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Will Puerto Rico Agencies Have Two Bankruptcy Processes?

Puerto Rico’s representative to the Federal government, Pedro Pierluisi, moved closer this week to trying to amend the Federal Bankruptcy Code to enable Commonwealth government instrumentalities to reduce their financial obligations when they are unable to meet the commitments.

Currently, the territory is treated like a State in all provisions of the Bankruptcy Code other than Chapter 9, which empowers States to authorize municipalities and other government creations of States to adjust their financial obligations through an orderly process.

Pierluisi, who has a seat in the U.S. House of Representatives with a vote only in committees, said that key Republicans as well as Democrats had responded positively to the idea.  The statehood party president may introduce the legislation before Congress takes a five-week break from meeting August 1st.

Because of the possibility that the Puerto Rico Electric Power Authority (PREPA) may be unable to pay both debts and costs of operations soon and because of the Commonwealth’s current exclusion from the law, Governor Alejandro Garcia Padilla June 25th — without notice — proposed a Commonwealth bankruptcy process law for PREPA and some other government corporations including the Aqueduct and Sewer Authority and the Highways and Transportation Authority and the territory’s Legislative Assembly passed it the same day.  June 25th was the last day for passing bills in each house of the Assembly before August.

Within hours of Garcia Padilla signing the bill June 28th, funds owning about one-fifth of PREPA’s $8.8 billion in bonds filed suit against the insular law in the Federal court in Puerto Rico. The suit claimed violations of the Bankruptcy, Takings, and Contracts Clauses of the Constitution of the United States.

Anticipating a court challenge, the Garcia Administration spent millions of dollars on law firms in writing the law.  Secretary of Justice Cesar Miranda has asserted that the territory has the authority to enact the law in the absence of a Federal law.

Garcia Administration officials said that Pierluisi’s interest in amending the Federal Bankruptcy Code was “positive” but seemed concerned that it would confuse negotiations in the event of a PREPA financial failure in the coming months.

They disclosed that they had raised the amendment idea with the U.S. Treasury Department and the White House, which supported it. But they said that they decided against seeking an amendment because of the time that enacting a Federal law would likely take and the possibility that PREPA would need a bankruptcy process before a Federal law could be enacted.


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