Puerto Rico recovery act confirmed invalid; law bans Chapter 9 filing

By Caroline Salls

Pittsburgh, July 7 – Puerto Rico resident commissioner Pedro Pierluisi announced Tuesday that the U.S. Court of Appeals for the First Circuit affirmed a Feb. 6 decision of the U.S. District Court for the District of Puerto Rico that the Puerto Rico Corporations Debt Enforcement and Recovery Act is preempted by Chapter 9 of the U.S. Bankruptcy Code and therefore invalid under the Supremacy Clause of the U.S. Constitution.

“For all practical purposes, it is now settled that Puerto Rico may not enact its own municipal bankruptcy law because such a law is preempted by Chapter 9 of the U.S. Bankruptcy Code,” Pierluisi said in the release.

“In 1984, Congress expressly barred the government of Puerto Rico from authorizing its municipalities to pursue relief under Chapter 9. Thus, it has now been confirmed that Puerto Rico – a U.S. territory that is home to more American citizens than 21 states – cannot enact its own municipal bankruptcy law at the territory level and it cannot permit its municipalities to utilize the municipal bankruptcy law enacted at the federal level.

“This means that Puerto Rico has one option and one option only, namely to ‘turn to Congress for recourse.’

“In February, I introduced H.R. 870, the Puerto Rico Chapter 9 Uniformity Act, which seeks state-like treatment for Puerto Rico under Chapter 9, nothing less and nothing more. A companion bill will soon be filed in the senate.

“This legislative effort – which would not cost federal taxpayers a penny and would promote the rule of law – is supported by virtually all bankruptcy experts.

“The bill is opposed by a narrow swath of investment firms who own bonds issued by Puerto Rico’s electric power authority, PREPA. PREPA, like other public corporations in Puerto Rico, is subject to all federal environmental, labor and transportation laws, but cannot currently avail itself of the federal municipal restructuring regime. This is profoundly unjust.

“These investment firms sued the Puerto Rico government for enacting the Recovery Act, insisting (correctly, it turned out) that the only path for Puerto Rico to permit its municipalities to restructure debt is to seek inclusion in Chapter 9. Yet these firms are now trying to block that solitary path.

“We are bound by laws we have essentially no role in crafting.

“If there is a silver lining here, it is that this entire debate over Chapter 9 is shining a bright light on the moral bankruptcy of Puerto Rico’s territory status.”

Franklin Advisers, Inc. and OppenheimerFunds said that the decision protects bondholders “from Puerto Rico's now-void statute and from any other state attempting to enact a similar statute.”

The two fund management companies added in a news release that they “continue to work with the Commonwealth and Puerto Rico's electric company toward a mutually agreed upon revitalization plan, and expect to work with the Commonwealth generally to develop reforms that holders of Puerto Rico's bonds can support.”

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