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BESPOKE BANKRUPTCY Laura N. Coordes* Abstract The U.S. Bankruptcy Code is the primary source of bankruptcy relief for debtors in the United States. But it is not the only source. Over the years, Congress has occasionally created bespoke bankruptcy— customized debt relief designed for a particular group of debtors. Bespoke bankruptcy may provide desperately needed bankruptcy relief to entities that are ineligible or otherwise unable to access bankruptcy through the Bankruptcy Code. But bespoke bankruptcy is also fraught with difficulties. To what extent should bespoke bankruptcy be used or developed instead of the Bankruptcy Code? This Article takes up this question. It begins by acknowledging the limitations of the Bankruptcy Code and highlighting instances where Code-based bankruptcy relief does not work. It then introduces the concept of bespoke bankruptcy and devises a framework that policymakers can use to decide when and how to implement it. In so doing, this Article sets the stage for a new direction in bankruptcy law: one where bespoke bankruptcy performs a limited, but critical, role in providing relief to entities that the Bankruptcy Code either does not or cannot assist. INTRODUCTION ..................................................................................... 360 I. CODE-BASED BANKRUPTCY: THE STANDARD TEMPLATE ...... 365 A. Bankruptcy’s Core Characteristics ................................ 365 B. Code-Based Bankruptcy and Its Limitations .................. 368 II. THE BANKRUPTCY MISFIT PROBLEM ...................................... 372 A. Accommodating Bankruptcy Misfits ............................... 374 1. Bankruptcy Code Amendments .............................. 374 a. Chapter 9 .......................................................... 374 b. Chapter 12 ........................................................ 376 c. Subchapter V .................................................... 377 2. Bespoke Bankruptcy ............................................... 379 * Associate Professor, Arizona State University Sandra Day O’Connor College of Law. Many thanks to Douglas Baird, Chris Bradley, Matthew Bruckner, Anthony Casey, Adam Feibelman, Pamela Foohey, Jason Iuliano, Ted Janger, Anna Lund, Stephan Madaus, Nathalie Martin, John Pottow, Laura Spitz, and Jay Westbrook for their insightful comments. This Article benefitted from discussions at the Global Bankruptcy Scholars’ Work-in-Progress Workshop, the University of New Mexico’s faculty colloquium, the National Business Law Scholars Conference, the Center on Law and Economy’s workshop at Tulane Law School, and the Villanova University faculty colloquium. Many thanks as well to Lucas Hickman for his invaluable research assistance. 359 360 FLORIDA LAW REVIEW [Vol. 73 a. Dodd-Frank ...................................................... 380 b. PROMESA ....................................................... 381 B. Future Reforms ............................................................... 388 III. BESPOKE BANKRUPTCY .......................................................... 391 A. Overuse Concerns .......................................................... 391 B. Further Use of Bespoke Bankruptcy .............................. 395 1. The Eligibility Test ................................................. 396 2. The Four-Factor Assessment ................................... 398 3. Some Thoughts on Process ..................................... 400 C. The Proposal in Action ................................................... 401 CONCLUSION ......................................................................................... 411 INTRODUCTION In the spring of 2016, Puerto Rico found itself on a financial precipice. Years of overborrowing and other poor economic decisions,1 spurred in part by mainland U.S. policies,2 had saddled the island with “layers of debt.”3 In April of 2016, then-Governor Alejandro García Padilla signed an emergency moratorium just before the island defaulted on a $422 million bond payment, while warning that Puerto Rico would also default on an upcoming July 1 bond payment of $800 million.4 These defaults threatened to “trigger a cycle of hospital closures, electric-grid instability, infrastructur[e] collapse, and emergency-service breakdowns.”5 In other words, Puerto Rico’s financial distress was at risk of morphing into a humanitarian disaster. Unfortunately, Puerto Rico had no way to address its mounting problems. The government lacked the money to repay the bonds.6 Rating agencies downgraded the island’s credit ratings to junk, impeding its ability to borrow additional funds.7 In June of 2016, the U.S. Supreme 1. See Jim Wyss & Michelle Kaske, Puerto Rico’s Comeback Was Nigh, but Then the Coronavirus Came, BLOOMBERG L. (June 12, 2020, 7:30 AM), https://news.bloomberglaw.com/ bankruptcy-law/puerto-ricos-comeback-was-nigh-but-then-the-coronavirus-came (“For years the commonwealth sold debt to paper over budget gaps.”). 