United States: Recap Of House Subcommittee Hearing On Puerto Rico Chapter 9 Uniformity Act Of 2015—H.R. 870

Last Updated: March 4 2015
Article by Bruce Bennett, Beth Heifetz, Scott J. Greenberg and Dan T. Moss
Most Read Contributor in United States, September 2019

On February 26, 2015, testimony was presented to the House Judiciary Committee's Subcommittee on Regulatory Reform, Commercial and Antitrust Law (the "Subcommittee") regarding H.R. 870, the "Puerto Rico Chapter 9 Uniformity Act of 2015" ("H.R. 870").1. This Commentary provides an overview of that testimony as well as the written testimony of each witness who testified before the Subcommittee and the text of H.R. 870

Hearing Overview 

H.R. 870 was introduced by the Resident Commissioner of Puerto Rico, Representative Pedro R. Pierluisi, on February 11, 2015. Anecdotal comments from the Representatives participating in the Subcommittee hearing, particularly Representative Issa, indicate that this bill is being fast tracked and will be sent to the full House Judiciary Committee for a vote in the near future. 

The hearing room was jam-packed—not a single open seat and at least a dozen or standing on the periphery. The hearing on H.R. 870 lasted from 11:30 a.m. to approximately 12:45 p.m. Current and former prominent Puerto Rican elected officials—the President of the Puerto Rico Senate, Eduardo Bhatia, among others—attended the hearing and were recognized by the Subcommittee Chairman, Representative Tom Marino (R-PA). Numerous members of the Puerto Rican media were also present. 

Four witnesses testified before the Subcommittee: John A. E. Pottow, professor at the University of Michigan Law School; Melba Acosta, President of the Government Development Bank for Puerto Rico (the "GDB"); Robert Donahue, Managing Director at Municipal Market Analytics, Inc.; and Tom Mayer, Partner and Co-Chair, Corporate Restructuring and Bankruptcy Group at Kramer Levin Naftalis & Frankel LLP (current counsel to funds managed by Franklin Municipal Bond Group and by Oppenheimer Funds, Inc.). 

Each witness submitted written testimony to the Subcommittee prior to the start of the hearing. Each witness's oral testimony concisely summarized his or her written submission. As discussed below, only one witness, Tom Mayer, spoke in opposition to H.R. 870. The remaining three witnesses spoke in support of H.R. 870. 

There were 10 Subcommittee members present at some point during the hearing, six of which questioned the witnesses: Chairman Marino and Representatives Issa (R-CA), Conyers (D-MI), Johnson (D-GA), Pierluisi (D-PR), and Cicilline (D-RI). Of the questioners, only Representative Issa indicated some skepticism regarding the need for H.R. 870, with the remaining questioners all voicing support for the Act. Virtually every questioner yielded any time he or she had remaining to Representative Pierluisi, who then took up the balance of the allotted time to criticize Mr. Mayer's written and oral testimony. Representative Pierluisi dug into details of Mr. Mayer's testimony and attacked specific points. 

Points Made in Support of H.R. 870

Puerto Rico's Exclusion from the Bankruptcy Code's Definition of "State" May Be a Legislative Anomaly. There is no evidence that Puerto Rico was intentionally excluded from this definition by Congress. Evidence indicates that Puerto Rico was inadvertently omitted from the definition and that Congress made attempts to correct this error, but, for some unknown reason, such efforts never yielded the intended result. 

H.R. 870 Does Nothing to Authorize a Chapter 9 Filing by Puerto Rico or Any of its Municipalities. It merely gives Puerto Rico the same right every other "state" has: the ability, if it so chooses, to enact a law that authorizes a "municipality" to seek relief under Chapter 9 of the Bankruptcy Code. 

Chapter 9 Relief will Make a Smoother Restructuring of Debt Possible. If Chapter 9 relief is available to municipalities in Puerto Rico, it will facilitate a more coordinated and orderly restructuring of debt associated with the Puerto Rico Electric Power Authority ("PREPA"), the Puerto Rico Aqueduct and Sewer Authority ("PRASA"), and the Puerto Rico Highways and Transportation Authority ("PRHTA"). One witness stated that Chapter 9 would provide a powerful motivating tool to bring all interested parties into an organized restructuring effort. 

Current Rules Provide an Ineffective Restructuring Framework. The current rules under which public corporations in Puerto Rico may restructure debts present grave uncertainty and provide a wholly inadequate legal framework to effectuate a highly complex financial restructuring. The most notable example cited was the possibility of the appointment of a "receiver" over PREPA who would have "vague powers" and would be prohibited from "encumbering or dispos[ing] of property." 

