[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
PUERTO RICO CHAPTER 9 UNIFORMITY ACT
OF 2015
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
REGULATORY REFORM,
COMMERCIAL AND ANTITRUST LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
ON
H.R. 870
__________
FEBRUARY 26, 2015
__________
Serial No. 114-13
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
________
U.S. GOVERNMENT PUBLISHING OFFICE
93-528 PDF WASHINGTON : 2015
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COMMITTEE ON THE JUDICIARY
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin JERROLD NADLER, New York
LAMAR S. SMITH, Texas ZOE LOFGREN, California
STEVE CHABOT, Ohio SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa Georgia
TRENT FRANKS, Arizona PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas JUDY CHU, California
JIM JORDAN, Ohio TED DEUTCH, Florida
TED POE, Texas LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah KAREN BASS, California
TOM MARINO, Pennsylvania CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho HAKEEM JEFFRIES, New York
BLAKE FARENTHOLD, Texas DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia SCOTT PETERS, California
RON DeSANTIS, Florida
MIMI WALTERS, California
KEN BUCK, Colorado
JOHN RATCLIFFE, Texas
DAVE TROTT, Michigan
MIKE BISHOP, Michigan
Shelley Husband, Chief of Staff & General Counsel
Perry Apelbaum, Minority Staff Director & Chief Counsel
------
Subcommittee on Regulatory Reform, Commercial and Antitrust Law
TOM MARINO, Pennsylvania, Chairman
BLAKE FARENTHOLD, Texas, Vice-Chairman
DARRELL E. ISSA, California HENRY C. ``HANK'' JOHNSON, Jr.,
DOUG COLLINS, Georgia Georgia
MIMI WALTERS, California SUZAN DelBENE, Washington
JOHN RATCLIFFE, Texas HAKEEM JEFFRIES, New York
DAVE TROTT, Michigan DAVID N. CICILLINE, Rhode Island
MIKE BISHOP, Michigan SCOTT PETERS, California
Daniel Flores, Chief Counsel
C O N T E N T S
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FEBRUARY 26, 2015
Page
THE BILL
H.R. 870, the ``Puerto Rico Chapter 9 Uniformity Act of 2015''... 3
OPENING STATEMENTS
The Honorable Tom Marino, a Representative in Congress from the
State of Pennsylvania, and Chairman, Subcommittee on Regulatory
Reform, Commercial and Antitrust Law........................... 1
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
Congress from the State of Georgia, and Ranking Member,
Subcommittee on Regulatory Reform, Commercial and Antitrust Law 5
The Honorable Pedro R. Pierluisi, a Representative in Congress
from Puerto Rico, and Member, Committee on the Judiciary....... 5
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Ranking Member, Committee on
the Judiciary.................................................. 6
The Honorable Luis V. Gutierrez, a Representative in Congress
from the State of Illinois, and Member, Committee on the
Judiciary...................................................... 6
The Honorable Darrell E. Issa, a Representative in Congress from
the State of California, and Member, Subcommittee on Regulatory
Reform, Commercial and Antitrust Law........................... 12
WITNESSES
John A. E. Pottow, Esq., Professor of Law, University of Michigan
Law School
Oral Testimony................................................. 14
Prepared Statement............................................. 17
Melba Acosta, Esq., President, Government Development Bank for
Puerto Rico
Oral Testimony................................................. 24
Prepared Statement............................................. 26
Robert Donahue, Managing Director, Municipal Market Analytics
Oral Testimony................................................. 39
Prepared Statement............................................. 42
Thomas Moers Mayer, Esq., Partner and Co-Chair, Corporate
Restructuring and Bankruptcy Group, Kramer Levin Naftalis and
Frankel, LLP
Oral Testimony................................................. 81
Prepared Statement............................................. 83
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Material submitted by the Honorable Luis V. Gutierrez, a
Representative in Congress from the State of Illinois, and
Member, Committee on the Judiciary............................. 8
APPENDIX
Material Submitted for the Hearing Record
Response to Questions for the Record from John A. E. Pottow,
Esq., Professor of Law, University of Michigan Law School...... 112
Response to Questions for the Record from Melba Acosta, Esq.,
President, Government Development Bank for Puerto Rico......... 121
Response to Questions for the Record from Robert Donahue,
Managing Director, Municipal Market Analytics.................. 129
Response to Questions for the Record from Thomas Moers Mayer,
Esq., Partner and Co-Chair, Corporate Restructuring and
Bankruptcy Group, Kramer Levin Naftalis and Frankel, LLP....... 143
PUERTO RICO CHAPTER 9 UNIFORMITY ACT OF 2015
----------
THURSDAY, FEBRUARY 26, 2015
House of Representatives,
Subcommittee on Regulatory Reform,
Commercial and Antitrust Law
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 11:33 a.m., in
room 2237, Rayburn House Office Building, the Honorable Tom
Marino (Chairman of the Subcommittee) presiding.
