On May 3, 2017, the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), on behalf of the Commonwealth of Puerto Rico (“Puerto Rico”), filed a petition for relief under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) in the United States District Court for the District of Puerto Rico. The filing follows six lawsuits that were commenced on May 2, 2017 concerning Puerto Rico’s massive debts after the expiration of the initial statutory stay imposed under PROMESA that had prevented creditor litigation against the Commonwealth. Having failed to reach a resolution with creditors through negotiations and mediation, Puerto Rico commenced the PROMESA proceeding. The filing had the effect of imposing an automatic stay to continue the protection of Puerto Rico against creditor lawsuits and triggered certain other core protections and restructuring tools afforded to municipalities eligible for relief under chapter 9 of title 11 of the United States Code. Because Puerto Rico is not eligible for such relief under the Bankruptcy Code, the purpose of the filing is to allow Puerto Rico to continue efforts to negotiate with its creditor constituencies a comprehensive debt restructuring through a plan under the (untested) PROMESA. Whether Puerto Rico will be successful remains to be seen.
Puerto Rico’s Crisis
For years, Puerto Rico has been mired in an economic crisis. The total public sector debt for Puerto Rico reportedly stands at approximately $74 billion and that amount does not include Puerto Rico’s pension liabilities. As of June 30, 2015, Puerto Rico’s three main retirement systems reportedly had over $49.56 billion of liabilities which were only 1.57% funded.
As we discussed in our previous bulletin (here), despite Puerto Rico’s dire situation, Puerto Rico and its instrumentalities are not eligible to be debtors under the Bankruptcy Code. Accordingly, Puerto Rico passed the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) on June 28, 2014, which purported to provide protections to Puerto Rico’s public utility debtors similar to those found in chapter 9 of the U.S. Bankruptcy Code. The Recovery Act, however, was held unconstitutional in a 5-2 decision by the Supreme Court in Puerto Rico v. Franklin California Tax-Free Trust on June 13, 2016.
In light of the long-standing fiscal problems affecting Puerto Rico and the Supreme Court’s decision in Franklin California Tax Free Trust, President Obama signed PROMESA into law on June 30, 2016. Among other things, PROMESA imposed an automatic stay on creditor lawsuits against Puerto Rico and its instrumentalities, established Title III and Title VI mechanisms to provide a restructuring process for Puerto Rico, and created the Oversight Board with the general mandate to achieve fiscal responsibility for Puerto Rico and gain it access to capital markets. PROMESA provides the Oversight Board with the ability to certify a fiscal plan for Puerto Rico and “covered entities” as well as the ability to restructure Puerto Rico’s debts under Title III and VI of PROMESA.
The Oversight Board voted to certify a fiscal plan proposed by the Governor of Puerto Rico on March 13, 2017. In its court papers, the Oversight Board stated that the certified fiscal plan “will reduce the fiscal gap by $39.6 billion and generate surplus cash flow of approximately $7.9 billion over a ten year period. . . . [t]hat will be available for debt service.” Although the Oversight Board and Puerto Rico undertook a joint effort to formulate a restructuring proposal based on the certified fiscal plan, those attempts ultimately failed. Creditors reportedly called for the certification of a new fiscal plan and despite attempts to reach a consensual restructuring plan, including mediation, no agreement was reached by May 1, 2017— the expiration date of PROMESA’s statutory stay on creditor litigation against Puerto Rico. Six lawsuits were filed by creditors holding Puerto Rico debt on May 2, 2017.
Filing Under Title III of PROMESA
With the expiration of PROMESA’s statutory stay, Puerto Rico’s massive debt load, and the need to attain pension and operational reform, the Oversight Board and Puerto Rico determined “that the best path forward was to commence a Title III case to protect Puerto Rico and its citizens.” In its filing, the Oversight Board noted “the Oversight Board and the Commonwealth will continue efforts to negotiate” a “comprehensive debt restructuring,” preferably through “consensual deals with all constituencies.” Given that this is the first test of PROMESA’s restructuring process though, it remains to be seen what course the case will take. By commencing its Title III PROMESA case, Puerto Rico gains the benefit of the Bankruptcy Code’s automatic stay, along with a wide array of other relief common to chapter 9 of the Bankruptcy Code. We will continue to monitor developments in the PROMESA proceeding and provide further updates as the situation develops. Please do not hesitate to contact us with any questions in the meantime.