NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A2102A
SPONSOR: Davila TITLE OF BILL:
An act to amend the banking law, in relation to restructuring unsustain-
able sovereign and subnational debt
PURPOSE:
To effectively restructure unsustainable Sovereign and Subnational debt
to strengthen the role of New York to issue and trade sovereign debt and
reduce the need for bailouts, negative social costs, systemic risk to
the economy, and creditor uncertainty.
SUMMARY OF PROVISIONS:
Section 1 of this legislation the banking law is amended to add a new
Article 7, which includes sections 300-309.
Section 300 provides the legislative intent for this article.
Section 301 provides definitions of "creditor," "claim," "plan,"
"state," and "independent monitor" for the purpose of this article.
Section 302 provides for the petition of relief and recognition which
authorizes the state to file a voluntary petition for relief with the
independent monitor. This relief is certified albeit that the state has
not previously sought relief under this article within the past 10
years, that not receiving relief would place an unsustainable burden of
debt on the state, the state agrees to restructure claims in accordance
with this article, the state agrees to all terms, conditions, and
provisions of the article, and that the state has enacted any national
or subnational law needed to catalyze the agreements. After a petition
has been filed, the terms, conditions, and provisions of the article
shall apply to the debtor-creditor relationship between the state and
its creditors of this jurisdiction, another jurisdiction, and all other
jurisdictions that have enacted the law sufficiently to this article.
Section 303 provides for the notification of intention to creditors and
approves that the state shall notify all of its known creditors within
30 days of filing its petition for relief, with the independent monitor
verifying the state's list of current creditors.
Section 304 provides for the debt reconciliation process to be
conducted, whereby the creditor's claims will be reconciled against
debtor's records.
Section 305 provides for the submission, contents, and voting on a plan.
A plan shall designate classes of claims, specify the proposed treatment
of each Class of claims, provide the same treatment for all claims,
disclose any claims not included, provide means for the plan's implemen-
tation, and certify that if the plan becomes effective on the state and
its creditors, that the state's debt will become sustainable. This plan
will become binding on the state and its creditors when it has been
submitted and agreed upon by each class of the creditors' claims. The
state will then be discharged from all claims included in the classes of
claims. The claims can only be agreed to if the creditors hold at least
two-thirds in amount and more than one-half in number of the claims.
Each class of claims shall also be of equal priority to the state.
Section 306 provides for financing the restructuring. The state shall
have the right to borrow money if the terms and conditions-deem it
appropriate. The state must notify all of its known creditors and the
creditors must respond to the independent monitor within 30 days of
notification. Any such loan must be approved by the creditors holding at
least two-thirds in principal amount of the covered claims of the credi-
tors responding to the independent monitor.
Section 307 provides for the priority of repayment. The state shall
repay loans lent under this article prior to any other claims and the
priority of payment shall be approved by the state's known creditors.
Section 308 provides for the adjudication of disputes and states that
the independent monitor may request that a court of competent jurisdic-
tion appoint a referee or special master to make recommendations for the
resolution of disputes.
Section 309 provides for application and opt-in, which applies that the
law governs the debtor-creditor relationship between a state and its
creditors. This article shall operate retroactively, overriding any
contractual provisions that are not consistent with the article and any
creditors of the state whose claims are not governed by the article may
opt in to the articles terms, conditions, and provisions.
Section 2 of the bill provides for the effective date.
JUSTIFICATION:
Nation states and subnational territories across the world have found
themselves mired in debt that they are unable to pay. Unlike individuals
and corporations, countries and subnational territories in the United
States cannot use bankruptcy law to restructure unsustainable debt.
Instead, they are forced to negotiate each of their debt contracts indi-
vidually, which often fails as it requires unanimity by various debt
holders. The absence of a predictable, orderly, and rapid process for
restructuring sovereign debt has created a "Wild Wild.West" system,
hurting debtor nations, their citizens, and their creditors, while also
posing serious systemic threats to the international financial system.
Approximately half of sovereign debt contracts are governed by New York
law. Because New York has no financial and legal architecture governing
sovereign debt contracts, its power is being superseded by a few bad
faith actors who are exploiting a void in the State's legal system to
engage in destabilizing and speculative behavior. This jeopardizes the
functioning of sovereign lending markets and the authority of New York
State.