Present: Representatives Marino, Issa, Walters, Bishop,
Johnson, Conyers, and Cicilline.
Also Present: Representatives Pierluisi and Gutierrez,
Staff Present: (Majority) Anthony Grossi, Counsel; Andrea
Lindsey, Clerk; and (Minority) Susan Jensen, Counsel.
Mr. Marino. The Subcommittee on Regulatory Reform,
Commercial and Antitrust Law will come to order.
Good morning, everyone.
Without objection, the Chair is authorized to declare a
recess of the Committee at any time.
We welcome everyone to today's hearing on H.R. 870, the
``Puerto Rico Chapter 9 Uniformity Act of 2015.''
And now for the record, I am going to recognize myself for
an opening statement.
We meet today to evaluate the merits of H.R. 870, the
``Puerto Rico Chapter 9 Uniformity Act of 2015.'' On its face,
this legislation is very simple. Existing laws exclude Puerto
Rico from allowing its municipalities to restructure under the
Federal bankruptcy laws. H.R. 870 removes this exclusion and
allows Puerto Rico the ability to utilize Chapter 9 of the
bankruptcy code.
To be clear, even if H.R. 870 is enacted into law, Puerto
Rico has the ultimate discretion to determine whether to allow
its municipalities access to the Federal bankruptcy laws. While
this may appear to be a technical fix to the bankruptcy code,
much is at stake for both Puerto Rico and investors in its
debt.
Despite its relatively small size in terms of population,
Puerto Rico ranks among the top municipal bond issuers in the
country. Puerto Rico, with its population of approximately 3.5
million people, has over $70 billion in municipal bond debt.
To put that in perspective, in terms of municipal bond
debt, Puerto Rico ranks only behind California, which has a
population of almost 39 million people, and New York, which has
a population of approximately 20 million people. In part due to
the amount of debt Puerto Rico has issued and because of its
tax attributes, Puerto Rican bonds are held by a diverse array
of investors, with bondholders ranging from sophisticated hedge
funds to Main Street folks with retirement accounts.
As we evaluate H.R. 870 today, we need to be mindful of its
potential broad and wide-ranging impact, particularly on those
Main Street investors. A significant portion of Puerto Rico's
municipal bonds are issued by various public corporations that
provide government services to the Puerto Rican population.
For example, the public corporation facing the most severe
financial distress, the Puerto Rico Electric Power Authority,
or PREPA, is responsible for providing, as its name implies,
electricity to the residents of Puerto Rico. PREPA has
approximately $8.6 billion in outstanding municipal bond debt.
The Puerto Rico public corporations that are responsible
for, among other things, its highways, ports, and telephone
service also each carry billions of dollars in municipal bond
debt. These are the types of Puerto Rican public corporations
that may have to resort to Chapter 9 if that option is afforded
to them.
Due in part to its exclusion from the Federal bankruptcy
laws for municipalities, Puerto Rico passed a local law that
was similar in many ways to Chapter 9. Three weeks ago, the
District Court for the District of Puerto Rico struck down that
local law, finding, among other things, that it was preempted
by Chapter 9 of the bankruptcy code.