2. See Fin. Oversight & Mgmt. Bd. for P.R. v. Aurelius Inv., LLC, 140 S. Ct. 1649, 1673 (2020) (Sotomayor, J., concurring) (“Congress repealed Puerto Rico’s favorable tax credits, and manufacturing growth deflated, precipitating a prolonged recession.”). 3. John A. E. Pottow, What Bankruptcy Law Can and Cannot Do for Puerto Rico, 85 REVISTA JURIDICA UNIVERSIDAD DE P.R. 689, 701 (2016). 4. Ed Morales, Who is Responsible for Puerto Rico’s Debt?, NATION (June 7, 2016), https://www.thenation.com/article/who-is-responsible-for-puerto-ricos-debt/. 5. Id. 6. See id. 7. Fin. Oversight & Mgmt. Bd. for P.R., 140 S. Ct. at 1673 (Sotomayor, J., concurring). 2021] BESPOKE BANKRUPTCY 361 Court confirmed that neither Puerto Rico nor its municipalities8 were eligible for bankruptcy relief under the U.S. Bankruptcy Code, while striking down Puerto Rico’s attempt to create its own bankruptcy law.9 Even if Puerto Rico had been eligible to file for bankruptcy, the Bankruptcy Code does not have a procedure designed to restructure or adjust the debts of a U.S. territory, meaning that, at best, Puerto Rico would have only had access to partial relief.10 On June 30, 2016, the day before Puerto Rico was set to default on the $800 million bond payment, Congress stepped in, passing the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).11 PROMESA provided a form of bankruptcy relief designed specifically for Puerto Rico and its instrumentalities.12 When President Barack Obama signed the Act into law, he claimed it would provide “more stability, better services and greater prosperity over the long term for the people of Puerto Rico.”13 Though even its supporters acknowledged that the law was far from perfect, there was a clear sense of hope that this new law—a combination of traditional bankruptcy relief and other debt restructuring mechanisms—would provide Puerto Rico with a fresh start and a functioning economy.14 PROMESA is a prominent example of what this Article calls “bespoke bankruptcy”—customized debt relief designed for a particular group of debtors (in this case, Puerto Rico and its municipalities). PROMESA combines portions of the Bankruptcy Code with other debt restructuring tools, namely a financial oversight board and collective 8. This Article also refers to Puerto Rico’s municipalities as “instrumentalities,” which tracks the language used in PROMESA. 48 U.S.C. § 2104(19)(A). For a discussion of the case law addressing what constitutes a municipality eligible for relief under Chapter 9 of the Bankruptcy Code, see Matthew Adam Bruckner, Special Purpose Municipal Entities and Bankruptcy: The Case of Public Colleges, 36 EMORY BANKR. DEV. J. 341, 353–68 (2020). 9. See Puerto Rico v. Franklin Cal. Tax-Free Tr., 136 S. Ct. 1938, 1942, 1947 (2016). 10. See Pottow, supra note 3, at 700 (noting that Puerto Rico’s substantial, unsustainable territorial debt would have been exempt under Chapter 9 of the Bankruptcy Code). 11. Pub. L. No. 114-187, 130 Stat. 549 (2016) (codified at 48 U.S.C. §§ 2101–2241). 12. See Patricia Guadalupe, Here’s How PROMESA Aims to Tackle Puerto Rico’s Debt, NBC NEWS (June 30, 2016, 1:39 PM), https://www.nbcnews.com/news/latino/here-s-how- promesa-aims-tackle-puerto-rico-s-debt-n601741 [https://perma.cc/HW4T-3CZB]. Although PROMESA was designed in response to Puerto Rico’s difficulties, by its terms it applies to other territories as well. See 48 U.S.C. § 2104(20)(A)–(E). 13. Guadalupe, supra note 12. 14. See Ben Norton, Critics Say Bipartisan Bill Signed by Obama Imposes “Colonial” Control Board on Puerto Rico, Puts “Hedge Funds Ahead of People,” SALON (July 1, 2016, 11:45 PM), https://www.salon.com/2016/07/01/critics_say_bipartisan_bill_signed_by_obama_imposes _colonial_control_board_on_puerto_rico_puts_hedge_funds_ahead_of_people/ [https://perma. cc/Z3MQ-2K6N] (“Some Democrats have admitted that they think the bill is bad, but argued it must be passed as it is the only way for Puerto Rico to be able to restructure its debts and avoid expensive legal fees when creditors take it to court.”). 362 FLORIDA LAW REVIEW [Vol. 73 action provisions for bond modification.15 Although PROMESA effectively provides a traditional bankruptcy procedure for the territory and its instrumentalities through Title III of the Act, it also equips these entities with tools and techniques drawn from sovereign debt restructuring and out-of-court municipal finance practices to create a form of relief that Congress hoped would be better suited to Puerto Rico’s needs than anything in the Bankruptcy Code itself.16 Although

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