Retroactivity Could Create Risks. In response to concerns over the constitutionality of retroactively applying H.R. 870, witnesses noted that municipal bond funds, as estimated by Fitch Ratings Inc., reduced their Puerto Rico holdings by approximately 65 percent beginning in the second and third quarters of 2013. Market trades indicate that these funds are now held by opportunistic investors with a higher risk tolerance and awareness. Today it is estimated that municipal bond funds collectively own less than one-third of the island's debt, with holdings concentrated in largely insured, general government issuers. Additionally, witnesses pointed out that risks outlined in the August 2013 PREPA Offering Statement included, among other things, a risk that the ability to fund operations and finances could be negatively affected if current and prior fiscal headwinds continue. Thus, investors holding PREPA bonds during or after August 2013 were expressly warned of the risk that their debt could be impaired. Further, witnesses noted that the U.S. Supreme Court has dealt with retroactivity in the context of contract rights impaired in bankruptcy cases before and did not find such retroactive impact to be unconstitutional. 

Professor Pottow did note, however, that retroactivity is a concern only under the Takings Clause of the United States Constitution (U.S. Const. amend. V), which is implicated only when property rights are impaired. He noted that these concerns are "rare" because, typically, secured creditors have many protections under the Bankruptcy Code. Testimony on this subject was cabined, however: while one could argue that the Bankruptcy Code's invalidation of property rights might implicate the Takings Clause, the issue has never been definitively resolved by the U.S. Supreme Court, and its resolution would be complicated and involve interpreting the intersection of the Bankruptcy Clause and Takings Clause jurisprudence. See Pottow at p. 4. 

Risk Premium Could Affect Bonds Issuances. Puerto Rico is currently paying a "risk premium" for all issuances because there is "uncertainty in the market" with respect to the island's ability to facilitate a coordinated restructuring. This may negatively affect upcoming bond issuances that are necessary to provide the central government and the GDB with liquidity. 

PREPA, PRASA, and PRHTA are Likely to Become More Self-Sufficient. The current Governor and other elected officials are working together to make PREPA, PRASA, and PHRTA self-sufficient. With a clear debt adjustment mechanism it is more likely that these entities will be restructured in an appropriate manner and become financially independent from the central government. 

Passage of H.R. 870 May Avert a Great Fiscal Crisis. More importantly, it could avoid the potential for a request to the federal government for financial aid or a bailout. 

H.R. 870 has Bipartisan and Strong Support. This support comes from members of Congress and Puerto Rico's leaders in addition to support from the National Bankruptcy Conference, notable bankruptcy practitioners and bankruptcy academics. 

Mr. Mayer's Points Made in Opposition to H.R. 870

Puerto Rico Should Not Have Access to Chapter 9. According to Mr. Mayer, it is wrong to allow Puerto Rico to have access now to Chapter 9 when billions of dollars of bonds were issued in reliance on the fact that Puerto Rico's debt could not be altered through a Chapter 9 restructuring. Mr. Mayer pointedly stated that "H.R. 870 breaks the faith with those millions of men and women."

The Public Corporations Are Not Exercising All Available Options to Manage Their Debt and Operating Expenses. They should, among other things, cut expenses, increase rates, and engage in more robust collection efforts before going down the Chapter 9 path or any other restructuring scenario.

Chapter 9 is Bad Policy for Bondholders, and Detroit was not a Success Story for Such Bondholders. Mr. Mayer stated that Chapter 9 should be altered to be more like the law prior to the 1978 enactment of the Bankruptcy Code with respect to bondholders: specifically, the requirement of an affirmative bondholder vote before a plan affects bondholders. This would be akin to the pre-1978 requirement that a Chapter 9 petition be accompanied by a plan accepted, in writing, by creditors owning not less than 51 percent of the securities affected by the plan.

Professor Pottow rebutted Mr. Mayer's arguments on this last point by pointing out that certain Detroit bondholders may receive a 74 percent recovery. He also stated that Mr. Mayer's testimony is colored on this point because his Detroit clients agreed to a settlement whereby they recovered only 13 percent because of the strong arguments that those Detroit bonds were illegal and the bondholders accordingly should receive nothing. 

Both Chairman Marino and Representative Issa voiced concern regarding the impact of "retroactively" impairing debt obligations and whether such conduct stands on firm constitutional grounds.

Various documents, including letters and other notes in support of H.R. 870, were moved into the record during the Subcommittee hearing. Also, Chairman Marino gave Subcommittee members one week to submit additional questions in writing to the witnesses. Those questions and any responses will become part of the hearing record.


1. This Commentary is meant to summarize what occurred during the Subcommittee hearing. The views, opinions, and recommendations of the witnesses and Members of Congress are not endorsed by or necessarily reflective of those of Jones Day. Issues regarding the scope and application of Chapter 9 are complicated. For further information on this subject matter, please contact any of the Commentary's authors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions