Res. Comm. Pedro Pierluisi

Representing the At Large District of PUERTO RICO

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

Feb 11, 2015
Press Release

Washington, DC—Resident Commissioner Pedro Pierluisi today re-introduced legislation that would empower the government of the U.S. territory of Puerto Rico to authorize one or more of its government-owned corporations, if they were to become insolvent, to restructure their debts under Chapter 9 of the U.S. Bankruptcy Code.  The bill is H.R. 870 and is entitled the Puerto Rico Chapter 9 Uniformity Act.

State governments themselves are not eligible to adjust their debts under Chapter 9 of the Code.  Rather, only a “political subdivision or public agency or instrumentality of a State”—called a “municipality” in the Code—can adjust its debts under Chapter 9.  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. 

Congress has thus empowered each state government to authorize its public utilities or instrumentalities to adjust their debts under Chapter 9, but has not empowered the government of Puerto Rico to do the same for its public utilities or instrumentalities.  A state government may choose to authorize its public instrumentalities to file for Chapter 9 protection, or a state government may decline to provide its public instrumentalities with this authority.  Under current law, the government of Puerto Rico does not even have that choice.

Puerto Rico’s exclusion from Chapter 9 led the territory’s government, in July 2014, to enact the “Puerto Rico Public Corporation Debt Enforcement and Recovery Act,” which sought to authorize certain government-owned corporations to restructure their debts.  Multiple investment firms that own Puerto Rico bonds sued the Puerto Rico government in U.S. federal district court, arguing that the Recovery Act—which differs from Chapter 9 in numerous respects—violates the U.S. Constitution and the Puerto Rico Constitution.

On February 6, 2015, the U.S. district court issued a 75-page decision, holding that the Recovery Act is preempted by the U.S. Bankruptcy Code and is therefore invalid under the Supremacy Clause of the U.S. Constitution.  In addition, the district court declined to dismiss the investment firms’ claims that the Recovery Act also violates the Contract Clause and the Takings Clause of the U.S. Constitution.  The Puerto Rico government has indicated that it intends to appeal this decision to the U.S. Court of Appeals for the First Circuit, but this appeal will be time-consuming and could prove unsuccessful.

“In the wake of the district court’s decision, it is more clear than ever that Congress should act swiftly to amend the U.S. Bankruptcy Code to empower the government of Puerto Rico to authorize its insolvent government-owned corporations to restructure their debts under Chapter 9.  If Congress does not act, government-owned corporations in Puerto Rico will be left without any legal framework—at either the federal or territory level—to adjust their debts,” said Pierluisi.

“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 as a last resort, under the supervision of an impartial federal bankruptcy judge in Puerto Rico, based on legal precedent established in Chapter 9 proceedings that have taken place throughout the nation.  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 Congressional Budget Office has confirmed that the bill, if enacted, would not require any additional expenditures on the part of the federal government.  Thus, the legislation should be viewed positively by fiscal conservatives in Congress. 

Pierluisi’s bill has been endorsed by the National Bankruptcy Conference, an organization of lawyers, law professors and bankruptcy judges that advises Congress about proposed changes to federal bankruptcy law.  Moreover, in a recent article published in the American Bankruptcy Law Journal, entitled “Puerto Rico and the Bankruptcy Clause,” Professor Stephen Lubben of Seton Hall University School of Law concludes:  “The logic behind excluding Puerto Rico from chapter 9, to the extent it did, no longer makes sense.  In a perfect world, Congress would quickly allow Puerto Rico’s public corporations to file chapter 9 bankruptcy petitions.”  Likewise, Professor John Pottow of the University of Michigan Law School has written:  “It seems archaic and patronizing not to let the people of Puerto Rico authorize (or forbid) their public entities from using chapter 9.  In terms of the policy decisions involved—some states refuse their entities to access chapter 9—it strikes me at least as eminently more sensible to let the government of that territory make that call rather than Congress.  Here’s hoping to swift passage of what should be a non-contentious error correction to the Code.”

Based on his conversations to date, the Resident Commissioner’s legislation also appears to be supported by the overwhelming majority of stakeholders in the investment community.  Investors recognize that even the possibility of Chapter 9 proceedings can incentivize a financially-distressed government-owned corporation in Puerto Rico and its creditors to reach a consensual, mutually-beneficial agreement to adjust the public corporation’s debts.  Investors further recognize that Chapter 9 provides a predictable and stable legal framework at a time when Puerto Rico’s economic and fiscal situation has generated substantial uncertainty and anxiety.  One of the credit rating agencies, Fitch Ratings, has expressed the view that enactment of this legislation “would be a positive and important development for Puerto Rico and holders of debt of its public utilities and public instrumentalities.”  Fitch further noted that the bill would simply “place Puerto Rico on an equal footing with the 50 States, who can currently use Chapter 9 for their municipalities.” 

In Puerto Rico, Pierluisi’s bill has been endorsed by two of the island’s largest newspapers, El Nuevo Día and El Vocero.  The Puerto Rico government recently indicated that, while it would appeal the district court’s decision invalidating the Recovery Act, it would also undertake all efforts to support enactment of the Resident Commissioner’s legislation.

Pierluisi will seek to have the House Judiciary Committee, of which he is a member, hold a hearing on the bill as soon as possible.