By Stephen J. Lubben (Seton Hall University School of Law)
Since 2017, the Commonwealth of Puerto Rico (and certain of its affiliated entities) have been in “bankruptcy” under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). PROMESA is a bankruptcy law, with various other bells and whistles, although Congress purported to enact it under its Article IV territories powers.
These cases are pending in the United States District Court for the District of Puerto Rico; however, Judge Laura Taylor Swain, of the Southern District of New York, was appointed by the Chief Justice to preside over the cases. My new paper – Puerto Rico; Act III – provides a concise overview of where things now stand in the PROMESA process, and where they might be heading.
In addition to its restructuring provisions, the law creates the Financial Oversight and Management Board for Puerto Rico. The Board frequently states that “the purpose of the Oversight Board is to provide a method for Puerto Rico to achieve fiscal responsibility and access to the capital markets.” In essence, the Board operates as a supra-governmental body for fiscal matters.
At present several members of the Board have stepped down, and President Trump bumped one member off the Board – former bankruptcy judge Arthur J. González – by appointing a new member to his slot. Congress and the president will have to fill out the Board, or devise a new path for the Commonwealth.
In the face of hurricanes, earthquakes, and COVID-19, the Board has attempted to push forward with a reorganization under Title III. The virus, however, might substantially delay the process and force a reconsideration of the present reorganization plan. It thus represents the opening of a third act in Puerto Rico’s debt drama.
Even before recent events, I had argued that the Board was being far too timid in its efforts to revamp Puerto Rico’s economy, given that the PROMESA process was presumably a one-time opportunity. In particular, the debt relief the Board was proposing was comparatively modest, and I worried that it might leave the Commonwealth with still too much debt to successfully restart its economy.
The problem is that the Board’s current plan has the support of almost nobody, making even “cramdown” of the plan extremely unlikely. Pensioners might be the most likely ally with the Board, although the government of Puerto Rico, and presumably many of the pensioners, object to the current offer. As Justice Sotomayor recently noted,
The Board’s decisions have affected the island’s entire population, particularly many of its most vulnerable citizens. The Board has ordered pensions to be reduced by as much as 8.5 percent… Other proposed cuts take aim at already depleted healthcare and educational services. It is under the yoke of such austerity measures that the island’s 3.2 million citizens now chafe.
Indeed, Justice Sotomayor’s recent opinion also provides a kind of roadmap for a challenge to PROMESA. She explains that she concurred in the Court’s result only because nobody had argued that Puerto Rico’s Commonwealth status was inconsistent with the creation of the Board. As she sees it, Congress made certain commitments to Puerto Rico in the 1950s when it created the Commonwealth, and Congress may not “take back” those commitments. Any litigation following her approach would presumably involve extensive appeals, but it looms as a threat to the PROMESA process.
At heart, the problem in Puerto Rico is not unlike the problem in many sovereign and municipal workouts. The bondholders want to recover as much as possible, of course, and are leery of settling claims only to see the debtor rebound shortly thereafter. The conundrum being that the rebound is unlikely to happen without serious debt reduction. Debt reduction is often not the only requirement for a rebound, but it is fundamental.
Either the Board needs to lead Puerto Rico out of this feedback loop, or Puerto Rico needs to extract itself from the PROMESA process. If not, the drama will continue for many more acts. Future acts could in theory include statehood for Puerto Rico, or some new restructuring process, or perhaps even both. Or the parties may simply reach a deal on a plan. At this point it is hard to say any particular outcome is more likely than another.
 Financial Oversight And Management Bd. For Puerto Rico v. Aurelius Investment, LLC, 590 U. S. ____ (2020), Sotomayor, J., concurring in judgment, slip opinion at page 7.