Bankruptcy Code




PROMESA provides two mechanisms to restructure PR’s debt, Title III, a bankruptcy like procedure and Title VI, a mechanism to formalize agreements negotiated between PR and its creditors. Moreover, the way PROMESA is written, Title VI negotiations are indispensable for eligibility to Title III.


Section 206(a)(1) of PROMESA requires that before the Board issues a restructuring certification (permission for Title III) it determine that “the entity has made good-faith efforts to reach a consensual restructuring with creditors” Hence, Title VI negotiations are imperative. What is the procedure for these negotiations? Who negotiates, the Board or the Government of PR? What happens if the parties reach an agreement? What happens if they don’t reach an agreement?


Title VI of PROMESA provides some of the framework for said negotiations. Sections 206(a) and 405(n) of PROMESA establish that the Puerto Rico Government, not the Board, will conduct these negotiations. That does not mean that the PR Government and the Board cannot coordinate negotiations efforts but the former, not the latter, conducts them. The Board, however, has made it clear to PR that only it can approve the agreements, as I will discuss shortly.


Title VI consists of two sections, to wit, 601 and 602. Section 602 simply excludes foreign and international law from Title VI, therefore, section 601 covers the negotiations process. Strangely enough, section 601 does not establish the manner or form of the negotiations but rather structures how bondholders are to vote for the proposed modifying qualifications (modifications of the bond debt).


Once PR and bondholders come to an agreement to modify the bond debt, the Board, PR or the bondholders may propose a Qualifying Modification to such debt. If the Board likes it, it will order voting on that Qualifying Modification and if it does not like it, there will be no chance to have it approved. Once approved by the Board, officials designated by the Governor will establish pools for the different issuers of bonds. For example, if the bonds issued by the Retirement Fund have differences in preferences, or a lien (as the First Circuit recognized to Altair on those bonds), these bonds have to be put in different pools. Once all outstanding bonds, meaning valid bonds that have not been paid (another reason why the Board will conduct its own audit of PR’s debt), have been accounted for and its owners identified, certain information has to be delivered to them. Section 601(f) establishes the following:


Before solicitation of acceptance or rejection of a Modification under subsection (h), the Issuer shall provide to the Calculation Agent, the Information Agent, and the Administrative Supervisor, the following information—


(1) a description of the Issuer’s economic and financial circumstances which are, in the Issuer’s opinion, relevant to the request for the proposed Qualifying Modification, a description of the Issuer’s existing debts, a description of the impact of the proposed Qualifying Modification on the territory’s or its territorial instrumentalities’ public debt;

(2) if the Issuer is seeking Modifications affecting any other Pools of Bonds of the Territory Government Issuer or its Authorized Territorial Instrumentalities, a description of such other Modifications;

(3) if a Fiscal Plan with respect to such Issuer has been certified, the applicable Fiscal Plan certified in accordance with section 201; and

(4) such other information as may be required under applicable securities laws.


As stated above, once this information is delivered to the bondholders, they will vote and if “the affirmative vote of the holders of the right to vote at least two-thirds of the Outstanding Principal amount of the Outstanding Bonds in each Pool that have voted to approve or reject the Qualifying Modification, provided that holders of the right to vote not less than a majority of the aggregate Outstanding Principal amount of all the Outstanding Bonds in each Pool have voted to approve the Qualifying Modification” the modification will be approved. Section 601(j) of PROMESA.


If the Qualifying Modification is approved by the vote of the bondholders, then the agreement is taken to the US Federal District Court for the District of Puerto Rico for the entry of an order that the requirements of Section 601 have been satisfied. Once this order is entered, the Modifying Qualification is binding on all bondholders but this may be questioned in the US Federal District Court for the District of Puerto Rico due to the unlawful application of Section 601 or that in the judgment of the Court it is “manifestly inconsistent” with Section 601.


Undoubtedly agreements will be reached between some issuers and some bondholders, especially with those with weaker claims, to wit, PFC and GDB, the latter which its bondholders had already accepted 53% haircut. In others, such as GO’s and COFINA, it is likely that a Title III filing will ensue, especially if a quick resolution of that controversy is not made by Court resolution. And those filings will make Detroit seem a walk in the park.







