Pierluisi Statement Regarding First Circuit Oral Argument on Puerto Rico Recovery Act
Resident Commissioner Pedro Pierluisi issued the following statement regarding yesterday’s oral argument before the United States Court of Appeals for the First Circuit on the constitutionality of the “Puerto Rico Public Corporation Debt Enforcement and Recovery Act,” and highlighted that the arguments made by the plaintiff bondholders in that case undercut the arguments these same bondholders are making to oppose Pierluisi’s bill to include Puerto Rico in Chapter 9 of the federal Bankruptcy Code:
“Puerto Rico, unlike the states, is not entitled to authorize its insolvent municipalities—including its government-owned corporations—to seek protection under Chapter 9. Puerto Rico’s exclusion led the territory’s government, in July 2014, to enact the Recovery Act, which sought to authorize certain government-owned corporations to restructure their debts.
Several investment firms that own bonds issued by Puerto Rico’s electric power authority, PREPA, sued the Puerto Rico government, arguing that the Recovery Act—which differs from Chapter 9 in numerous respects—violates the U.S. Constitution. In February, the U.S. district court held that the Recovery Act is preempted by the federal Bankruptcy Code and is therefore invalid under the Supremacy Clause. The Puerto Rico government appealed this decision, and oral argument on the case was held yesterday before the First Circuit.
In February, following the district court’s decision, I introduced legislation, H.R. 870, to give Puerto Rico the same power that the states have to authorize their insolvent municipalities to restructure their debts under Chapter 9. This bill is supported by the National Bankruptcy Conference and virtually all bankruptcy experts; by the editorial boards of The Washington Post, Bloomberg, and The New York Times; and by the vast majority of stakeholders in the investment community.
My legislation has been opposed by a handful of investment firms, including the same firms that sued to invalidate the Recovery Act. Together, the firms own about five percent of Puerto Rico’s $73 billion in total debt. They argue that it would be unfair to apply Chapter 9 to debt issued by Puerto Rico municipalities prior to the date of enactment of H.R. 870, because that would be akin to “changing the rules of the game” for investors who bought Puerto Rico municipal bonds when Chapter 9 was not available.
Leading Chapter 9 experts, including Ken Klee at UCLA and John Pottow at the University of Michigan, reject this argument in testimony to Congress. As Professor Pottow observes: “Some might worry that H.R. 870 applying ‘retroactively’ to pre-existing debts is somehow unfair or even unconstitutional to the holders of that debt. This concern is mistaken. The Nation has had numerous bankruptcy laws throughout its history. Those laws generally applied to pre-existing debt when enacted, and the Supreme Court confirmed the permissibility of Congress exercising its power under the Bankruptcy Clause in this manner. This of course makes sense, because Congress has authority under the Constitution’s Bankruptcy Clause to adjust debts, putting all on notice that their contractual rights are always subject to adjustment by the Congress should a debtor ever avail itself of bankruptcy relief.” Professor Pottow further notes: “Allowing some debts (future debts), but not others (pre-existing debts), to be resolved is pointless. There is no such thing (or, more precisely, no such useful thing) as a ‘half-restructuring.’”
Financial experts have also dismissed this “retroactivity” argument as disingenuous, observing that investors fully understand that federal legal regimes are not set in stone and that Congress can—and often does—act to modify those regimes.
Notably, in their arguments in federal court against the Recovery Act, the bondholder plaintiffs undermine their own arguments on Capitol Hill against H.R. 870, particularly their argument that application of Chapter 9 to pre-existing debt would be unfair.
For example, in their briefs, the plaintiff bondholders concede that, between 1937 (when Congress provided for a municipal bankruptcy regime) and 1984 (when Congress explicitly excluded Puerto Rico municipalities from that regime), Congress did authorize the Puerto Rico government to allow its municipalities to adjust their debts. Accordingly, any investor who bought Puerto Rico municipal debt after 1984 should have known that Congress could well modify federal law and again allow Puerto Rico municipalities to adjust their debts under Chapter 9.
In addition, in its brief, plaintiff BlueMountain notes: “Of course, Congress—which ultimately governs the Commonwealth—does have the option to permit Puerto Rico to invoke Chapter 9.” The brief continues: “[T]here is nothing surprising (never mind inappropriate) in Congress’s decision to retain control over whether and when Puerto Rico’s municipalities may seek bankruptcy protection.” The brief goes on: “Congress, like the States, can alter its bankruptcy policy for municipalities under its control if its chooses; Puerto Rico’s delegate to the House of Representatives already has proposed such legislation.” Plaintiffs Franklin Templeton and OppenheimerFunds make the same point in their brief: “If Congress determines Puerto Rico is in need of Chapter 9, it has the power to alter the Chapter 9 eligibility requirements to permit that result.”
Of course, these firms neglect to mention to the judges hearing the case on the Recovery Act that the firms actively oppose enactment by Congress of the legislation that, according to the firms, constitutes the only permissible method by which Puerto Rico municipalities can be authorized to adjust their debts. Moreover, in their filings with the First Circuit, these firms never suggest that application of Chapter 9 to pre-existing debt would be unconstitutional or unfair. That is because this is an argument of convenience intended to confuse, not an argument of merit intended to persuade.
H.R. 870 has broad-based support, and the opposition to it is narrow and unprincipled. I believe enactment of this bill is the most fair, logical and simple way to proceed.”
