Bishop: Fiscal Board Rushed Puerto Rico to Bankruptcy
Editor’s note: This article was originally published in the July 5 – 11 issue of Caribbean Business.
In a friend of the court brief submitted in an appeal to the U.S. First Circuit Court of Appeals, U.S. House Committee on Natural Resources Chairman Rob Bishop, who drafted the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) as Congress’ response to Puerto Rico’s debt crisis, says the board violated Promesa’s intent.
Bishop’s friend of the court brief, in which he urged the court to “respect the letter and intent of Promesa,” was filed June 29 in the appeal filed by Ambac Assurance Corp. In February, U.S. District Judge Laura Taylor Swain had said she lacked jurisdiction to evaluate challenges to Puerto Rico’s five-year fiscal plans and could not adjudicate Ambac’s claims that payments on Highways & Transportation Authority (HTA) special revenue bonds were being unconstitutionally diverted to government coffers. The district court dismissed several claims made by Ambac, including a special revenues claim under Sections 922 and 928 of the Bankruptcy Code, because the court did not read either section as empowering it to order the government to pay Pledged Special Revenues to HTA bondholders.
While Bishop said he was not siding with anybody in the brief, the document appears to side with Ambac. He said Promesa pre-empts the unilateral debt-related measures Puerto Rico deployed prior to Promesa’s passage, and prevents Puerto Rico from taking such actions while the oversight board exists. The purpose of the pre-emption is to establish federal law as the only debt-relief regime available and to protect creditors’ rights.
Bishop noted that special revenue bonds, such as those owned by Ambac, should have continued to be paid despite being in Title III bankruptcy. Furthermore, Sections 922 and 928, “the “special revenue” provisions of Chapter 9 of the Bankruptcy Code, are intended to ensure that revenue streams pledged to bondholders continue to pay out during a Title III proceeding, just as they would during a Chapter 9 bankruptcy by municipal debtors. Title III also contains creditor protections that apply at confirmation of a plan of adjustment, the means by which a debtor exits Title III,” Bishop said.
Furthermore, Bishop said a debt-adjustment plan for the bankrupt entities cannot be confirmed unless the government complies with the fiscal plan, which itself must respect payment priorities and liens.
Bishop also noted that under Promesa, the intention of Congress was to allow Puerto Rico to file bankruptcy only after all negotiations with creditors failed but that the oversight board filed bankruptcy for the commonwealth and other entities right after the stay on lawsuits ended.
“The committee agreed to provide Puerto Rico access to restructuring, conditioned by the inclusion of provisions to prioritize consensual negotiations, improve transparency on the island, pre-empt unilateral debt-related measures and protect the best interests of creditors. If nonconsensual restructuring were to ultimately prove necessary, the legislation provided that it could occur only under clear federal mandates that would respect creditor interests and enable Puerto Rico’s future access to capital markets,” he said.
Therefore, Promesa mandated that bankruptcy proceedings under Title III be available only as a last resort if voluntary negotiations failed. “Indeed, the committee envisioned that most—if not all—creditor claims would be resolved not under Title III but under Title VI, which authorizes collective action by creditors to voluntarily restructure debt. Like other parts of Promesa, Title VI mandates protection of the best interest of creditors and careful classification of similarly situated debtors,” Bishop said.
“Although the oversight board has steered debtors into Title III proceedings, Title III was created as a last resort, to be used in truly intractable cases after a lengthy negotiation period proved fruitless,” he said.
To implement this, the law imposed several gating requirements on the oversight board to prohibit a rush into the Title III restructuring process and to ensure the oversight board would consistently and proactively engage with the creditor community.
The first gating requirement instructs the oversight board to determine if the debtor entity has made “good-faith efforts to reach a consensual restructuring with creditors.”
Another gating requirement focused on transparency by requiring the government to make public draft financial statements and other data.
The final gating provision is the requirement that a fiscal plan be certified before any Title III case commences to ensure entities first get on the path of fiscal responsibility before filing for bankruptcy. “Despite the clear intent and design of the gating provisions, the oversight board filed Title III cases for four debtors within one month of the expiration of the stay,” he said.
Bishop also warned that the government must obey the fiscal plan and budgets must be compliant with it. The government passed a budget that the board said was not compliant.
Any debt restructuring must remain fair to creditors and creditor rights would be protected at all stages of a Title III case. “The committee included two key creditor protections at the plan confirmation stage of every Title III proceeding. First, the court cannot confirm a plan of adjustment unless it is consistent with the applicable Fiscal Plan certified by the oversight board under Title II.” By requiring the plan of adjustment to conform to the fiscal plan, Promesa mandates that the plan of adjustment “respects the relative lawful priorities or lawful liens of creditors,” he said.