El día 28 de enero de 2017 se celebró la cuarta reunión de la Junta de Supervisión Fiscal, quería incluir el enlace a esta reunión pero por alguna razón, no está. Interesting. Durante la misma se concedió al Gobierno de PR la extensión al “stay” de PROMESA hasta el 1ro de mayo de 2017. Durante la reunión, los miembros de la Junta dijeron que el “stay” no se podía extender más allá del 1ro de mayo excepto por el “automatic stay” del Título III de PROMESA, el procedimiento de quiebra. En la parte de comentarios, mencioné que además del “automatic stay” del Título III de PROMESA, los bonistas y PR pueden llegar a un “Forbearance Agreement” (Acuerdo de Indulgencia) donde se puede acordar no demandar durante un periodo específico mientras se continúan negociaciones consensuales. Por las caras de los miembros de la Junta era obvio que no les gustó la sugerencia.


Desde que la Junta entró en funciones, ha puesto en “fast track” la aprobación del Plan Fiscal. ¿Por qué la prisa de aprobar el plan fiscal? Como ya vimos, no hay que tener el plan fiscal aprobado para que extendieran el “stay” de PROMESA. Pero si es indispensable para dar una certificación para que el Gobierno de PR o sus instrumentalidades puedan ser autorizados a radicar un Título III, ver, sec. 206(a)(3). Otro requisito es que se lleven a cabo negociaciones de buena fe con los bonistas, sec. 206(a)(1) y sabemos la insistencia de la Junta de que se lleven a cabo estas negociaciones. No me cabe duda de que luego de la expiración del stay de PROMESA la Junta llevará al gobierno de PR al Título III.


Si los bonistas y el Gobierno están dispuestos a negociar, ¿por qué la prisa por un Título III? Como he dicho anteriormente, PROMESA no se aprobó para ayudar a PR si no más bien como un experimento de tener una Ley de Quiebras para los Estados de la Unión. Me explico.


David Skeel, miembro de la Junta y experto en quiebras de la Universidad de Pennsylvania, entiende que el Cap. 9 se puede utilizar para entre otras cosas vender haberes municipales o disolver el municipio. Además, en un artículo en el Wall Street Journal para el 2011 dijo lo siguiente sobre una ley de quiebras para los estados- “First, the governor and his state could immediately chop the fat out of its contracts with unionized public employees, as can be done in the case of municipal bankruptcies.”


El Sr. Skeel es un coautor de un artículo en 2016 Titulado “Governance Reform and the Judicial Role in Municipal Bankruptcy”. En el artículo, Skeel dice


Failed budget policies do not arise autonomously, disaggregated from the political environment in which they are devised. Rather, with the exception of cases in which municipalities face some exogenous shock, such as a crippling tort suit or natural disaster, or in which local governments suffer from broad economic disruptions beyond their control, local fiscal crises usually are caused by a governance structure that tolerates financial decisions in which the benefits and costs of public expenditures are misaligned. . . The financial distress of a substantial municipality nearly always signals that its politics are dysfunctional. The same entrenched political environment that exacerbates fiscal instability may also frustrate efforts to initiate reforms necessary to escape a cycle of financial irresponsibility. That entrenchment can be overcome only by the inducement or imposition of structural reforms from outside the municipality.


¿Les suena familiar?


El Sr. Skeel también dice en su artículo:


We contend that municipal bankruptcy can and should address governance failures where they contribute to financial failures. We argue that this conclusion follows from an appreciation of the similarities between municipal corporations and the for profit corporations that are reorganized in Chapter 11 of the Bankruptcy Code. Where governance failures contribute to corporate financial distress, no one would treat governance reform as irrelevant to the reorganization of a corporation. Carefully crafted governance rules were a central feature of the Chrysler bankruptcy, and governance rules figure prominently in most other substantial Chapter 11 cases as well. From a purely functional perspective, governance reform is even more essential to an effective Chapter 9 municipal bankruptcy than it is in Chapter 11, since at least some stakeholders in insolvent municipalities are more dependent on those entities than are stakeholders in insolvent firms.” (Énfasis suplido)


Espero hayan captado la referencia al caso de la quiebra de Chrysler porque el ex Juez Arthur González (ahora miembro de la Junta) resulta que era el Juez de ese caso. ¿Coincidencia? Yo no creo en coincidencias. Parece ser que algunos miembros de la Junta quieren usar a PR como un conejillo de indias y experimentar. De esa manera parecerán los salvadores y peritos en este tipo de asunto. No se ustedes pero a mi no me gusta la idea que usen a PR y los puertorriqueños como experimentos.


