OBLIGATION BONDS. OTHER TYPES OF G.O. BONDS HAVE
MULTIPLE PLEDGES. THEY’LL HAVE A FULL FAITH
AND CREDIT PLEDGE, BUT THEY ALSO MAY HAVE A PLEDGE
OF A SPECIFIC REVENUE STREAM, A SPECIFIC TAX OR–OTHER
SPECIFIC SOURCE OF REVENUES. AND THESE ARE CALLED
DOUBLE BARREL BONDS. AND THEY’LL HAVE
MULTIPLE PLEDGES. AND THE QUESTION IS, WHAT WILL
BE THE RANK AND PRIORITY OF EACH OF THOSE PLEDGES? NOW, THE SPECIFIC TERMS OF ANY
OF THESE TYPES OF OBLIGATIONS ARE DEFINED
IN THE BOND INDENTURE, THE RESOLUTION APPROVING
THE BOND ISSUANCE, AND APPLICABLE STATE
AND LOCAL LAW, ALL OF WHICH HAVE
TO BE LOOKED AT VERY CAREFULLY TO DETERMINE THE QUESTIONS WE’RE
TALKING ABOUT. WIGGINS: IT QUICKLY GETS VERY
COMPLICATED… LAROSE: IT SURE DOES. WIGGINS: OK.
SO WHAT’S THE DIFFERENCE BETWEEN
A GENERAL OBLIGATION BOND AND A REVENUE BOND? LAROSE: OK. IN CONTRAST
TO THE GENERAL OBLIGATION BOND, A REVENUE BOND IS SUPPORTED
BY SPECIFIC REVENUES THAT ARE GENERATED
BY A PROJECT OR A SPECIFIC TAX OR SOME OTHER REVENUE SOURCE
OF A MUNICIPALITY WITHOUT RECOURSE
TO THE GENERAL FUND. SO A TYPICAL EXAMPLE OF THAT
WOULD BE BONDS SUPPORTED BY A UTILITY– WATER SYSTEM
OR ELECTRIC SYSTEM, A TRANSIT SYSTEM,
SALES TAX BONDS, OR BONDS SUPPORTED BY STATE AID. NOW, THESE ARE ALL TYPES OF
SPECIFIC REVENUES THAT ARE PLEDGED TO THE BONDS. WIGGINS: OK. SO HOW DOES THE
CODE TREAT THOSE KINDS OF BONDS? LAROSE: OK. WELL, BECAUSE THESE
ARE ONGOING REVENUE STREAMS THAT ARE PLEDGED
FOR PAYMENT OF THE BONDS, WE HAVE SOMETHING CALLED
SECTION 552(a) OF THE CODE, WHICH IS INCORPORATED
INTO CHAPTER 9. AND IN THE CASE
OF REVENUE BONDS, IT CREATES SOMETHING OF AN ISSUE. WELL, THE REVENUE
THEMSELVES HAVE LIENS ON THEM, AND THOSE LIENS
ARE FAIRLY CLEAR. SECTION 552(a)
SAYS THAT PROPERTY ACQUIRED BY THE DEBTOR AFTER
THE COMMENCEMENT OF THE CASE THAT IS SUBJECT TO A LIEN RESULTING
FROM A SECURITY AGREEMENT BEFORE THE COMMENCEMENT
OF THE CASE IS NOT PART OF THE LIEN
AFTER COMMENCEMENT OF THE CASE. WIGGINS: BUT THEN
WE HAVE SECTION 928, RIGHT? LAROSE: MM-HMM, YEAH. SO WHAT HAPPENED IS 552(a) WAS
SO CONFUSING TO THE MUNICIPAL MARKET
AND CAUSED THE MUNICIPAL MARKET TO QUESTION
WHETHER REVENUES ACQUIRED AFTER THE COMMENCEMENT OF
THE CASE WOULD BE SUBJECT TO THE LIENS
THAT CONGRESS IN 1988 HAD TO AMEND THE CODE. NOW, IT TOOK THEM 50 YEARS
TO DO THIS, BUT THEY FINALLY GOT
AROUND TO IT IN 1988. AND IN 1988, THEY INSERTED