As a result of this decision, upon a default by a Puerto
Rican public corporation, the contract governing its bonds is
the sole source for methods by which parties can resolve the
default. These are the contracts that were in place when the
investors purchased the Puerto Rican municipal bonds, and we
should be mindful of the potential impacts on their rights when
considering H.R. 870, which is proposed to operate
retroactively. At the same time, we should also consider
whether H.R. 870 would bring greater stability to the broader
municipal bond market for the benefit of all investors.
Now this hearing is focused solely on the merits of
allowing Puerto Rico the ability to utilize Chapter 9 under
H.R. 870. We are not--we are not here today to evaluate the
broader topic of Chapter 9, which is beyond the scope of this
hearing and an issue on which these witnesses are not prepared
to testify.
I look forward to today's testimony on the merits of H.R.
870.
[The bill, H.R. 870, follows:]
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__________
Mr. Marino. It is now my pleasure to recognize the Ranking
Member of the Subcommittee on Regulatory Reform, Commercial and
Antitrust Law, Mr. Johnson of Georgia, for his opening
statement.
Mr. Johnson. Thank you, Mr. Chairman, for holding this
important hearing.
I support H.R. 870, the ``Puerto Rico Chapter 9 Uniformity
Act of 2015,'' which would provide a vital roadmap for severely
distressed Puerto Rican municipalities to restructure their
debt in the interest of both the citizens who rely on vital
public services and creditors of these corporations.
This bill will close a gap in the bankruptcy code, which
excludes Puerto Rico for Chapter 9 municipal bankruptcy for
reasons that are, at best, unclear. This legislation is also
consistent with the purpose of Chapter 9, which is to provide
relief to severely distressed municipalities that have
exhausted alternative remedies.
Notwithstanding my support for H.R. 870, I close by noting
that the municipal bankruptcy is not a cure-all, and there will
be remaining questions concerning the restructuring of Puerto
Rico's public debt. I strongly support the right of public
workers to receive their healthcare and pension benefits, and I
support Ranking Member Conyers' legislative efforts to
guarantee this right in municipal bankruptcies.
With that, I yield the remainder of my time to Congressman
Pierluisi, who has expertly served as Puerto Rico's sole Member
of Congress and resident commissioner since 2009. And I hope I
have been correct in my pronunciation.
Thank you, Mr. Pierluisi.
Mr. Pierluisi. Thank you for yielding, Mr. Johnson.
Chairman Marino and Chairman, actually, Goodlatte, who is
not here, I would like to thank both of you for scheduling this
hearing.
I want to use my time not to explain this simple bill or to
itemize the many reasons why it is good policy, but rather to
underscore the broad support it has attained. Among professors
and attorneys that specialize in bankruptcy law, support for
the legislation is virtually unanimous.
The bill has been endorsed by the National Bankruptcy
Conference, which is composed of about 60 top scholars and
practitioners, including Mr. Mayer, one of today's witnesses.
In addition, some of the most respected subject matter experts
in the country have written to this Committee to urge enactment
of the bill. This includes James Spiotto, an experienced
attorney who has represented bondholders in Chapter 9
proceedings and who has written a tour de force letter in favor
of the bill.
In Puerto Rico, where unity is rare, H.R. 870 has virtually
unanimous support as well. The current administration will
testify for the bill. Senate President Eduardo Bhatia is here
today to demonstrate his support for the bill. Former Governor
Luis Fortuno has written a letter in support of the bill. The
legislative assembly has adopted a joint resolution urging
enactment of the bill, and nine former presidents of the Puerto
Rico Government Development Bank have sent a letter in support
of the bill.
In addition, 13 private sector trade associations on the
island have signed a memorandum of agreement endorsing the
bill, and the bill is supported by Banco Popular, Puerto Rico's
largest bank.