Si el caso de las quiebras (si plural) de PR tienen algún tipo de éxito, esto propulsará la idea en el Congreso de ayudar a los estados demócratas como Illinois, New York y California para que se establezca una ley de quiebras para el estado que sería de forma voluntaria como lo es el Capítulo 9 de quiebra municipal.


¿Como se pueden llevar a cabo estos cambios mencionados por el Sr. Skeel? ¿Que pasaría si el gobierno de PR es llevado a la quiebra?


Antes que nada, el Gobierno de PR NO DECIDE SI ALGUNA PARTE del Gobierno se va a la quiebra, es la Junta, sección 206(a). No solo es la Junta la que decide si alguna parte del Gobierno se acoge al Titulo III de PROMESA. Más aún, la Junta es la radica la quiebra , sección 304 y la que determina y presenta el plan de quiebras, sección 312. El plan de quiebras puede incluir el rechazo o aceptación de los executory contracts. ¿Que es un executory contract? Puede ser un arrendamiento o un CONVENIO COLECTIVO. Y cuando digo rechazar, a lo que me refiero es que el convenio colectivo que los empleados públicos celebraron con el Gobierno, por ejemplo el de los maestros que se firmó en agosto puede ser rechazado y entonces pasamos a un convenio nuevo. Normalmente, en capítulos 11, la sección 1113 de Quiebras pone límites a como se llevan a cabo estos rechazos pero ni en Cap. 9 ni en PROMESA esa sección fue adoptada. La sección que si fue adoptada fue la 365, la cual es la que permite el rechazo del executory contract y la 1123(b)(2) que hace lo mismo.


Este rechazo en el Cap. 9, por ende en PROMESA, se rige por la decisión del Supremo Federal en NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984). Para poder llevar a cabo el rechazo, el municipio tiene que demostrar que el (1) contrato es burdensome (gravoso); (2) que el balance de las equidades favorece al municipio y (3) que antes de rechazar el contrato ha negociado de buena fe para cambiar el contrato. Ver también, In Re City of San Bernardino, 530 B.R. 474 (E.D. Cal. 2015) y In Re City of Vallejo, 432 B.R. 262 (E.D. Cal. 2010). Así que las uniones verán sus contratos modificados de forma no muy agradable.


Como indiqué, el plan de quiebras lo radica la Junta, NO el gobierno de Puerto Rico. ¿Qué se puede hacer en ese plan de quiebras? Veamos. La sección 1123(a)(5)(D)del Código de Quiebras, adoptado en PROMESA, dice que el plan puede proveer para el “sale of all or any part of the property of the estate, either subject to or free of any lien, or the distribution of all or any part of the property of the estate among those having an interest in such property of the estate”. Puede además cambiarse el “charter” del deudor (1123(a)(5)(i)) o sea, cambiar la ley habilitadora de cualquier agencia. Bajo la 1123(b)(4) el plan puede “provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests.” El 1123(b)(6) añade que el plan puede “include any other appropriate provision not inconsistent with the applicable provisions of this title.” Como ven, el plan puede hacer lo que muchos grupos en PR no “permitirían” bajo ningún concepto, la venta del patrimonio natzional, incluyendo la AEE, la AAA, el Fondo del Seguro del Estado y la Autoridad de Carreteras, por mencionar algunos.