Plaintiff bondholders made key admissions that undermine their arguments against Puerto Rico’s inclusion in Chapter 9
Pierluisi Statement Regarding First Circuit Oral Argument on Puerto Rico Recovery Act | Res. Comm. Pedro Pierluisi
“Puerto Rico, unlike the states, is not entitled to authorize its insolvent municipalities—including its government-owned corporations—to seek protection under Chapter 9. Puerto Rico’s exclusion led the territory’s government, in July 2014, to enact the Recovery Act, which sought to authorize certain government-owned corporations to restructure their debts.
Several investment firms that own bonds issued by Puerto Rico’s electric power authority, PREPA, sued the Puerto Rico government, arguing that the Recovery Act—which differs from Chapter 9 in numerous respects—violates the U.S. Constitution. In February, the U.S. district court held that the Recovery Act is preempted by the federal Bankruptcy Code and is therefore invalid under the Supremacy Clause. The Puerto Rico government appealed this decision, and oral argument on the case was held yesterday before the First Circuit.
In February, following the district court’s decision, I introduced legislation, H.R. 870, to give Puerto Rico the same power that the states have to authorize their insolvent municipalities to restructure their debts under Chapter 9. This bill is supported by the National Bankruptcy Conference and virtually all bankruptcy experts; by the editorial boards of The Washington Post, Bloomberg, and The New York Times; and by the vast majority of stakeholders in the investment community.
My legislation has been opposed by a handful of investment firms, including the same firms that sued to invalidate the Recovery Act. Together, the firms own about five percent of Puerto Rico’s $73 billion in total debt. They argue that it would be unfair to apply Chapter 9 to debt issued by Puerto Rico municipalities prior to the date of enactment of H.R. 870, because that would be akin to “changing the rules of the game” for investors who bought Puerto Rico municipal bonds when Chapter 9 was not available.
Leading Chapter 9 experts, including Ken Klee at UCLA and John Pottow at the University of Michigan, reject this argument in testimony to Congress. As Professor Pottow observes: “Some might worry that H.R. 870 applying ‘retroactively’ to pre-existing debts is somehow unfair or even unconstitutional to the holders of that debt. This concern is mistaken. The Nation has had numerous bankruptcy laws throughout its history. Those laws generally applied to pre-existing debt when enacted, and the Supreme Court confirmed the permissibility of Congress exercising its power under the Bankruptcy Clause in this manner. This of course makes sense, because Congress has authority under the Constitution’s Bankruptcy Clause to adjust debts, putting all on notice that their contractual rights are always subject to adjustment by the Congress should a debtor ever avail itself of bankruptcy relief.” Professor Pottow further notes: “Allowing some debts (future debts), but not others (pre-existing debts), to be resolved is pointless. There is no such thing (or, more precisely, no such useful thing) as a ‘half-restructuring.’”
Financial experts have also dismissed this “retroactivity” argument as disingenuous, observing that investors fully understand that federal legal regimes are not set in stone and that Congress can—and often does—act to modify those regimes.
Notably, in their arguments in federal court against the Recovery Act, the bondholder plaintiffs undermine their own arguments on Capitol Hill against H.R. 870, particularly their argument that application of Chapter 9 to pre-existing debt would be unfair.
For example, in their briefs, the plaintiff bondholders concede that, between 1937 (when Congress provided for a municipal bankruptcy regime) and 1984 (when Congress explicitly excluded Puerto Rico municipalities from that regime), Congress did authorize the Puerto Rico government to allow its municipalities to adjust their debts. Accordingly, any investor who bought Puerto Rico municipal debt after 1984 should have known that Congress could well modify federal law and again allow Puerto Rico municipalities to adjust their debts under Chapter 9.
In addition, in its brief, plaintiff BlueMountain notes: “Of course, Congress—which ultimately governs the Commonwealth—does have the option to permit Puerto Rico to invoke Chapter 9.” The brief continues: “[T]here is nothing surprising (never mind inappropriate) in Congress’s decision to retain control over whether and when Puerto Rico’s municipalities may seek bankruptcy protection.” The brief goes on: “Congress, like the States, can alter its bankruptcy policy for municipalities under its control if its chooses; Puerto Rico’s delegate to the House of Representatives already has proposed such legislation.” Plaintiffs Franklin Templeton and OppenheimerFunds make the same point in their brief: “If Congress determines Puerto Rico is in need of Chapter 9, it has the power to alter the Chapter 9 eligibility requirements to permit that result.”
Of course, these firms neglect to mention to the judges hearing the case on the Recovery Act that the firms actively oppose enactment by Congress of the legislation that, according to the firms, constitutes the only permissible method by which Puerto Rico municipalities can be authorized to adjust their debts. Moreover, in their filings with the First Circuit, these firms never suggest that application of Chapter 9 to pre-existing debt would be unconstitutional or unfair. That is because this is an argument of convenience intended to confuse, not an argument of merit intended to persuade.
H.R. 870 has broad-based support, and the opposition to it is narrow and unprincipled. I believe enactment of this bill is the most fair, logical and simple way to proceed.”
Plaintiff bondholders made key admissions that undermine their arguments against Puerto Rico’s inclusion in Chapter 9
Pierluisi Statement Regarding First Circuit Oral Argument on Puerto Rico Recovery Act | Res. Comm. Pedro Pierluisi
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