SECTION 928 OF THE CODE. SO SECTION 928 OF THE CODE
ESSENTIALLY SAYS, “NOTWITHSTANDING
SECTION 552(a)”– FORGET ABOUT IT
FOR THIS PURPOSE– SPECIAL REVENUES ACQUIRED AFTER
THE COMMENCEMENT OF THE CASE ARE STILL SUBJECT TO THE LIEN. WIGGINS: OK, SO NOW I HAVE
TO ASK YOU ANOTHER QUESTION, AND THAT IS,
WHAT ARE SPECIAL REVENUES? LAROSE: THAT’S A GOOD ONE. SO SPECIAL REVENUES
ARE SPECIFICALLY DEFINED AS PART OF THIS 1988 AMENDMENT, AND THEY’RE DEFINED
AS SECTION 902(2), SUBSECTIONS (a) THROUGH (e). AND THE DEFINITION GENERALLY
ENCOMPASSES REVENUES THAT ARE GENERATED FROM WHAT THEY CALL PROJECTS OR SYSTEMS OF THE DEBTOR THAT ARE USED PRIMARILY
FOR PUBLIC SERVICES, OK? THEY ALSO ARE DEFINED AS SPECIFIC TAXES AND VARIOUS
OTHER TYPES OF REVENUES THAT ARE DERIVED FROM FUNCTIONS OF THE CITY, OK? WIGGINS: SO WHAT’S THE
IMPORTANCE OF THIS DEFINITION FOR THE BANKRUPTCY ANALYSIS? LAROSE: YEAH, WELL,
ESSENTIALLY IMPORTANT BECAUSE UNDER SECTION 928(a),
THE LIENS THAT ARE GRANTED ON SPECIAL REVENUES, AS DEFINED, ARE NOT CUT OFF UNDER 552(a) AND THE AUTOMATIC STAY UNDER
SECTION 362 DOES NOT APPLY. WIGGINS: OK.
ARE THERE OTHER LIMITATIONS TO THE APPLICATION
OF SECTION 552(a) THAT ARE IMPORTANT
IN THE CHAPTER 9 CONTEXT? WIGGINS: YEAH,
THAT’S A VERY GOOD QUESTION. BECAUSE 552(a) BY ITS TERMS
ONLY APPLIES TO LIENS THAT ARE CREATED
BY A SECURITY AGREEMENT, I.E. BY A CONTRACT BETWEEN
PARTIES, IT DOESN’T APPLY TO LIENS THAT
ARE CREATED SOLELY BY A STATUTE, AND SUCH LIENS CONTINUE
AFTER THE FILING OF A PETITION. NOW, IT’S IMPORTANT TO NOTE
THAT STATUTORY LIENS ARE LIENS THAT ARISE AUTOMATICALLY
BY THE FORCE OF LAW AND ARE NOT BASED ON ANY
AGREEMENTS BETWEEN THE PARTIES, EITHER CONTRACT AGREEMENTS
OR JUDICIAL ACTION. NOW, THE INTERPLAY BETWEEN
THE RELEVANT STATUTORY LANGUAGE AND ANY FINANCING DOCUMENTS THAT
ARE INVOLVED IN AN OBLIGATION SUPPORTED BY A STATUTORY LIEN
ARE VERY IMPORTANT. IT’S AN IMPORTANT DYNAMIC
THAT WAS LITIGATED EXTENSIVELY BY BOTH THE BANKRUPTCY COURT AND THE DISTRICT COURT
IN THE ORANGE COUNTY CASES. AND WE DO HAVE
SOME LEARNING ON IT. BUT SUFFICE IT TO SAY
THAT THE MORE EXPLICIT THE STATUTORY LANGUAGE IS THAT
CREATES THE LIENS AND THE MORE AUTOMATIC
THAT THE LIEN IS IN THE STATUTE, THE MORE LIKELY IT IS TO
BE ENFORCED AS A STATUTORY LIEN. WIGGINS: OK, SO LET ME SEE
IF I CAN SUMMARIZE THIS. SO IS IT RIGHT THAT IF…
BONDS BASED ON STATUTORY LIENS OR PLEDGED SPECIAL REVENUES
