Puerto Rican debt legislation: is the territory better off restructuring municipal debt under promesa?
| Autor | Scott M. Christman |
| Páginas | 87-102 |
COMMENT
PUERTO RICAN DEBT LEGISLATION: IS THE TERRITORY BETTER OFF
RESTRUCTURING MUNICIPAL DEBT UNDER PROMESA?
SCOTT M. CHRISTMAN
I. Introduction ............................................................................................................................................... 87
II. Background ................................................................................................................................................ 88
A. Puerto Rico v. Franklin California Tax-Free Trust Ensured Puerto Riva Had No Where
to Turn but Congress .......................................................................................................................... 88
B. How Puerto Rico Became Buried in a Mountain of Debt .......................................................... 90
III. Key Differences Between Chapter 9 and PROMESA ........................................................................ 93
A. The Oversight Board ........................................................................................................................... 94
B. Creditor Collective Action ................................................................................................................ 96
C. Capturing all of Puerto Rico’s Debt ............................................................................................... 101
IV. Conclusion .................................................................................................................................................. 102
I. INTRODUCTION
In 1984, and without explanation, Congress stripped Puerto Rico of its access to Chapter
9 of the Bankruptcy Code,1 titled Adjustment of Debts of a Municipality. Thirty-two years later
and seventy-two billion dollars in debt,2 the territory of Puerto Rico needs relief.
In February of 2015, a simple, one-page bill was introduced in Congress to reinstate
Puerto Rico’s access to Chapter 9.3 This bill would have affected two-thirds of Puerto Rico’s
debt by affording its municipalities the same opportunity to utilize bankruptcy as all the other
U.S. States’ municipalities have; however, the bill was not passed.4 Instead, sixteen months later,
Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act
(PROMESA), paving the way for a robust bill that goes beyond Chapter 9.5
This comment begins by discussing the Supreme Court decision of June of 2016 that
eliminated Puerto Rico’s ability to create its own legislation to address its debt problem. It also
describes the many underlying factors that contributed to Puerto Rico’s enormous debt. This
assessment is followed by a discussion of three key differences between PROMESA and Chapter
9. After weighing the advantages and disadvantages of the key differences, the comment
concludes that Puerto Rico fairs better by restructuring municipal debt under PROMESA than
it would have been under Chapter 9.
2 D. ANDREW AUSTIN, CONG. RESEARCH SERV., R44095, PUERTO RICO’S CURRENT FISCAL CHALLENGES 12 (Apr. 11,
2016).
3
All Bill Information (Except Text) for H.R.870–Puerto Rico Chapter 9 Uniformity Act of 2015
,
CONGRESS.GOV,
https://www.congress.gov/bill/114th-congress/house-bill/870/all-info (last visited Aug. 6, 2017).
4
Id.
(claiming the latest action on H.R. 870 was referral to a subcommittee on Mar. 16, 2015).
5
S.2328–PROMESA
,
CONGRESS.GOV,
https://www.congress.gov/bill/114th-congress/senate-bill/2328 (last visited
Aug. 6, 2017) (noting the bill became public law on Jun. 30, 2016).
University of Puerto Rico Business Law Journal Vol. 8
88
II. BACKGROUND
A. Puerto Rico v. Franklin California Tax-Free Trust Ensured Puerto Rico Had No Where to
Turn but Congress
In 2014, the territory of Puerto Rico enacted the Puerto Rico Public Corporation Debt
Enforcement and Recovery Act (the “Recovery Act”).6 This was the island’s response to its
position between a rock and a hard place: the territory’s corporations were under a mountain of
debt but could not utilize Chapter 9 of the Federal Bankruptcy Code (the “Code”). Nevertheless,
this was not always the case. Up until 1984, Puerto Rico could utilize Chapter 9,7 but in that
year the definition of “State” was revised to include Puerto Rico for all purposes “except for the
purpose of defining who may be a debtor under Chapter 9.”8 Why the definition was updated to
include this language is unknown:
The only comment on excluding Puerto Rico from Chapter 9 came from Professor Frank
Kennedy, former Executive Director of the Commission on Bankruptcy Laws, who said:
“I do not understand why the municipal corporations of Puerto Rico are denied by the
proposed definition of ‘State’ of the right to seek relief under Chapter 9.”9
With this seemingly minor adjustment, Puerto Rico was disallowed the ability to use
Chapter 9. It’s important to note, however, that having access to Chapter 9 is not synonymous
with the ability to declare bankruptcy. A state’s access to Chapter 9 does not mean the state can
declare bankruptcy. What Chapter 9 involves is that the state can permit any of its
municipalities or corporations to declare bankruptcy: “An entity may be a debtor under Chapter
9 of [the Bankruptcy Code] if and only if such entity . . . is a municipality . . . [and] is specifically
authorized . . . to be a debtor . . . by State law . . . .”10 Bankruptcy is a very useful tool that can be
beneficial for all parties involved because it brings order to an otherwise disorderly situation.
When a municipality stops paying its debt, each creditor that was not paid can sue individually.
In fact, there is a so-called race to the courthouse because each creditor wants his or her
judgment first. In this way, an individual creditor can make the insolvent municipality pay its
debt before other creditors. Bankruptcy can bring order to this process by staying all litigation
against the municipality, getting all the creditors involved in the same proceeding, and having a
federal bankruptcy judge oversee a restructuring process.11 The judge determines how much the
debtor can pay back, who should be paid back first, and how much each creditor should be paid
back.12 As Professor Pottow summarized before Congress:
[A]llow m e to sing the praises of Chapter 9 . . . . Chapter 9 —like chapter 11— allows
collective resolution of a municipal debtor’s financial distress. In the absence of a
collective forum, value-destroying fights with individual creditors will consume what
6
Franklin California Tax-Free Trust
7
Id.
at 1951–1952 n.1.
8
Id.
at 1940 (quoting 11 U.S.C. § 101(52) (2015)).
9
Id.
at 1954 n.2 (quoting
Bankruptcy Improvements Act, Hearing on S. 333 et al. Before the Senate Comm. on the
Judiciary
, 98th Cong., 1st Sess. 326 (1983)).
10 11 U.S.C. § 109(c) (2015).
11
Chapter 9–Bankruptcy Basics
, USCOURTS.GOV, http://www.uscourts.gov/services-
forms/bankruptcy/bankruptcy-basics/chapter-9-bankruptcy-basics (last visited Aug. 6, 2017).
12
Id.
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