Although attempts have been made to try to bypass the unanimity require-
ment in sovereign debt contracts by including so-called collective
action clauses, many contracts still lack them. Furthermore, most
collective action clauses only bind a party to the particular contract
that includes it. Herein emerges one of the central challenges in sover-
eign debt restructuring known as "the holdout problem"-- a type of
collective action problem where certain creditors, such as vulture funds
that may have bought debt in the secondary market for a steep discount,
sue to receive full payment by refusing to agree to a debt restructuring
plan that proposes to change critical terms, even though the other debt
holders consider the plan reasonable.
These tactics delay the finalization of a restructuring plan, leading to
inequities between creditors while posing severe consequences for debtor
nations. Unsustainable debt burdens that are unresolved for a prolonged
period of time can lead to sovereign nations losing access to the credit
market, hampering their ability to provide for their population's most
basic needs.
Most recently, vulture funds are engaging in these predatory practices
in Puerto Rico, where they have attempted to co-opt debt restructuring
proceedings to make huge profits while the people of Puerto Rico contin-
ue to be hit with austerity measures. The human cost of protracted debt
restructuring processes has also led to everything from famines in the
Congo to a sustained economic depression in Argentina, where vulture
funds were allowed to extract ransom money by buying debt claims to
block the ability of majority creditors to reach a settlement. judicial
decisions like these, issued by a federal court interpreting New York
law, threaten New York's dominance as the law that governs sovereign
debt contracts.
Because of its role in the sovereign debt market, New York is uniquely
positioned to help solve the sovereign debt crisis and preserve its
dominance through the model law. The model law would create a systematic
legal resolution framework for helping debtor states restructure unsus-
tainable debt. The proposed legislation would address the holdout prob-
lem by legally mandating supermajority voting that can bind dissenting
creditors. Contracts that now require unanimity for revisions could be
amended to allow changes that are approved by at least a supermajority
of similarly situated creditors (even if those creditors' claims arise
under different debt contracts); such a law would overcome the major
hurdle to sovereign debt restructuring. That, in turn, would give strug-
gling nations and subnational territories the real prospect of equitably
restructuring their debt to sustainable levels, thereby lowering sover-
eign borrowing costs and increasing creditor confidence by reducing
uncertainty.
Absent an actual federal treaty, New York has the right and responsibil-
ity to fill this clear legal void. Even though the model law could
retroactively impair contract rights, any impairment would be a reason-
able exercise of the state's police powers to protect its economy reduc-
ing the likelihood that a country-debt default could trigger a systemic
collapse, as occurred in 2008 when mortgage-debt defaults triggered a
global economic meltdown. Because any impairment must be voluntarily
agreed to by a "supermajority" of creditors, such a law would preserve
reasonable contractual expectations based on what creditors then realis-
tically expect to receive as payment. •
Additional key aspects of the legislation include, but are not limited
to: addressing the critical need for financially • troubled debtor
states to obtain liquidity during their restructuring process by giving
new-money lenders priority over existing creditors and establishing an
independent monitor.
This is a financially powerful opportunity for New York. Never before
has a U.S state had the power to influence the international community
to such an extent Circumstances have given New York State the astonish-
ing ability to make history by establishing an orderly sovereign debt
resolution procedure under the rule of law. New York would benefit as
would the global community. This extraordinary opportunity is too impor-
tant for the state to ignore.
PRIOR LEGISLATIVE HISTORY:
A. 7562/S. 6627 of the 2021/22 Legislative Session
FISCAL IMPLICATIONS:
To be determined.
EFFECTIVE DATE:
This act shall take effect on the 180th day after it shall have become a
law.
STATE OF NEW YORK
________________________________________________________________________
2102--A
2023-2024 Regular Sessions
IN ASSEMBLY
January 23, 2023
___________
Introduced by M. of A. DAVILA, RIVERA, GONZALEZ-ROJAS, CRUZ, CLARK,
REYES, MAMDANI, BURDICK, MITAYNES, GALLAGHER, COLTON, FORREST, SIMON,
TAYLOR, JACKSON -- read once and referred to the Committee on Banks --
committee discharged, bill amended, ordered reprinted as amended and
recommitted to said committee
AN ACT to amend the banking law, in relation to restructuring unsustain-
able sovereign and subnational debt
The People of the State of New York, represented in Senate and Assem-bly, do enact as follows:
1 Section 1. The banking law is amended by adding a new article 7 to
2 read as follows:
3 ARTICLE 7
4 SOVEREIGN AND SUBNATIONAL DEBT
5 Section 300. Legislative intent.
6 301. Definitions.
7 302. Petition for relief; recognition.
8 303. Notification of creditors.
9 304. Debt reconciliation.
10 305. Submission, contents and voting on plan.
11 306. Financing the restructuring.
12 307. Priority of repayment.
13 308. Adjudication of disputes.
14 309. Application; opt in.
15 § 300. Legislative intent. The purpose of this article is to provide
16 effective mechanisms for restructuring unsustainable sovereign and
17 subnational debt so as to:
18 1. reduce the social costs of sovereign and subnational debt crises to
19 residents of this state;
20 2. reduce systemic risk to the financial system, a system that is
21 concentrated in this state;
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[] is old law to be omitted.
LBD02418-04-3
A. 2102--A 2
1 3. reduce creditor uncertainty, including to the numerous holders of
2 sovereign debt that are residents in this state;
3 4. strengthen the role of the state of New York as a primary location
4 for the issuing and trading of sovereign debt;
5 5. reduce the need for sovereign and subnational debt bailouts, which
6 create moral hazard and are costly to residents of this state;
7 6. otherwise protect economic activity within this state's borders, by
8 reducing the likelihood of a sovereign debt default which could adverse-
9 ly impact the state's economy; and
10 7. reduce, out of universal human rights and humanitarian imperatives,
11 the social cost of unresolved sovereign debt crises imposed on the
12 people of insolvent nations, especially the poorest among them, taking
13 due account of creditor rights.
14 § 301. Definitions. For purposes of this article:
15 1. "creditor" means a person or entity that has a claim against a
16 state;
17 2. "claim" means a payment claim against a state for monies borrowed
18 or for the state's guarantee of, or other contingent obligation on,
19 monies borrowed; the term "monies borrowed" shall include the following,
20 whether or not it represents the borrowing of money: monies owing under
21 bonds; debentures; notes, or similar instruments of original maturity of
22 at least one year; monies owing for the deferred purchase price of prop-
23 erty or services, other than trade accounts payable arising in the ordi-
24 nary course of government operations; monies owing on capitalized lease
25 obligations; monies owing on or with respect to letters of credit, bank-
26 ers' acceptances, or other extensions of credit of original maturity of
27 at least one year;
28 3. "plan" means a debt restructuring plan contemplated by section
29 three hundred five of this article;
30 4. "state" means a sovereign nation; or unincorporated territory; or
31 any subnational unit thereof, excluding any municipality whose adjust-
32 ment or debts is governed by 11 U.S.C. 9; and
33 5. "independent monitor" means an individual appointed by the governor
34 and acceptable to the sovereign debtor and to the holders, or their
35 agents, of a majority of the obligations issued under New York law. The
36 monitor is meant to facilitate and encourage an effective, prompt and
37 fair agreement by the parties, as intended by this article.
38 § 302. Petition for relief; recognition. 1. A state may invoke appli-
39 cation of this article by filing a voluntary petition for relief with
40 the state of New York.
41 2. Such petition shall certify that the state:
42 (a) seeks relief under this article, and has not previously sought
43 relief under this article, or under any other law that is substantially
44 in the form of this article, during the past ten years;
45 (b) needs relief under this article to restructure claims that, absent
46 such relief, would constitute unsustainable debt of the state;
47 (c) agrees to restructure those claims in accordance with this arti-
48 cle;
49 (d) agrees to all other terms, conditions and provisions of this arti-
50 cle;
51 (e) has duly enacted any national or subnational law needed to effec-
52 tuate these agreements. If requested by the independent monitor, such
53 petition shall also attach documents and legal opinions evidencing
54 compliance with this paragraph; and
55 (f) is cooperating with the International Monetary Fund to devise an
56 effective, efficient, timely and fair path back to sustainability.
A. 2102--A 3
1 3. Immediately after such a petition for relief has been filed, and so
2 long as such filing has not been dismissed by the independent monitor
3 for lack of good faith, the terms, conditions, and provisions of this
4 article shall:
5 (a) apply to the debtor-creditor relationship between the state and
6 its creditors to the extent such relationship is governed by the law of
7 this jurisdiction;
8 (b) apply to the debtor-creditor relationship between the state and
9 its creditors to the extent such relationship is governed by the law of
10 another jurisdiction that has enacted law substantially in the form of
11 this article; and
12 (c) be recognized in, and by, all other jurisdictions that have
13 enacted law substantially in the form of this article.
14 § 303. Notification of creditors. 1. Within thirty days after filing
15 its petition for relief, the state shall notify all of its known credi-
16 tors of its intention to negotiate a plan under this article.
17 2. The independent monitor shall prepare and maintain a current list
18 of creditors of the state and verify claims for the purposes of super-
19 vising voting under this article.
20 § 304. Debt reconciliation. The creditor claims shall be reconciled
21 against debtor records and any discrepancies shall be addressed between
22 the parties.
23 § 305. Submission, contents and voting on plan. 1. The state may
24 submit a plan to its creditors at any time, and may submit alternative
25 plans from time to time.
26 2. No other person or entity may submit a plan on behalf of the state.
27 3. A plan shall:
28 (a) designate classes of claims in accordance with subdivision six of
29 this section;
30 (b) specify the proposed treatment of each class of claims;
31 (c) provide the same treatment for each claim of a particular class,
32 unless the holder of a claim agrees to a less favorable treatment;
33 (d) disclose any claims not included in the plan's classes of claims;
34 (e) provide adequate means for the plan's implementation including,
35 with respect to any claims, curing or waiving any defaults or changing
36 the maturity dates, principal amount, interest rate, or other terms or
37 canceling or modifying any liens or encumbrances; and
38 (f) certify that, if the plan becomes effective and binding on the
39 state and its creditors under subdivision four of this section, the
40 state's debt will become sustainable.
41 4. A plan shall become effective and binding on the state and its
42 creditors when it has been submitted by the state and agreed to by each
43 class of such creditors' claims designated in the plan under subdivision
44 three of this section. Thereupon, the state shall be discharged from all
45 claims included in those classes of claims, except as provided in the
46 plan.
47 5. A class of claims has agreed to a plan if creditors holding at
48 least two-thirds in amount and more than one-half in number of the
49 claims of such class voting on such plan agree to the plan.
50 6. Each class of claims shall consist of claims against the state that
51 are equal in priority, provided that:
52 (a) equal claims need not all be included in the same class;
53 (b) claims of governmental or multi-governmental entities holding
54 claims defined under this article shall be included with the claims of
55 private holders of such claims, and each shall be classed separately;
56 and
A. 2102--A 4
1 (c) claims that are governed by this article or the law of another
2 jurisdiction that is substantially in the form of this article shall not
3 be classed with other claims.
4 § 306. Financing the restructuring. 1. Subject to subdivision three of
5 this section the state shall have the right to borrow money on such
6 terms and conditions as it deems appropriate.
7 2. The state shall notify all of its known creditors of its intention
8 to borrow under subdivision one of this section, the terms and condi-
9 tions of the borrowing, and the proposed use of the loan proceeds. Such
10 notice shall also direct those creditors to respond to the independent
11 monitor within thirty days as to whether they approve or disapprove of
12 such loan.
13 3. Any such loan shall be approved by creditors holding at least two-
14 thirds in amount of the claims of creditors responding to the independ-
15 ent monitor within that thirty-day period.
16 4. In order for the priority of repayment, and corresponding subordi-
17 nation, under section three hundred seven of this article to be effec-
18 tive, any such loan shall additionally be approved by creditors holding
19 at least two-thirds in principal amount of the covered claims of the
20 creditors responding to the independent monitor within that thirty-day
21 period. Claims shall be deemed to be covered if they are governed by
22 this article or by the law of another jurisdiction that is substantially
23 in the form of this article.
24 § 307. Priority of repayment. 1. The state shall repay loans approved
25 under this article prior to paying any other claims.
26 2. The claims of creditors of the state are subordinated to the extent
27 needed to effectuate the priority payment under this section. Such
28 claims are not subordinated for any other purpose.
29 3. The priority of payment, and corresponding subordination, under
30 this section is expressly subject to the approval by creditors under
31 subdivision four of section three hundred six of this article.
32 § 308. Adjudication of disputes. The independent monitor may request
33 that a court of competent jurisdiction appoint a referee or a special
34 master to make recommendations to the court regarding the resolution of
35 any disputes arising under this article.
36 § 309. Application; opt in. 1. This article applies where, by contract
37 or otherwise;
38 (a) the law of New York state governs the debtor-creditor relationship
39 between a state and its creditors; and
40 (b) the application of this article is invoked in accordance with
41 section three hundred two of this article.
42 2. Where this article applies, it shall operate retroactively and,
43 without limiting the foregoing, shall override any contractual
44 provisions that are inconsistent with the provisions of this article.
45 3. Any creditors of the state whose claims are not otherwise governed
46 by this article may contractually opt in to this article's terms, condi-
47 tions, and provisions.
48 4. The terms, conditions, and provisions of this article shall apply
49 to the debtor-creditor relationship between the state and creditors
50 opting in under subdivision one of this section as if such relationship
51 were governed by the laws of New York state under subdivision three of
52 section three hundred two of this article.
53 § 2. This act shall take effect immediately.