CONTINUE TO BE PAID DURING THE PENDENCY
OF THE BANKRUPTCY CASE, OF COURSE, ACCORDING
TO THEIR TERMS AND, OF COURSE, TO THE EXTENT
OF THE PLEDGED SPECIAL REVENUES? LAROSE: WELL, NOT NECESSARILY. CODE SECTION 922(d)… WHICH IS AN EXCEPTION
TO THE AUTOMATIC STAY, IT ONLY APPLIES
TO PLEDGED SPECIAL REVENUES AND DOESN’T APPLY TO
STATUTORY LIENS. AND SO PROPERTY THAT IS SUBJECT
TO A STATUTORY LIEN DOES NOT HAVE THAT EXCEPTION. AND SO WITH RESPECT
TO SPECIAL REVENUES, CODE SECTION 928(b) CREATES
A CARVE OUT FOR THE LIEN. IT ESSENTIALLY SAYS, ANY LIEN ON SPECIAL
REVENUES THAT IS DERIVED FROM A PROJECT OR A SYSTEM, LIKE A WATER SYSTEM
OR ELECTRICAL SYSTEM, IS SUBJECT TO
THE NECESSARY OPERATING EXPENSES OF THE PROJECT OR SYSTEM,
AS THE CASE MAY BE. NOW, THE LEGISLATIVE HISTORY
OF THE 1988 AMENDMENTS SUGGESTS THAT
THAT 928(b) CARVE OUT WAS MEANT TO PROTECT
GROSS LIENS, MEANING A LIEN THAT WAS ON
ALL THE REVENUES OF THE PROJECT FROM DEPRIVING THE PROJECT OF
OPERATING EXPENSES DURING THE PENDENCY OF THE CASE. IT WAS NOT MEANT TO BE APPLIED
TO NET LIENS, WHICH ATTACH TO REVENUES AFTER
PAYMENT OF OPERATING EXPENSES. NEVERTHELESS, THIS ISSUE WAS
LITIGATED EXTENSIVELY IN THE JEFFERSON COUNTY
CHAPTER 9 CASES. AND IN THAT CASE, THE BANKRUPTCY
JUDGE DETERMINED THAT THE DEFINITION
OF OPERATING REVENUES FOR 928(b) PURPOSES
IS ESSENTIALLY THE DEFINITION IN THE INDENTURE
THAT WAS A NET LIEN CASE. AND HE DIDN’T MODIFY IT FOR 928,
BUT IT’S AN OPEN ISSUE. WIGGINS: OK. SO CAN YOU TELL ME
MORE ABOUT STATUTORY LIENS ON NON-SPECIAL REVENUE PROPERTY? LAROSE: YEAH, SURE. NOW, HOLDERS OF STATUTORY LIENS
ON NON-SPECIAL REVENUE PROPERTY IN ORDER TO GET ACCESS
TO THE REVENUES DURING THE PENDENCY OF THE CASE,
THEY HAVE TO FILE A MOTION TO LIFT
THE AUTOMATIC STAY UNDER 362, AND THEY HAVE TO FILE A MOTION
TO LIFT THE STAY FOR CAUSE. NOW, THERE IS
NO CASE LAW–NONE– SPECIFICALLY ADDRESSING
ADEQUATE PROTECTION OR WHAT CONSTITUTES CAUSE
FOR THIS PURPOSE. AND ANALOGOUS PROVISIONS OF
CHAPTER 11 IN THE CHAPTER 11 CASE LAW
ON ADEQUATE PROTECTION CAN BE EASILY DISTINGUISHED
IN A CHAPTER 9 CONTEXT. NOW, RECENT LITIGATION IN THE
PUERTO RICO CASES UNDER PROMESA, THE NEW BANKRUPTCY LAW THAT
APPLIES ONLY TO PUERTO RICO, SUGGEST THAT BONDHOLDERS
HAVE THE BURDEN OF PROOF TO SHOW THAT THEY ARE NOT
ADEQUATELY PROTECTED AND THEREFORE NEED TO LIFT
THE STAY. BUT IT’S UNCLEAR
WHETHER THOSE PROMESA CASES WOULD APPLY IN CHAPTER 9. WIGGINS: OK. WELL, LET’S MOVE ON
