Law360, New York (June 30, 2016, 1:20 PM ET) -- After four hearings and one markup at the House Committee on Natural Resources, and countless hours of public and behind-the-scenes debate by the legislators, the House of Representatives passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) on June 9, 2016. Then, on June 29, 2016, the Senate agreed to the House bill, sending the bill to the president for his expected signature. On the heels of June’s successful bipartisan efforts in the House and the Senate, the US Supreme Court also decided, in Puerto Rico v. Franklin California Tax-Free Trust, that a local restructuring law passed by Puerto Rico in 2014 to deal with its fiscal crisis is preempted by federal law (specifically, Chapter 9) and is therefore unconstitutional under the supremacy clause.
This ruling was the second significant ruling by the Supreme Court in one week that clarified both Puerto Rico’s status as a territory and the concomitant plenary power of Congress over Puerto Rico. In the first, Puerto Rico v. Sanchez Valle, a case involving the double jeopardy clause, the Supreme Court held that Congress is the “ultimate source” of power over Puerto Rico.
These recent Supreme Court decisions are significant and should be considered together and in the context of PROMESA in understanding the federal government’s relationship with Puerto Rico, “a relationship to the United States that has no parallel in our history.” For decades there has been vigorous debate about Puerto Rico’s status and “sovereignty.” Indeed, while periodic referenda have been held on the island to decide whether Puerto Rico should become a state, there has been simultaneous debate about whether or not Puerto Rico’s existing status was “special.” The recent events will change this dynamic as now both the Supreme Court and Congress have spoken clearly, saying that Puerto Rico is a territory of the US and that Congress is the ultimate source of power over Puerto Rico. Thus, these actions by the Supreme Court and Congress will play a role in future efforts to change Puerto Rico’s status, efforts that are already underway as a call for a referendum on statehood on Nov. 8, 2016, has been made by the New Party for Progress gubernatorial candidate Ricardo Rosselló.
However, the Supreme Court decisions are also relevant because they underscore the need and importance of the recent legislative battle over PROMESA. In Franklin, the Supreme Court determined that Congress does not “hide elephants in mouseholes” and, if Congress had intended to exclude Puerto Rico from the Chapter 9 preemption clause, it would have said so. In short, the Supreme Court’s decision clarified that Puerto Rico will only be able to restructure its debts through consensual agreements among the parties or through an act of Congress — and Congress has just acted by passing PROMESA.
The Supreme Court’s enunciation of the clear limits of Puerto Rico’s power and its ability to restructure municipal debt made the bipartisan negotiation and passage of PROMESA in the House and Senate crucial. It also highlighted that the process and manner in which the legislation was passed will be an essential component of PROMESA for posterity.
Both from a substance and a process point of view, the PROMESA legislation is unique. The legislation tackled thorny substantive issues involving the exercise of plenary powers, presidential appointments clause powers, and the ability to restructure municipal debts issued by territorial authorities. In an era characterized by gridlock, the legislation provides a meaningful victory that demonstrated congressional leaders have the ability to craft bipartisan deals. While PROMESA may gain prominence as the first successful bipartisan effort under House Speaker Paul Ryan’s leadership using regular order to pass a major bill, it is also significant because, among those countless hours of debate and member statements, a robust legislative history has developed to help clarify the meaning of this intricate legislation in the future.
Ironically, while the Franklin case hinged on legislative history rather than case law, there was a stark lack of legislative record to help the Supreme Court deduce the intent behind the congressional action. This lack of legislative record and the confusion it created apparently was not lost on the drafters of PROMESA.
In contrast to the scarcity of legislative history about the intent of the 1984 amendments to the Bankruptcy Code at issue in Franklin, the House Committee on Natural Resources Report on PROMESA is replete with evidence of legislative intent. The report specifically enunciates several important themes that will be useful as the legislatively created oversight board exercises its broad authority over the territorial instrumentalities.
PROMESA’s text and accompanying legislative history in the House of Representatives explains the necessity for immediate congressional action to prevent the worsening of a fiscal crisis impacting both the territory and its US citizens. It also underlines Congress’ responsibility and authority to take action. First, PROMESA suggests that this fiscal crisis is due, at least in part, to the inability of local politicians to bring order and transparency to the territory. Second, the intent to provide “a workable solution that will ensure Puerto Rico regains access to capital markets and achieves fiscal responsibility and transparency” is clearly articulated and reflects important policy that should instruct PROMESA’s implementation. Third, PROMESA’s goal of ensuring the protection of the lawful priorities and lawful liens as guaranteed by the territorial constitution and applicable laws, and prevent unlawful interdebtor transfers of funds is well-defined in both the legislation and the report language. And, fourth, while the legislation seeks to provide an adequate level of funding for pension systems, “it does not allow for pensions to be unduly favored over other indebtedness in a restructuring.”
The difficult issues involving the fiscal crisis in Puerto Rico at the heart of Franklin and addressed in PROMESA will take years of hard work to resolve. PROMESA is a very good first step. Along the way, there will no doubt be continuing disputes about Puerto Rico’s restructuring authority and perhaps efforts to change Puerto Rico’s status. While there will be passionate parties on both sides of these complex issues, the combined effect of the recent Supreme Court decisions and PROMESA will provide more clarity to the debate going forward. Moreover, any future litigation that may ensue as Puerto Rico moves to restructure its debts will have to contend not only with the bill language itself, but also with the robust legislative history created beyond the words found within the four corners of the legislation.