Finalmente, algunos analistas hablan de que si los bonistas no aceptan el plan, pues el cramdown lo soluciona todo. Aparte del hecho de que nunca ha ocurrido un cramdown en un Capítulo 9, el cramdown de PROMESA es diferente al del Código de Quiebras. La sección 314(b) de PROMESA enumera los factores que debe tomar en consideración el Tribunal para aprobar el plan y su inciso 6 dice así:


the plan is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan” Lo que añado en negro no esta en el Código de Quiebras y es único en PROMESA. Creo que es claro que la mayoría de los acreedores podrían recobrar más fuera de quiebras que en quiebra, por ende, sería difícil aprobar el plan ya que aún en “cramdown” la sección 314(c) requiere que esto se cumpla. Además, la sección 314(b)(7) require que el plan de quiebras sea consistente con el Plan Fiscal y este en tiene que “respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act.” Sección 201(b)(1)(N) de PROMESA. Más aún, el informe de Comité de Recursos Naturales de la Cámara en su informe sobre PROMESA indica a la página 50:


By incorporating consistency with the Fiscal Plan into the requirements of confirmation of a plan of adjustment, the Committee has ensured lawful priorities and liens, as provided for by the territory’s constitution, laws, and agreements, will be respected in any debt restructuring that occurs


No olvidemos que una vez se radica la quiebra, el pago de las deudas pre-quiebra se detiene y no comienza nuevamente (aún con menoscabo) hasta que se apruebe el plan de quiebras. En Detroit, que fue sumamente rápido, tardó 16 meses, mientras que en San Bernardino tardó más de 4 años. Y recordemos que el “automatic stay” de la sección 362 de quiebras, adoptada en PROMESA, no aplica a los casos donde hay un “pledge” en el acuerdo de bonos, como en el caso de Altair, Peaje y la UPR, según decidido por el Primer Circuito y el Juez Besosa, ver secciones 922 y 927 de la ley de quiebras, adoptadas en PROMESA. Además, los bonos de la AEE y la AAA son considerados “revenue bonds” y tampoco los aplica el “automatic stay”, sujeto al pago de los “necessary expenses” para operar las mismas, ver, sección 928 de la ley de quiebras, también adoptado en PROMESA. Y que son “necessary expenses” en el caso de ambas agencias va a traer múltiples litigios.


Otro asunto que los múltiples analistas que salivan con la quiebra de PR no han mencionado es ¿que ocurre si el plan no aprueba por el Tribunal? Ahí entra en función la sección 930(b) de la ley de quiebras, adoptada en PROMESA, dice que la quiebra se puede desestimar si no se aprobó el plan. Y volvemos al primer momento con una deuda que no hemos pagado. Tremendo avance.


Sabemos que el gobierno del Dr. Rosselló, a través de Elías Sánchez, ha estado combatiendo algunas de la pretensiones de la Junta. Está por verse si podrán utilizar PROMESA y la ley de quiebras para seguir haciéndolo.



Dos últimos puntos a mencionar. Habrá miles de casos o “adversary proceedings” radicados en estos casos de quiebra. PR gastará millones en la representación legal de los mismos. A manera de ejemplo, en la quiebra de Detroit, con $18 billones en deuda, la ciudad, entre peritos y abogados se gastó $178 millones. Y hablando de Detroit, la ciudad aún no ha podido ir al mercado de bonos sin la garantía del estado de Michigan. ¿Quien le va a dar esa garantía a PR en el futuro?



Como he dicho en múltiples ocasiones, be careful what you wish for, you may get it.


The Road to Hell is Paved with Good Intentions


Lin Manuel Miranda's 100 Miles Across

Lin Manuel Miranda’s 100 Miles Across

On Last Week With John Oliver last night, Lin Manuel Miranda and John Oliver made an impassioned plead in favor of Congressional help to Puerto Rico. Since I am not a fan of musical theater, my wife, who would give a kidney for tickets to Hamilton, had to explain who Lin Manuel was, I saw the video and recognize his incredible talent.  It is clear that they both are sincere in their plead for the island. It is also clear that they do not have all the information on the PR Debt Crisis.


The bad guys in their narrative are the hedge funds or as they call them, vulture funds. These are funds that go into distressed businesses or municipalities and buy their bonds at a discount. In the case, for example, of the Puerto Rico Government Development Bank bonds, they are selling at around 18 cents on the dollar. This is equivalent of a 34% interest rate. Of course, PR will likely default on them on May 1.


Hedge funds come in all colors and sizes. Some want to be paid 100 cents on the dollar, others are willing to take a haircut (a cut in the price and hence the interest rate paid) because they would still make money. For example, in the PR Power Electric Company’s deal, where bondholders are taking haircuts, there are hedge funds. Hence, to say they are the enemy is disingenuous.


