Res. Comm. Pedro Pierluisi

Representing the At Large District of PUERTO RICO

Pierluisi Introduces Bill to Include Puerto Rico in Chapter 9 of the U.S. Bankruptcy Code

Jul 31, 2014
Press Release
Legislation would provide state-like treatment to the U.S. territory

Washington, DC—Resident Commissioner Pedro Pierluisi today introduced legislation that would empower the government of the U.S. territory of Puerto Rico to authorize certain government-owned corporations to restructure their debt obligations under Chapter 9 of the U.S. Bankruptcy Code. 

The bill, the Puerto Rico Chapter 9 Uniformity Act of 2014, has been endorsed by the National Bankruptcy Conference, an organization of lawyers, law professors and bankruptcy judges that advises Congress about any proposed change to federal bankruptcy law.

Under the U.S. Bankruptcy Code, only a “municipality” can adjust its debts under Chapter 9.  A provision in the Code defines this term as a “political subdivision or public agency or instrumentality of a State.”  Another provision in the Code provides that the term “State” includes Puerto Rico, “except for the purpose of defining who may be a debtor under chapter 9 of this title.”  Thus, Congress has empowered the governments of each of the 50 states to authorize their municipalities to file under Chapter 9, but has not empowered the government of Puerto Rico to do the same.  The Resident Commissioner’s bill would rectify this disparity.

Prior to introducing this legislation, Pierluisi undertook extensive due diligence.  He meticulously researched the relevant legislative history, mostly from the 1970s and 1980s, in order to comprehend why Puerto Rico was excluded from Chapter 9, and has concluded that there is no principled basis for the exclusion.  The Resident Commissioner also held dozens of meetings with key House and Senate offices to brief them on the proposal, and consulted with outside experts working in private law practice and academia.   

Pierluisi’s action is prompted by a recent series of events in Puerto Rico.  In late June, the Governor of Puerto Rico unveiled—and the Legislative Assembly of Puerto Rico hastily approved—the “Puerto Rico Public Corporation Debt Enforcement and Recovery Act,” which seeks to enable certain government-owned corporations in financial distress to restructure their debt obligations.  Multiple investment firms that own Puerto Rico bonds have sued the Puerto Rico government in U.S. federal district court, arguing that the local Recovery Act—which differs from Chapter 9 in numerous respects—violates both the U.S. Constitution and the Puerto Rico Constitution.  This litigation is likely to be complex, costly and time-consuming, with an uncertain outcome.

“By enacting the Recovery Act, the governing party in Puerto Rico gave a clear signal that one or more of its government-owned corporations might seek to adjust their debts in the future.  This signal generated a strong negative reaction from the bond market and credit rating agencies.  It also led to legal challenges filed by investors represented by some of the best law firms in the nation, who argue that the Puerto Rico government does not have the power to enact this law.  If the governing party concluded that restructuring is the only option in the case of specific government-owned corporations, it should have considered—and had a transparent public debate about—whether there was an alternative way to accomplish this objective,” said Pierluisi.

“I believe that amending the U.S. Bankruptcy Code to extend Chapter 9 to Puerto Rico is the most sensible and logical way to proceed.  I am encouraged that the governing party in Puerto Rico has indicated its support for this approach.  My legislation would simply enable the Puerto Rico government to authorize its government-owned corporations to utilize the tried-and-true Chapter 9 procedure if it becomes necessary, under the expert supervision of an impartial federal bankruptcy judge, based on legal precedent established in Chapter 9 proceedings that have taken place throughout the nation.  The Chapter 9 process would be more predictable, orderly and swift, and I believe this procedure is the one most likely to result in an outcome that is fair and equitable to all stakeholders,” added the Resident Commissioner.

The National Bankruptcy Conference, in a letter endorsing Pierluisi’s bill, observed:  “The Conference sees no bankruptcy policy reason why Puerto Rico’s municipalities should not have the same access as municipalities in the States to chapter 9. . . . Enactment of the Bill, allowing Puerto Rico to authorize its municipalities to file for chapter 9 relief, would ensure immediate access to debt adjustment for Puerto Rico on a less constitutionally-contested basis than the Commonwealth’s [Recovery] Act.”     

Pierluisi said that stakeholders should comprehend several important points about Chapter 9. 

First, if the U.S. Bankruptcy Code is amended to empower the Puerto Rico government to authorize its government-owned corporations to adjust their debts under Chapter 9, the Puerto Rico government would still be required to enact local legislation before any government-owned corporation in the territory could file for relief.  Presumably, the Puerto Rico government would authorize the same government-owned corporations to file under Chapter 9 that it purported to authorize to file under the local Recovery Act. 

Second, a government-owned corporation must be “insolvent” to be eligible for relief under Chapter 9, not simply financially distressed.  A federal bankruptcy judge would dismiss a Chapter 9 case filed by a government-owned corporation in Puerto Rico if it fails to meet this test, which appears to be more stringent than the test established by the local Recovery Act.

Third, no government-owned corporation could maintain a case under Chapter 9 unless it has attempted to negotiate in good faith with its creditors or has determined that such a negotiation is impracticable.  A government-owned corporation that cannot make this showing would not be eligible for relief under Chapter 9.

Finally, and of particular importance to bondholders who own bonds issued by Puerto Rico’s central government, Puerto Rico—like the 50 states—is not currently eligible to use Chapter 9, and this bill would not change that fact.  Chapter 9 is reserved for municipalities, as the Code defines the term, and Puerto Rico is not a “political subdivision or public agency or instrumentality of a State.”  The Puerto Rico Constitution provides special protection to owners of Puerto Rico’s general obligation and related bonds.

Pierluisi’s bill will be referred to the House Judiciary Committee, of which he is a member.

To view the bill, click here:  Puerto Rico Chapter 9 Uniformity Act of 2014