Finally, the bill is supported by the vast majority of
Puerto Rico's creditors and other stakeholders in the
investment community. For example, a letter in support of the
bill has been sent to the Committee on behalf of 32 funds who
own billions of dollars in Puerto Rico bonds.
Last week, the head of the municipal bond group at the
world's largest asset manager said in an interview that he
supported the bill. A respected investment firm surveyed
approximately two dozen market participants and found that
there is nearly unanimous agreement that application of Chapter
9 to Puerto Rico instrumentalities is a reasonable approach and
would not impair the normal functioning of the marketplace.
Fitch Ratings has stated that enactment of this bill would be a
positive and important development for Puerto Rico and holders
of debt of its public utilities and public instrumentalities.
Opposition to this bill comes from a very small number of
investment firms. I believe the arguments they have put forward
cannot withstand meaningful scrutiny, and I hope that the
Committee will not allow these objections to frustrate forward
movement on this sensible and broadly supported bill.
I yield back the balance of my time.
Mr. Marino. Thank you, Mr. Pierluisi.
And thank you, Mr. Johnson, for yielding some of your time
to him.
Now the Chair recognizes the gentleman from Michigan, the
Ranking Member of the full Committee, Congressman Conyers.
Mr. Conyers. Thank you, Chairman Marino.
Members of the Committee, we think this is so important. A
hearing on H.R. 870, the ``Puerto Rico Chapter 9 Uniformity Act
of 2015,'' before this very important Subcommittee.
Inexplicably, the bankruptcy code excludes the Commonwealth
of Puerto Rico for the purpose of defining who may be a debtor
under Chapter 9. And fortunately, the measure before us--and I
welcome the witnesses--takes care of this problem.
Now my source for all information on Puerto Rico stems from
the gentleman from Illinois, Chicago, who I am very proud to
yield the balance of my time to because of his great
contributions to the Judiciary Committee and to the Congress in
general.
I want to acknowledge the presence of Senator Eduardo
Bhatia, the president of the Senate of the Commonwealth of
Puerto Rico, as well. And so, I yield my time to the gentleman
from Chicago.
Oh, gosh, Nydia Velazquez is here, too. And Jose Serrano, a
former all-star Member of the Congress, is here as well. And
so, I am very happy to yield at this point.
Mr. Marino. We can't forget about Joe. We can't forget
about Joe back there. Luis?
Mr. Gutierrez. Thank you. Thank you so much.
Thank you, Ranking Member Conyers.
Let me first ask unanimous consent to have Senator Eduardo
Bhatia, president of the Senate's statement entered into the
record.
We gather here in the Judiciary Committee, we are usually
easy to identify by our partisan divisions. But today should
not be one of those days.
Today, we are discussing how the Congress of the United
States can help millions of U.S. citizens without spending a
dime of the taxpayers' money. Can you imagine that?
And all the stakeholders agree the legislation we are
discussing is the right course of action. The people who
support statehood for Puerto Rico and those who do not,
Republicans and Democrats, we are here to discuss a consensus
approach, not a contentious approach. This legislation is a
wise use of the law, a step we can take now to avoid a bailout
or a financial crisis later.
I think the Governor of Puerto Rico has been doing a very
good job with a very difficult situation. He has been open and
transparent. He has engaged the stakeholders in restructuring
the dire financial situation he inherited, which has plagued
the Island of Puerto Rico for generations.
He has worked diligently with the public corporations on
the island to enlist their help and to encourage them to take
the steps necessary to avoid a financial crisis. The Governor
is dealing effectively with the situation that was left to him,
but we in Congress can do our part to help today.
We can help by passing this legislation that I support and
that has been offered for our consideration by the resident
commissioner of Puerto Rico, Mr. Pierluisi, and which is
supported across the board by the Puerto Ricans in this
Congress.
I look forward to the testimony, and I want to thank the
Chairman for scheduling this hearing. I also want to say that
it is a distinct pleasure to be a Member of the Judiciary
Committee with my fine, distinguished colleague from Puerto
Rico, Congressman Pierluisi, and to sit here on this dais as
two Members.
