Puerto Rico Chapter 9 bankruptcy filing authorization bill introduced

By Caroline Salls

Pittsburgh, July 15 – A bill introduced in the Senate on Wednesday seeks state-like treatment for the Commonwealth of Puerto Rico under Chapter 9 of the federal Bankruptcy Code, according to a news release.

Specifically, senator Richard Blumenthal of Connecticut and senator Charles Schumer of New York, along with 10 other U.S. senators, filed an identical companion bill to H.R. 870, the Puerto Rico Chapter 9 Uniformity Act, which was introduced by Puerto Rico resident commissioner Pedro Pierluisi on Feb. 11 and was the subject of a hearing before a subcommittee of the House Judiciary Committee on Feb. 26.

The number of senators cosponsoring the legislation is expected to increase in the coming days, the release said.

Chapter 9 bankruptcy

Through Chapter 9 of the Bankruptcy Code, Congress has empowered each state government to authorize a municipality within the state to adjust its debts under the supervision of a federal bankruptcy judge based on federal substantive and procedural law.

A state government may authorize or decline to authorize its insolvent municipalities to file for Chapter 9 protection. The release said Puerto Rico is treated like a state in every chapter of the Bankruptcy Code except for Chapter 9.

In 1984, Congress enacted legislation that expressly excluded Puerto Rico from Chapter 9.

Recovery Act

Puerto Rico’s exclusion from Chapter 9 led the territory’s government, in July 2014, to enact local legislation called the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which sought to authorize some Puerto Rico public corporations to adjust their debts.

However, multiple investment firms that own Puerto Rico Electric Power Authority bonds sued the Puerto Rico government, arguing that the Recovery Act violated the U.S. Constitution.

On Feb. 6, a federal district court judge in Puerto Rico held that the Recovery Act is preempted by the U.S. Bankruptcy Code and is therefore invalid under the Supremacy Clause of the Constitution. On July 6, the U.S. Court of Appeals for the First Circuit affirmed the district court’s decision.

According to the court, Puerto Rico’s only option is to “turn to Congress for recourse,” the release said.

Legislation purpose

“This bill would simply grant Puerto Rico a power that every state has and that Puerto Rico itself had for nearly half a century until Congress inexplicably removed it in 1984, namely the power to authorize its municipalities – specifically, its public corporations – to seek Chapter 9 protection if they are insolvent and meet other strict conditions,” Pierluisi said in the release.

“This bill is not intended to, and will not, resolve all of Puerto Rico’s economic and fiscal problems. It must be complemented by other reforms at both the federal and local level.

“However, if it enacts this legislation into law, Congress will be empowering a U.S. jurisdiction to help itself, at no cost to federal taxpayers.”

Puerto Rico currently has about $72 billion in debt, according to the release, and the electric power authority, the water and sewer authority and the highway and transportation authority have a total of $20 billion in debt. In addition, 17 entities in Puerto Rico have bonds outstanding, including general obligation bonds issued by the central government, bonds backed by sales tax revenue and bonds issued by the territory’s public corporations.

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