TO A DIFFERENT ISSUE. LAROSE: SURE. WIGGINS: CAN WE TALK A LITTLE
BIT ABOUT THE DIFFERENCES BETWEEN CREDITOR CONSTITUENCIES
IN CHAPTER 9 CASES VERSUS CHAPTER 11 CASES? LAROSE:
THAT’S ANOTHER GOOD QUESTION. THE MOST OBVIOUS DIFFERENCE
WOULD BE THE LACK OF CREDITOR COMMITTEES
IN CHAPTER 9 CASES. NOW, IT’S NOT THAT THE CODE
DOESN’T PERMIT THEM. IT DOES. SECTION 1102 AND 1103 ARE
INCORPORATED INTO CHAPTER 9. THE REASON YOU GENERALLY DON’T
SEE CREDITOR COMMITTEES IS BECAUSE THERE’S NO PROVISION AND THE COURT CANNOT FORCE
A MUNICIPAL DEBTOR TO PAY THE FEES AND EXPENSES
OF A COMMITTEE. SO, GENERALLY,
THEY AREN’T FORMED. THE EXCEPTION TO THAT IN MAJOR
CASES ARE RETIREE COMMITTEES. WE HAD RETIREE COMMITTEES THAT
WERE FORMED IN BOTH THE STOCKTON CASES
AND THE DETROIT CASE. THEY PLAYED MAJOR ROLES,
BUT THOSE WERE FORMED WITH THE CONSENT OF THE DEBTOR, AND THE DEBTOR CONSENTED TO PAY THE REASONABLE FEES
AND EXPENSES DURING THE CASE. WIGGINS: I’D LIKE TO TALK ABOUT
SOME OF THOSE ISSUES AT A LATER DATE,
BUT LET’S MOVE ON. WHAT ABOUT TRUSTEES? LAROSE: AH, WELL, TRUSTEES ARE
INTERESTING AS WELL. CODE SECTION 1104 IS
NOT APPLICABLE IN CHAPTER 9 EXPLICITLY, SO THE COURT HAS
NO AUTHORITY TO APPOINT A TRUSTEE
OR A RECEIVER. THEY ALSO CANNOT APPOINT
AN EXAMINER IN THE CASE. SO, TRADITIONALLY,
THE RIGHTS OF BONDHOLDERS IN CHAPTER 9 CASES HAVE
BEEN LEFT TO BE PROTECTED BY INDENTURE TRUSTEES
OR THE LIKE, ALTHOUGH MANY TYPES OF MUNICIPAL
BONDS, I HAVE TO TELL YOU, INCLUDING, PARTICULARLY,
INCLUDING G.O.s, DON’T HAVE INDENTURE TRUSTEES. THEY HAVE FISCAL AGENTS, WHICH
CAN SOMETIMES BE THE CITY THEMSELVES. SO IN MANY CASES,
THE BONDHOLDERS ARE LEFT TO FEND FOR THEMSELVES. WIGGINS: OK, SO WHAT DOES
THE PRESENCE OF BOND INSURANCE HAVE TO DO WITH THE CASE? LAROSE: WELL, BOND INSURANCE
IS A UNIQUE ASPECT OF MUNICIPAL FINANCE. BOND INSURANCE ARE
INSURANCE COMPANIES THAT INSURE THE PAYMENT
OF PRINCIPAL AND INTEREST WHEN DUE ON MUNICIPAL BONDS. GENERALLY, FINANCIAL GUARANTY
POLICIES OBLIGATE THE INSURER TO PAY WHEN DUE
BUT NOT UPON ACCELERATION, AND THEY THEREFORE MEAN THAT
THE BOND INSURER ARE IN THE CASE FOR THE FULL CASE. THEY CAN’T TRADE THEMSELVES OUT
OF THE CASE, AND THEY,
UNDER THE BOND DOCUMENTS, GENERALLY STEP INTO THE SHOES
OF THE BONDHOLDERS TO ENFORCE THEIR RIGHTS AND EVEN
FOR VOTING PROVISIONS UNDER THE CODE. AND SO BOND INSURERS CAN AND,