And I thank all of the Members for allowing the two Members
from Puerto Rico, one who actually lives there and one that
wants to---- [Laughter.]
Mr. Gutierrez [continuing]. To join you here and for
allowing us time to express ourselves. And again, it is a joy
to be enjoined with the resident commissioner of Puerto Rico,
Mr. Pierluisi, in supporting his legislation. Godspeed to your
legislation. Anything I can do, please let me know.
Thank you. Thank you so much.
Mr. Marino. Thank you, Congressman Gutierrez.
Thank you, Congressman Conyers, for affording him the time.
And without objection, other Members' opening statements
will be made part of the record. I think you had a document
that you asked to be submitted or----
Mr. Gutierrez. Yes, I asked----
Mr. Issa. I would ask unanimous consent that that be placed
in the record.
Mr. Gutierrez [continuing]. That it be placed in the
record.
Mr. Marino. Without objection. Without objection.
Mr. Gutierrez. No objection? Thank you, Mr. Chairman.
[The information referred to follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
__________
Mr. Marino. The Chair is now going to recognize Congressman
Issa for a statement.
Mr. Issa. I thank you, Mr. Chairman.
Recognizing that Mr. Goodlatte is not here, I want to take
a liberty and discuss very, very quickly a conversation I had
with the Chairman night before last.
This bill appears to be noncontroversial. It appears to be
fast-tracked, and the Chairman viewed it that way. But in
looking at the legislation and the effect on a nonstate player
and having been in my past life the Chairman of the Committee
that oversees entities, including cities, counties,
territories, and the District of Columbia, there were a number
of areas of concern that I hope today we will be addressing.
First of all, retroactivity, contract sanctity. The reality
is that a debtor assumes a debt based on a risk factor and is
given a rate for that debt based on a risk factor. Those risk
factors were based on the law in place. In fact, the absence of
an ability to bankrupt under Chapter 9.
Additionally, the District of Columbia is an interesting
model for the fact that--and so is the City of New York,
historically--when irresponsible behavior, not one crisis, not
one event, but irresponsible behavior over a long period of
time leads to an entity, a public entity--in this case, the
District of Columbia or the City of New York--finding itself in
a level of insolvency, there has been a history of control
boards, a history of preemption in return for any action by the
sovereign body. That is not on the table here today.
The fact is that public corporations in most of America
are, in fact, private corporations. A major utility in most
places is not owned by a city or a State. There are exceptions.
And in fact, they are subject to ordinary bankruptcy. They also
have an obligation to be fiscally responsible to their
shareholders.
That is not the case in Puerto Rico. Puerto Rico has, in
many cases, public entities that may not be wise to continue
having. It is not this Committee or, in fact, the Oversight
Committee's job to micromanage territories, cities, or the
District of Columbia. But it is our obligation to question
three things.
One is do we have a constitutional and legitimate role in
retroactively changing contracts in place so that a bankruptcy
could occur that was not in place at the time those contracts
were incurred?
Two, and most importantly, is it wise to provide this even
prospectively without a real plan presented from the
Commonwealth of Puerto Rico going forward for how they are
going to work their way out of an ongoing and systemic pattern?
I have had the honor to serve under multiple, I guess three
Representatives from Puerto Rico and now four Governors. I have
found each of them decidedly different, each to care greatly
about the people of Puerto Rico, each to be a proud American.
But I have found that how they deal with the direction of
the territory has been decidedly different. One seems to want
to pay back debt. Another seems to want to run it up. Some seem
to think that the only way to prosperity is to reduce taxes.
Others have incurred tax increases with deficit spending.
That is not uncommon here in government. What is uncommon
is to come to the Congress and say after a Federal judge says
you don't have a right to do something, ask for a right to do
it and have it affect $70 billion-plus worth of contracts in
place.
So although I have not made a decision on the bill in its
current form, I have serious questions about whether it can
become law in its current form. And most importantly, if it
does become law in any form, what safeguards will we insist on
being in place to prevent this kind of, if you will, crisis in
the territory Commonwealth of Puerto Rico or, for that matter,
in the other territories, the District of Columbia, or any
other holding of the United States?
