U.S. House Hearing Set on Puerto Rico Agency Bankruptcy

The U.S. House of Representatives subcommittee that handles bankruptcy law plans a public hearing next Thursday on a bill to authorize the Commonwealth of Puerto Rico to enable its independent agencies and the territory’s municipalities to rearrange their debts.

The Federal Bankruptcy Code gives States this power but denies it to the territory.

The bill, H.R. 870, was proposed by Puerto Rico’s Resident Commissioner in the House, Pedro Pierluisi, who serves on the House Judiciary Committee, the parent committee of the subcommittee. Although the sole representative of the 3.5 million people of the territory in the Federal government cannot vote in the full House, he or she can vote in House committees to which she or he is assigned.

The hearing will be held by the Subcommittee on Regulatory Reform, Commercial and Anti-Trust Law chaired by Representative Tom Marino (R-PA). Its top ranking minority party member is Hank Johnson (D-GA).

Puerto Rico is treated as a State for all other purposes of the Bankruptcy Code. It is also treated as a State in most laws other than many tax laws and some major programs, particularly those that provide assistance for healthcare, the disabled, and low-income individuals.

The hearing comes in the wake of the Federal District Court in Puerto Rico two weeks ago striking down a law enacted by the territorial government last June that claimed to give certain of its agencies the power to dismiss their financial obligations. The controversial law was proposed by Governor Alejandro Garcia Padilla without any warning and passed by the “commonwealth” party majorities in both houses of Puerto Rico’s Legislative Assembly in half a day.

It was drafted in secret by contracted law firms paid several million dollars for the language. It was enacted shortly before the Puerto Rico Electric Power Authority (PREPA), an agency covered by the law, was going to be unable to make a debt payment — and it was proposed half a day after Garcia Padilla’s top aide said that the Governor would not seek to enable insular agencies to avoid paying their debts.

Judge Francisco Besosa ruled that the law contradicts the Federal Bankruptcy Code. He also suggested that it may violate the clauses of the U.S. Constitution that prevent government from breaking contracts and taking things of value without paying a fair amount.

The suit was brought by large national investment funds that own nearly $2 billion of PREPA’s bonds.

The law was a significant factor in owners and insurers of more than 60% of the agency’s bonds and banks that also made loans to it agreeing last August to let it delay making debt payments until the end of next month while plans are developed for it to reorganize its operations and debts.

PREPA has been losing money for years because its uses costly imported oil to generate two-thirds of the electricity that it produces, because its operations are otherwise inefficient in a number of areas, and because of Puerto Rico’s failing territory economy, which has reduced electrical needs.

The agency owes twice as much as the value of its plants and equipment, which is estimated at about $4.5 billion. It also needs several billion dollars with of infrastructure improvements.

At the time of the ruling, the Garcia Administration was trying to convince the bond owners and insurers and banks to let PREPA further delay payment on its debts until the end of June. The delay was being sought to give more time for the development of plans to reorganize PREPA’s operations and debts for agreement by the agency’s lenders.

The Garcia Administration is appealing the District Court’s decision striking down the insular law to the Federal First Circuit Court of Appeals but it has now also started to lobby in favor of Pierluisi’s bill.

The Resident Commissioner, who heads Puerto Rico’s statehood party, is expected to seek the party’s nomination to challenge Garcia for re-election next year. He leads the “commonwealth” party incumbent in the polls (as does another statehood party figure).

The Garcia Administration had previously said that it was supportive of the bill but not had not lobbied for it.

A wide range of organizations in the territory has also endorsed the legislation.

The Garcia Administration had explored the possibility of seeking the authority that the bill would provide but dropped the idea even though it was supported by officials of the U.S. Treasury Department. Insular officials said that a Federal law would take to long to obtain.

One of those officials, the territorial government’s Chief Financial Officer and President of its Development Bank, Melba Acosta, will be one of four witnesses at the hearing.

Two other witnesses are expected to support the legislation: John Pattow, a University of Michigan Law School professor who has written on the subject, and Robert Donahue, an advisor on government bonds who has closely followed the issue.

The fourth scheduled witness is the head of the legal team that represented two of the three investment fund groups that successfully challenged the “Puerto Rico Public Corporations Debt Enforcement and Recovery Act” in Federal court, Thomas Moers Mayer.

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