IN FACT, HAVE PLAYED MAJOR ROLES IN MOST OF THE LARGER
CHAPTER NINES. WIGGINS: OK. SO SPECIAL
REVENUE BONDS CLEARLY HAVE A UNIQUE STATUS IN CHAPTER 9. LAROSE: YES. WIGGINS: WHAT ABOUT
THE CONFIRMATION PROCESS? HOW ARE THEY TREATED
OR TO BE TREATED IN THE PLAN OF ADJUSTMENT? LAROSE: YEAH. SO TOWARDS THE END
OF THE CASE, WHEN IT COMES TO CONFIRMATION,
THE QUESTION OF WHETHER SPECIAL REVENUE CLAIMS
CAN BE IMPAIRED WITHOUT THE CONSENT
OF THE BONDHOLDERS– A CRAM DOWN UNDER 1129(b)–
IT’S HOTLY DEBATED. AND WE DON’T HAVE
JUDICIAL RESOLUTION YET. IT IS CLEAR THAT
1129(b) GENERALLY APPLIES TO CHAPTER 9,
BUT ITS APPLICATION TO SPECIAL REVENUE CLAIMS
IS VERY DIFFICULT BECAUSE THERE’S
A REAL DIFFICULTY IN VALUING REVENUE STREAMS. AND, OF COURSE, WE CAN’T FORCE
A MUNICIPALITY TO LIQUIDATE ITS ASSETS,
SO YOU HAVE VALUATION ISSUES. THE DEBTOR IN
DETROIT ATTEMPTED TO CRAM DOWN ON ITS
SPECIAL REVENUE OBLIGATIONS. THEY PROPOSED A PLAN
THAT WOULD HAVE IMPOSED… PRINCIPAL HAIRCUTS
AND INTEREST HAIRCUTS ON THE BONDS. THEY BASED THE INTEREST CUT ON
A “TILL” MARKET BASE ANALYSIS UNDER THE SUPREME COURT CASE, EVEN THOUGH IN THAT CASE,
ALL PARTIES AGREED THAT THE SPECIAL REVENUES AVAILABLE
WERE MORE THAN SUFFICIENT TO SERVICE THE BONDS IN FULL. WIGGINS: OK. SO WHAT HAPPENED? LAROSE:
WELL, IT WAS HOTLY CONTESTED. THE PARTIES FULLY BRIEFED
THE ISSUES, AND THOSE BRIEFS
ARE VERY INSTRUCTIVE. THEY’RE STILL ON
THE PUBLIC RECORD. BUT NO JUDICIAL RESOLUTION CAME
OUT OF THAT DEBATE BECAUSE EVENTUALLY DETROIT
AMENDED ITS PLAN OF ADJUSTMENT TO PAY THE BONDS–THOSE
SPECIAL REVENUE BONDS–IN FULL FOR A REFINANCING. WIGGINS: SO WHAT DO YOU THINK
SHOULD HAPPEN? LAROSE: MY PERSONAL OPINION
IS THAT IN A CASE WHERE SPECIAL REVENUES
ARE SUFFICIENT TO PAY THE BONDS
AND THE CLAIMS IN FULL, NEITHER A CRAM DOWN
UNDER 1129(b), NOR A MARKET INTEREST
RATE ADJUSTMENT UNDER “TILL,” IS PERMISSIBLE BECAUSE THE LIEN
ON THE SPECIAL REVENUES, AS WE DISCUSSED BEFORE, ATTACHES TO EVERY DOLLAR
OF THE REVENUES AS THEY’RE
COLLECTED DURING THE CASE. AND NOTHING UNDER THE CODE,
UNDER THE CASE LAW, OR EVEN THE PLURALITY
SUPREME COURT OPINION IN “TILL” PERMITS OR CONDONES
AN IMPAIRMENT OF A LIVE LIEN. WIGGINS: OK. LAROSE: AND, REMEMBER, SPECIAL
REVENUES HAVE A LIVE LIEN DURING THE CASE. WIGGINS: SO IT’S GOING
TO BE PRETTY INTERESTING TO SEE HOW THAT’S PUT FORTH
AND RESOLVED IN FUTURE CASES. LAROSE: IT SURE WILL. WIGGINS: OK.