So I take this, Mr. Chairman, as an extremely important
hearing, and I hope that all of us will look at this as a
bigger potential challenge to be addressed than just a
technical correction of an oversight, which I believe it might
have been. But these $70 billion-plus worth of debts are, in
fact, based on people who took the law as it was, not as it
perhaps should have been.
And I thank the Chairman for his indulgence and yield back.
Mr. Marino. We have a very distinguished panel before us
today. I will begin by swearing in our witnesses before
introducing them. Would you please stand and raise your right
hand?
Do you swear that the testimony you are about to give is
the truth, the whole truth, and nothing but the truth, so help
you God?
[Response.]
Mr. Marino. Okay. Let the record reflect that all witnesses
have responded in the affirmative.
Thank you. You may be seated.
I am going to introduce the distinguished panel that we
have today. And we will begin with Professor John Pottow. Am I
pronouncing that correctly, sir? Good.
Mr. Pottow is a professor at the University of Michigan Law
School and is an internationally recognized expert in the field
of bankruptcy law. Professor Pottow has published articles in
prominent legal journals in the United States and Canada,
presented his works at academic conferences around the world,
provided frequent commentary for national and international
media outlets, and argued bankruptcy cases before the Supreme
Court.
Professor Pottow received his bachelor's degree from
Harvard College, summa cum laude, and his law degree from
Harvard Law School, magna cum laude, where he served as
treasurer of the Harvard Law Review.
Welcome, sir.
Mr. Pottow. Thank you very much, Mr. Chairman.
Mr. Marino. Our next witness is Ms. Melba Acosta. Ms.
Acosta is the president of the Government Development Bank of
Puerto Rico, referred to as the GDB, a bank that serves as the
fiscal agent and financial adviser for Puerto Rico and all of
its instrumentalities.
Prior to appointment as president of the GDB, Ms. Acosta
served Puerto Rico in a number of capacities, including as
secretary of the Treasury Department, chief public financial
officer, director of OMB, and chief information officer. Ms.
Acosta is a certified public accountant and attorney.
She received her bachelor's degree in accounting from the
School of Business Administration of the University of Puerto
Rico, her MBA from the Harvard Graduate School of Business
Administration, and her law degree from the School of Law of
the University of Puerto Rico.
Welcome.
Our next witness is Mr. Robert Donahue. Mr. Donahue is a
managing director at Municipal Market Analytics, known as MMA,
an independent research firm servicing the municipal bond
industry. Mr. Donahue oversees research for more than 150 bank
municipal investment portfolios and is responsible for issues
pertaining to Puerto Rico's municipal bond market.
He has nearly 20 years of experience in the field and has
worked at leading investment firms, including DWS Investment,
Fidelity Investments, and T. Rowe Price Associates.
Mr. Donahue received his bachelor's degree from the College
of Holy Cross and a master's of public administration from
Syracuse University's Maxwell School of Citizenship and Public
Affairs.
Welcome.
Our next witness is Mr. Tom Mayer. Mr. Mayer is a partner
at the firm of Kramer Levin, where he is the co-chair of the
firm's Corporate Restructuring and Bankruptcy Department. Mr.
Mayer has over 30 years of experience as a bankruptcy lawyer,
principally representing creditors in large Chapter 11 cases.
He also has substantial experience with municipal
bankruptcies, where he has represented creditors in Chapter 9
cases of Jefferson County, Alabama, and Detroit and Michigan--
in Michigan, excuse me.
Mr. Mayer received his bachelor's degree, summa cum laude,
from Dartmouth College and his law degree, magna cum laude,
from Harvard Law School, where he was editor of the Law Review.
And welcome to all.
Each of the witnesses' written statements will be entered
into the record in its entirety. I ask that each witness
summarize his or her testimony in 5 minutes or less. To help
you stay within that time, there is a timing light in front of
you. The light will switch from green to yellow, indicating
that you have 1 minute to conclude your testimony.
