H.R. 5278, the Puerto Rico Oversight, Management, and E6 Economic Stability Act (May 2016)
This month’s Legislative Update features a summary of the provisions found in the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), passed by the House on June 9 by a bipartisan vote of 297-127. The bill, which allows a seven-member board to oversee negotiations with creditors and file a restructuring plan in court to reduce Puerto Rico’s debt, now heads to the Senate, which is expected to deliver its vote sometime this summer. Puerto Rico’s representative in Congress, Pedro Pierluisi, supports the bill despite opposition from other lawmakers on the island.
The urgency for PROMESA increased on June 13, when the U.S. Supreme Court rejected an effort to allow public utilities to restructure $20 billion in debt, under a local law passed in 2014. (Puerto Rico v. Franklin California Tax- Free Trust , No. 15-233, and Acosta-Febo v. Franklin California Tax-Free Trust, No. 15-255.) Justice Clarence Thomas, writing for the 5-2 majority, said that the law was at odds with the Bankruptcy Code, which bars states and lower units of government from enacting their own versions of bankruptcy law. Puerto Rico argued that it needed to restructure at least some of its $70 billion in public debts. Since it is excluded from chapter 9, the island tried to enact its own version of a bankruptcy law. That attempt, called the Recovery Act, was challenged by utility creditors. They argue that the Bankruptcy Code preempted it. The justices agreed. The federal law, Justice Thomas wrote, “bars Puerto Rico from enacting its own municipal bankruptcy scheme to restructure the debt of its insolvent public utilities”. Chief Justice John Roberts and Justices Anthony Kennedy, Stephen Breyer and Elena Kagan joined him. Justice Thomas wrote that the decision was compelled by a straightforward reading of the federal law. In dissent, Justice Sonia Sotomayor, joined by Justice Ruth Bader Ginsburg, said that the majority’s approach was too mechanical and failed to take into account the purpose of the bankruptcy law and the impact of its decision. The Recovery Act, she wrote, “is the only existing legal option for Puerto Rico to restructure debts”.
Thanks go to Sonia Colón, chair of the Bankruptcy and Creditors’ Rights Department of Ferraiuoli, LLC, for the content of this chart. For more news and analysis, visit ABI’s “Puerto Rico in Distress” webpage at abi.org/PR-crisis.