SO WHAT OTHER UNIQUE ASPECTS OF MUNICIPAL FINANCE
DO YOU THINK ARE IMPORTANT IN THE CHAPTER 9 CONTEXT? LAROSE: YEAH, THE STATE LAWS
GENERALLY APPLY, OK, DURING THE CHAPTER 9 CASE, AND THE LAWS THAT
ESTABLISH RESTRICTED FUNDS– SOMETIMES THEY’RE
CALLED ENTERPRISE FUNDS OR LIMITED USE FUNDS–
THEY REMAIN APPLICABLE. AND THAT MEANS THAT THOSE FUNDS
MUST BE MAINTAINED SEPARATE FROM THE GENERAL OBLIGATIONS
OF THE CITY AND AREN’T AVAILABLE FOR
CREDITORS. SO THAT’S A DISTINCTION. IN OTHER CASES, THERE MAY BE
THINGS CALLED INTERCEPT LAWS THAT HAVE BEEN IMPLICATED IN
BOND ISSUES. UNDER AN INTERCEPT STATUTE,
A REVENUE SOURCE THAT IS OTHERWISE BEING PAID TO A CITY–
SAY, FEES OR STATE AID– UPON A CERTAIN TRIGGER, WHETHER
IT’S DEFAULT OR INSOLVENCIES, THAT REVENUE STREAM
IS AUTOMATICALLY REDIRECTED TO BE PAID DIRECTLY
TO THE BONDHOLDERS. NOW, THE ENFORCEABILITY OF
INTERCEPT LAWS UNDER CHAPTER 9 IS, AGAIN, SUBJECT TO DEBATE. IT WAS LITIGATED
IN THE VALLEJO CASE BUT NOT TO
A CONCLUSION, SURPRISINGLY. BUT SUFFICE IT TO SAY THAT
THE MORE AUTOMATIC THE TRIGGER AND THE LESS NEED
FOR THIRD PARTY ACTION, THE MORE LIKELY
THE INTERCEPT IS TO BE ENFORCED. WIGGINS: SO YOU’VE OUTLINED
FOR US MANY INTERESTING ISSUES THAT ACTUALLY HAVEN’T RESOLVED
AT THE BANKRUPTCY COURT OR THE DISTRICT COURT, MUCH LESS
THE COURT OF APPEALS THAT WOULD CREATE
SOME BINDING PRECEDENT. LAROSE: RIGHT. WIGGINS: YOU MENTIONED
PUERTO RICO AND PROMESA EARLIER. WHAT EFFECT, DO YOU THINK,
THE LITIGATION IN THOSE CASES IS GOING TO HAVE ON
MUNICIPALITY RESTRUCTURING AND CHAPTER 9 GENERALLY? LAROSE: YEAH, LOOK, I THINK IT’S
DIFFICULT TO SAY. IT’S TRUE THAT
THE COMMONWEALTH OF PUERTO RICO AND VARIOUS OF
ITS PUBLIC INSTRUMENTALITIES, THEY USED VIRTUALLY EVERY
MUNICIPAL FINANCE STRUCTURE KNOWN, AND SOMETIMES UNIQUE ONES
TO PUERTO RICO, TO FINANCE THEIR
OBLIGATIONS OVER MANY YEARS. AND MANY OF THOSE STRUCTURES
ARE BEING TESTED CURRENTLY IN THE PUERTO RICO
BANKRUPTCY CASES. WE CALL THEM “BANKRUPTCY” CASES,
EVEN THOUGH THEY’RE NOT. BUT IN MY VIEW,
THE WIDER IMPACT OF RULINGS IN THOSE PUERTO RICO CASES
IS REALLY UNKNOWN. AND I THINK WE NEED TO BE
CAUTIOUS ABOUT DRAWING PARALLELS BETWEEN CHAPTER 9
AND THE PROMESA CASES FOR A NUMBER OF REASONS. FIRST, PROMESA IS
A UNIQUE FEDERAL STATUTE THAT CURRENTLY APPLIES
ONLY TO PUERTO RICO, AND IT WAS IMPLEMENTED UNDER THE TERRITORIAL CLAUSE