When the light turns red, it indicates that your time has
expired. And if that happens, I will politely just give you a
little tap to give you an indication and ask you to wrap up
quickly.
I am going to start now with Professor Pottow for his
opening statement. Sir?
TESTIMONY OF JOHN A. E. POTTOW, ESQ., PROFESSOR OF LAW,
UNIVERSITY OF MICHIGAN LAW SCHOOL
Mr. Pottow. Thank you very much, Mr. Chairman and Ranking
Members. And thank you for the opportunity to be able to talk
at this hearing today on this important matter.
I think that the comments were well taken that it seems
like this is a technical bill, and I think that is why there is
unanimous support amongst the bankruptcy community for this
correction. But there also are some serious concerns that we
should be mindful of in thinking of something of this nature to
correct the bankruptcy code.
And so, I would like to touch a little bit about those
bankruptcy concerns and then talk, if I don't run out of time,
about the experience that Detroit has had with its Chapter 9,
its recent Chapter 9 restructuring of that city.
The concerns of the bankruptcy code with regarding, talking
about a retroactivity or talking about applying a change to
preexisting debts is one that the Supreme Court has actually
had occasion to wrestle with because we have amended the
bankruptcy laws several times through this Nation's history. In
the 19th century, we had temporary bankruptcy laws that
expired. They had to reenact them, and then we had the
comprehensive overhaul of 1978.
And what the Supreme Court did was draw a distinction
between contract rights and property rights. And basically, in
the Moyses case, which is cited in my letter at page 4, it came
to the conclusion that because of the bankruptcy clause power
that the Congress has, everyone who makes an investment is
already on notice that if Congress chooses to exercise its
regulatory right in a bankruptcy matter, that a debtor might
avail himself to those bankruptcy laws, and so they go in
knowing that those laws might change.
And that makes good sense, not just a matter of
constitutional law, but as a matter of bankruptcy law as well.
Because if you tried to have a restructuring like a Chapter 11
for the private sector or Chapter 9 for the public sector, but
only half the debts could be restructured, and the other half
couldn't be restructured, you would have this sort of
Frankenstein hybrid where some people were making difficult
compromises and other people walked in with a straight veto and
say, ``I don't have to show up at the table.''
And that is antithetical to what the idea of a
restructuring is. It is to get everyone to come in together, to
have the stakeholders come together, everyone makes
concessions. And one sign that there has been a good
restructuring is that if everyone leaves slightly unhappy,
there has probably been a good deal that has been reached by
all.
Now with property rights, there is a greater concern
because we have the takings clause of the Constitution, and
that is something the Supreme Court gets very concerned about
is when there is property rights. So, for example, in
bankruptcy, a secured creditor would have a property right of
sorts by having a lien on collateral.
And there is one provision in the bankruptcy code that I am
familiar with, which is Section 522(f), which is pretty much
Congress at its most invasive on property rights and
bankruptcy. And what 522(f) does is it just erases liens on
property. There are certain liens on secondhand consumer goods
that basically the Congress thought was extortionate, and so it
says those liens are not enforceable in bankruptcy. They can be
canceled in bankruptcy.
And when that amendment was passed to the bankruptcy code,
it went to the Supreme Court, and the Supreme Court said, well,
that is actually taking away a lien. That is just more than a
contract investment. That is a property right.
And so, they avoided a difficult constitutional question in
the Security Bank case, which is also in my letter at page 4,
by saying we are going to interpret 522(f) to apply
prospectively only. So this thing that cancels liens, we are
not going to apply it to preexisting liens, only if you have a
lien that is done after this enactment occurred.
And they cited the old cases on contract law to draw a
distinction. They said, by contrast, if this was just an
investment, that would be fine, and these sorts of amendments
to the bankruptcy code take place all the time.
