Puerto Rico is an unincorporated territory of the United States, located in the Caribbean approximately 1,600 miles southeast of New York City. It has an area of approximately 3,500 square miles and a population estimated by the United States Census Bureau of approximately 3.26- million as of July 1, 2021.
Puerto Rico came under United States sovereignty pursuant to the Treaty of Paris of 1898. Puerto Ricans have been citizens of the United States since 1917. In 1950, the United States Congress authorized Puerto Rico to draft and approve a Constitution, which was drafted by a popularly elected constitutional convention, approved in a special referendum by the people of Puerto Rico, amended and ratified by the United States Congress, and subsequently approved by the President of the United States in 1952. The Constitution of Puerto Rico provides for the separation of powers of the executive, legislative and judicial branches of government.
The current Governor, Pedro R. Pierluisi, was sworn into office on January 2, 2021for a term ending in January 2025. The Legislative Assembly consists of a Senate and a House of Representatives, the members of which are elected for four-year terms.
The people of Puerto Rico are citizens of the United States but do not vote in Presidential elections and are represented in Congress by a non-voting Resident Commissioner. Most federal taxes, except those such as Social Security and Medicare taxes, are not levied in Puerto Rico.
Puerto Rico has faced an unprecedented fiscal emergency for the past decade as a result of, among other things, economic decline, accumulated operating deficits and excessive borrowing. In response to this crisis, Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) in 2016. PROMESA is codified at 48 U.S.C. §2101 et seq.
The statute establishes an oversight board, within the government of Puerto Rico, with certain statutorily defined and limited governmental powers, a process for restructuring debt, and expedited procedures for approving critical infrastructure projects in order to address public debt and other financial obligations in Puerto Rico. Among said oversight board’s powers are certification of a fiscal plan and budget for covered territories, instrumentalities and public corporations.
The Financial Oversight and Management Board for Puerto Rico was established on August 31, 2016 (the “Oversight Board”).
A copy of PROMESA is available here.
The Oversight Board’s website is available here.
PROMESA Title III and Title VI
A critical facet of PROMESA is its mechanisms for restructuring public debt. PROMESA has two titles dealing with debt restructuring: Title III and Title VI.
Title III of PROMESA establishes an in-court process for adjusting the debts of Puerto Rico and other United States territories modeled after the process by which municipal entities can adjust their debts under chapter 9 of the U.S. Bankruptcy Code.
In order to qualify as a debtor under Title III, the Government or any of its instrumentalities or public corporations must satisfy three criteria (the “Title III Requirements”): (i) have an oversight board established for it or be designated a “covered entity”; (ii) have the oversight board issue a restructuring certification under PROMESA section 206(b); and (iii) “desire to effect a plan to adjust its debt.” PROMESA § 302.
If the entity satisfies the Title III Requirements, the oversight board has sole authority to commence a Title III case for such entity by filing a voluntary petition seeking protection under Title III of PROMESA. See PROMESA § 304(a). To date, the Title III process has been used to complete restructurings for the Commonwealth of Puerto Rico, the Puerto Rico Sales Tax Financing Corporation, the Puerto Rico Public Buildings Authority, and the Employees Retirement System of the Government of the Commonwealth of Puerto Rico.
In a Title III case, the Oversight Board acts as the debtor’s representative and is authorized to take any actions necessary to prosecute the Title III case. See PROMESA § 315. Immediately upon filing the Title III petition, Bankruptcy Code section 362 (which is incorporated into Title III cases under PROMESA) applies to automatically stay substantially all litigation against the debtor. After the Title III case is commenced, the Chief Justice of the United States must designate a district court judge to sit by designation and preside over the Title III case. On May 5, 2017, the Chief Justice designated the Hon. Laura Taylor Swain of the United States District Court for the Southern District of New York to preside over all Title III Cases.
The result of a successful Title III case is the confirmation by a United States District Court judge of a plan of adjustment of the debts of the debtor. The Oversight Board has the exclusive authority to file and modify a plan of adjustment prior to confirmation. See PROMESA § 312. In order to be confirmed, a disclosure statement for a plan must have been approved by the District Court and sent to creditors, and votes on the plan must be properly solicited from creditors holding claims that arose before the commencement of the applicable Title III Case.
After proper solicitation of the proposed plan of adjustment, the District Court will review the proposed plan of adjustment to ensure that it satisfies the requirements set forth under PROMESA section 314. A full description of the requirements for confirmation of a Title III plan of adjustment are beyond the scope of this website. If the proposed plan of adjustment satisfies these requirements, the District Court will enter an order confirming its approval of the plan of adjustment.
Upon the confirmation of a debtor’s plan of adjustment and it becoming effective, the debtor is discharged of all of its debts pursuant to Bankruptcy Code section 944 (as incorporated into Title III of PROMESA) and implements the plan according to its terms, which includes the process of providing distributions to certain creditors as provided for in the plan.
Title VI of PROMESA allows voluntary “Qualifying Modifications” of bond debt (or other financial debt) through a collective action mechanism that binds dissenting creditors to an agreement reached with a super-majority of creditors. If a “Voluntary Agreement” (i.e., a Restructuring Support Agreement) exists between a government issuer and a bondholder group, the Oversight Board must certify that the agreement conforms to the issuer’s certified fiscal plan and provides for a sustainable level of debt (or is limited to an extension of principal and interest payments for one year). Thereafter, the Oversight Board must certify the Voluntary Agreement as a “Qualifying Modification” under either the “Voluntary Agreement Process” or “Consultation Process.”
Under PROMESA, the Oversight Board is authorized to establish “Pools” of bonds based upon relative priorities. Under the Voluntary Agreement Process, to obtain Oversight Board certification, each creditor in a class or “Pool” must be offered the same consideration and the RSA must be executed by a majority of bondholders. Under the Consultation Process (i.e., where there is no consensus from a majority of bondholders), the Overnight Board must also find that the proposed modification is in the best interests of the creditors and is feasible.
After certification as a Qualifying Modification, the agreement is solicited to all bondholders for their approval. The Qualifying Modification is approved if: (i) at least a majority of the principal amount in each Pool votes in favor; and (ii) of those who actually vote, at least 2/3 vote in favor. The Qualifying Modification only becomes effective after the Oversight Board certifies that the voting requirements have been met and the District Court enters an order approving that the Qualifying Modification satisfies the requirements of Title VI.
Upon the entry of an order by the District Court approving the Qualifying Modification the Qualifying Modification shall be valid and binding “on any person or entity asserting claims or other rights in respect of Bonds subject to the Qualifying Modification”; and all property of the issuer subject to the Qualifying Modification “shall vest in the issuer free and clear of all claims in respect of any Bonds of any other issuer.” PROMESA § 601(m)(2).
In addition, the District Court’s order approving the Qualifying Modification is “full, final, complete, binding, and conclusive,” and not subject to any collateral attack in any court or other forum. PROMESA § 601(m)(2).
To date, the Title VI process has been used to complete a Qualifying Modification for the Government Development Bank for Puerto Rico (“GDB”), Puerto Rico Convention Center District Authority (“CCDA”), and the Puerto Rico Infrastructure Financing Authority (“PRIFA”).
DOCKET FOR PROMESA TITLE VI