OF THE CONSTITUTION, NOT THE BANKRUPTCY CLAUSE. NOW, WE CALL THE TITLE III CASES
BANKRUPTCY-LIKE CASES, BUT THEY ARE NOT
BANKRUPTCY CASES UNDER THE CODE. IN FACT, THEY’RE
IN THE DISTRICT COURT. THEY’RE NOT
IN THE BANKRUPTCY COURT. SECONDLY, WHILE PROMESA
DOES INCORPORATE MANY PROVISIONS OF BOTH CHAPTER 9
AND CHAPTER 11, INCLUDING MANY OF THE THINGS
WE’VE DISCUSSED TODAY, IT ALSO HAS MANY OTHER
UNIQUE PROVISIONS, AND THOSE UNIQUE PROVISIONS
NEED TO BE TAKEN INTO ACCOUNT WHEN INTERPRETING THE STATUTE. THIRD, I DON’T THINK
IT CAN BE IGNORED THAT THE ENTIRE PUERTO RICO
SITUATION IS RIFE WITH POLITICS. AND IN ADDITION TO THAT, THE UNEXPECTED
HUMANITARIAN DISASTERS OF THE HURRICANES HAS PUT
A PATINA OVER THOSE CASES, WHICH MAKES THEM COMPLETELY
UNIQUE AND, I THINK IT’S FAIR TO SAY, MAY HAVE SOME BEARING
ON THE OUTCOMES IN THOSE CASES. SO, FINALLY, THE DISTRICT COURT
IN PUERTO RICO IN ONE OF
THE EARLY PROMESA CASES– THAT’S BEFORE
THEY FILED FOR TITLE III– WHEN THAT COURT WAS INTERPRETING
CONCEPTS UNDER CHAPTER 11 AND CHAPTER 9, THAT COURT
CAUTIONED THAT JURISPRUDENCE FROM CHAPTER 11 CAN’T BE APPLIED
DIRECTLY UNDER PROMESA BECAUSE OF UNIQUE CIRCUMSTANCES
OF THE STATUTE. SO THE REVERSE MAY ALSO BE TRUE. SO WE NEED TO BE VERY CAUTIOUS. SOMETHING WE MAY WANT TO REVISIT
IN A YEAR OR TWO. WIGGINS:
THAT’LL BE A FUN CONVERSATION. MAYBE SOME MORE DEVELOPMENT IN
THE CHAPTER 9 CONTEXT AND DEVELOPMENT
IN THE PROMESA CASES, AND WE’LL HAVE
A GOOD DISCUSSION. SO, FOR NOW, WHAT I’D LIKE
TO DO IS, CAN YOU TELL ME IN A NUTSHELL WHAT THE MAJOR
TAKEAWAYS FROM OUR DISCUSSION TODAY ARE? WHAT WOULD YOU LIKE TO LEAVE
JUDGES WITH? LAROSE: SURE. LOOK,
I THINK, AS WE’VE TALKED ABOUT, THE INTERFACE BETWEEN
MUNICIPAL FINANCE AND BANKRUPTCY IS A DIFFICULT ONE. THE PARAMETERS OF THE ISSUES
WE’VE TALKED ABOUT HAVE BEEN FAIRLY DRAWN OUT, BUT THE DETAILS HAVE YET TO BE
DETERMINED. AND SO I THINK PRACTITIONERS
AND JUDGES NEED TO BE VERY CAREFUL ABOUT THE FACTS
AND CIRCUMSTANCES OF THEIR INDIVIDUAL CASES
IN ORDER TO DETERMINE THOSE CASES IN THE MOST FAIR
AND EQUITABLE WAYS WHILE WAITING FOR THE LAW
TO DEVELOP. WIGGINS: THAT’S GOING TO
BE REALLY FUN TO TALK ABOUT IN A FEW YEARS. BUT FOR TODAY, THANK YOU SO MUCH
FOR BEING HERE AGAIN, AND REALLY APPRECIATE IT. LAROSE: THANK YOU, BETH.
MY PLEASURE.