Thursday, January 20, 2022

PRMA to US Supreme Court: Services, Jobs in Jeopardy without Restructuring Framework

By on January 31, 2016

SAN JUAN – The lack of a legal framework to allow a fair restructuring of Puerto Rico’s debt and that of its public corporations threatens the manufacturing sector, which provides 350,000 direct and indirect jobs on the island, the Puerto Rico Manufacturers Association (PRMA) says.

The remarks were made in a friend of the court brief filed with the U.S. Supreme Court as part of the Puerto Rico v. Franklin California Tax Free Trust, in which the top court will decide if Chapter 9 of the federal bankruptcy code, which does not apply to Puerto Rico, nonetheless preempts a local statute creating a mechanism for the commonwealth’s public utilities to restructure their debts.

The PRMA, which represents 1,200 companies, argued that the manufacturing sector generates 50% of Puerto Rico’s gross domestic product and that, like the rest of Puerto Ricans, depends on public utilities to operate. Public utilities represent a huge share of the island’s roughly $70 billion debt. These entities, like Puerto Rico, do not have access to capital markets.

“If a viable and reasonable solution is not promptly offered or implemented, the commonwealth would be forced to suspend immediately all basic services to its constituents,” the PRMA said in a brief written by former Justice Secretary Luis Sánchez Betances.

Forced to deal with the debt, the utilities may be forced to increase rates, affecting the manufacturing sector. The PRMA says utility costs have a high impact on the manufacturing sector’s decisions involving cutting jobs, making improvements and capital investments.

PRMA Chairman Carlos Rivera testifies, Jan. 12, 2016, at a U.S. House Energy & Mineral Resources Subcommittee on energy related issues affecting Puerto Rico.

PRMA Chairman Carlos Rivera testifies, Jan. 12, 2016, at a U.S. House Energy & Mineral Resources Subcommittee on energy related issues affecting Puerto Rico.

“We have repeatedly stressed that operating costs on the island are high, and if they continue to rise due to [public corporation’s] inability to pay or restructure their debts, the competitiveness of Puerto Rico will be undermined, thus affecting millions of American citizens,” the brief reads.

In March, the U.S. Supreme Court is slated to hear oral arguments on whether the Debt Recovery and Enforcement Act is unconstitutional because it was preempted by the federal bankruptcy law. The Puerto Rico government wants the Supreme Court to overturn federal district and appeals court rulings that declared the law unconstitutional and left Puerto Rico without any debt restructuring alternatives.

Meanwhile, two experts in municipal bankruptcy and bankruptcy law, Clayton P. Gillette and David A. Skeel Jr., argue that even though the U.S. Congress adopted in 1984 a new definition of “State” that excluded Puerto Rico from federal bankruptcy law, there is no evidence that Congress intended for the new definition of State to leave the island without any restructuring options.

“By striking down the Recovery Act, the District Court took the extraordinary step of overriding Puerto Rico’s exercise of its territorial police powers. If Congress clearly intended to preempt a Puerto Rican restructuring law, it had the power to do so. But there is no evidence supporting the conclusion that it did. When the predecessor of section 903(1) was enacted, Puerto Rico was deemed to be a State for municipal bankruptcy purposes and thus permitted to allow its municipalities to make use of the federal bankruptcy laws,” the professors said.

The scholars argued that a literal reading of the U.S. Bankruptcy Code indicates that the pre-emptive effects of Section 903(1) cannot apply to Puerto Rico. That is because the provision prohibits the binding of “creditors,” and “creditors” exist only once a petition under the bankruptcy code has been filed. “Since Puerto Rico municipalities cannot file such petitions, the preemptive effect on States with respect to ‘creditors’ is inapplicable to Puerto Rico. Moreover, the objective of Section 903, which is to preserve State autonomy and thus to shield Chapter 9 from assertions that it violates States’ Tenth Amendment autonomy, has no application to Puerto Rico, which does not share States’ immunity from federal intervention,” they said.

A finding that Congress intended Puerto Rico to have no ability – either from the bankruptcy code or from domestic legislation – to adjust municipal debts would jeopardize the delivery of public services, the very function that Puerto Rico municipalities were created to fulfill.

“The history of municipal insolvency law demonstrates attention to the need for debt adjustment in order to ensure the continued provision of municipal services without generating substantial increases in the cost of service or exit by residents. It is, therefore, implausible that Congress, by denying Puerto Rico’s municipalities access to Chapter 9, intended that they have no avenue by which to adjust their debts,” the professors argued.

The First Circuit Court’s response that Puerto Rico has recourse to Congress not only reverses the presumption against pre-emption, but also fails to consider that, unlike States, Puerto Rico does not have direct representation in Congress that permits it to bargain for legislation that protects its interests. Nor are the interests of Puerto Rico in obtaining debt adjustment legislation aligned with those of States, which are represented in Congress but that already possess federal authority to allow their municipalities to adjust debts in federal bankruptcy proceedings, they said

“Given the long-settled rule against preemption of State or territorial legislation unless the preemption is unmistakably clear, and the absence of clear preemption here, this Court should reverse the judgment invalidating the Recovery Act,” the experts said.

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