Another misconception is Chapter 9. If you hear Mr. Miranda or Mr. Oliver, it seems the panacea to all of the island’s problems. However, Chapter 9 DOES NOT APPLY to the Government of Puerto Rico or to ANY state government. It applies to MUNICIPALITIES, which is defined as the more common cities of a state or its political subdivisions. In Puerto Rico’s case, much of the debt was issued by political subdivisions. Still, Chapter 9 does not provide much relief as I further explain.


According to the Government Development Bank Quarterly Report dated May 7, 2015, PR’s GO debts total $23.804 billion. PR’s GO’s have the protection of the island’s constitution which requires that in case of a lack of funds in the budget, they be paid before anything else. See, Article VI, section 8 of the Constitution. That leaves us with $48.400 billion as potentially subject to Chapter 9. However, 11 U.S.C. § 109(c) requires that state law specifically allow a municipality or public corporation to file for Chapter 9 protection. If Law 71-2014, the Recovery Act, is any indication of the legislature’s intent, municipalities, the GBD and its subsidiaries, the Fideicomiso de Niños, the Commonwealth’s Retirement System and its instrumentalities, the Judicial Retirement Fund, the Agency for Municipal Financing, AFI, COFINA, the Teacher’s Retirement Fund, and others were excluded from filing for its protection. Therefore, one can conclude that the legislature would not allow them to file for Chapter 9 protection. If one excludes these parties bonds, one is left with only $24.914 billion that could file for Chapter 9 protection, leaving $47.290 unprotected. See pages 56 and 64 of Government Development Bank Quarterly Report dated May 7, 2015.


Moreover, 11 USC § 109(c) requires that a municipality be insolvent in order to file for Chapter 9 protection. But COFINA is not insolvent. Hence, even if PR law allowed it to file, it could not. In addition, § 109(c) requires that the parties negotiate in good faith. Ms. Melba Acosta, head of the Government Development Bank testified in a case in February 2016 in Federal Court where WalMart was challenging a PR tax and admitted, under oath, that the FIRST time PR had met with its creditors was January 29, 2016. Hence, this good faith negotiation has not yet been met.


These and other reasons are why PR is pushing for a Super Chapter 9 where it would restructure all of its debt. That, however, has a snowball’s chance in hell of being approved since no STATE can do this and would be a terrible precedent for General Obligation bondholders. If Congress gives this to a territory, why would it not provide it to the states? And the 10th Amendment would not be a bar since it would mirror Chapter 9 by making it a state decision to take advantage of the law.


Another inaccuracy is the mention of firing teachers as a hedge funds idea. Happens to be that it is part of the Government of Puerto Rico’s Krueger report, which in typical IMF fashion, favors wholesale firing of employees and lowering of minimum wage. AGAIN, THIS IS NOT HEDGE FUNDS’ IDEAS BUT RATHER AN OFFICIAL GOVERNMENT REPORT. As to the hospital that had its electricity disconnected, there is no mention that the lack of government payments was what forced the default. PR’s Government claims it cannot pay its bond debt, but it is not paying its suppliers to the tune of $2 billion. In addition, there is no mention of the fact that the last 4 administrations have more than doubled the debt in order to finance its budgetary deficits or that the island has 120 public agencies. Nevertheless, Puerto Rico has been able to pay TENS OF  MILLIONS  to their restructuring advisors and spin-doctors without complain.  See:  Professional Services Contracts for the Government Development Bank 1/1/2013-4/26/2016 (And this is just for the Government Development Bank, does not include the TENS OF MILLIONS already spent over at PREPA, PRASA, and other agencies)

Finally, and more importantly, the fact is that the PR economy has not grown in quite a while. Without economic development, PR cannot pay its debt. At the center of this morass is the status, which Mr. Miranda seems to want to ignore. Interestingly, since the 1930’s Luis Muñoz Marín proclaimed that the status was not the issue but rather improving the economy. More than 70 years later the economy is worse than ever. The status IS the issue.


Puerto Rico is in dire problems, yes, and help is needed, yes, but as Sergeant Joe Friday used to say, “just the facts, just the facts.”




Previous Last Week With John Oliver where he mentioned Puerto Rico