I do think that it is interesting that Puerto Rico has
taken what I consider to be a moderate approach when it tried
to pass its Recovery Act. It has been struck down as
unconstitutional, and the reason why is they said that is the
purview of the Federal Government. So if you want to have a
bankruptcy regime, go off and talk to Congress, which was an
invitation of the court to do so.
And in that Recovery Act, Puerto Rico chose to apply its
version of a Chapter 9 law only to a subset of public entities
that otherwise would be available under Federal Chapter 9. So
they did not apply it to cities, which they otherwise could.
And that makes sense because you see different States take
different approaches about how they want to use Chapter 9. Some
States forbid it. Some States allow it. Some are in the middle.
Puerto Rico might be in the middle.
I would like to make two quick points about Detroit, if I
could. Number one, it was a comprehensive overhaul that had not
just financial restructuring and financial pain, but also had
operational change.
There has been $1.7 billion of capital investment pursuant
to a 10-year plan that was laid out in the disclosure statement
that the creditors voted on and supported. The bondholders and
the pensioners all got together and supported this plan,
recognizing their need to be operational changes and financial
oversight.
And some said Chapter 9 is going to kill you. The municipal
capital markets will never let you borrow money again, and you
are going to lose your credit rating. Well, the financing
Detroit got in its Chapter 9 is short term. It is private debt,
and it rolls over in 4 months. And they are getting prepared to
roll over that debt and go out to the capital markets again.
And what has happened to Detroit as a consequence of its
success in Chapter 9 is it is going to get investment grade
rating. And so, that capital is going to be priced at a lower
level than Detroit has ever been able to have before, and that
is part of the success of the Chapter 9 process for the City of
Detroit.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Pottow follows:]
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__________
Mr. Marino. Thank you, Professor.
President Acosta, please?
TESTIMONY OF MELBA ACOSTA, ESQ., PRESIDENT, GOVERNMENT
DEVELOPMENT BANK FOR PUERTO RICO
Ms. Acosta. Thank you, Chairman Marino, Ranking Member
Johnson, and Members of the Subcommittee.
I am the president of the GDB, as we already know, that is
known. The GDB and the Commonwealth of Puerto Rico appreciate
the opportunity to participate in this hearing.
The fiscal and economic situation in Puerto Rico is
critical. Puerto Rico's economy has still not recovered from
the financial crisis and the great recession. Unemployment
remains double the national average, and the average personal
income per capita is approximately $17,000.
Our population is declining, as many talented people move
to the mainland United States. Puerto Rico's unprecedented
economic difficulties have contributed to rising budget
deficits at all levels of government. Today, Puerto Rico has
$73 billion in public debt outstanding, with a total population
of less than 3.6 million U.S. citizens.
Puerto Rico's Governor, Alejandro Garcia Padilla, took
office in 2013 and has forcefully responded to these challenges
in an effort to achieve long-term fiscal sustainability. My
written testimony highlights these efforts in detail.
One critical component of fiscal sustainability is ensuring
that Puerto Rico's public corporations, which are government-
owned municipal corporations, become self-sufficient. The
public corporations are essential to the well-being of
residents because they provide basic public services, including
water, sewer, electricity, and transportation.
Puerto Rico's three largest public corporations have $20
billion in debt. Our public corporations are not eligible for
Federal bankruptcy protection, and in response, Puerto Rico
adopted the Debt Enforcement and Recovery Act last June. The
Recovery Act filled a gap in the U.S. bankruptcy code to permit
Puerto Rico's public corporations to adjust their debt in an
orderly process, much like Chapters 9 and 11 of the bankruptcy
code.
A Federal judge, however, recently struck down the Recovery
Act, holding that it preempted--that it is prevented by the
bankruptcy code. Both the Commonwealth and the GDB disagree
with this decision and expect the decision to be reversed on
appeal.
We support amending Chapter 9 to permit Puerto Rico to have
the same opportunity as the 50 States to determine whether its
public corporations should be eligible to utilize Chapter 9. In
the event that H.R. 870 is adopted, there will be no need for
the Recovery Act.
The practical and unfortunate result of the recent court
decision on the Recovery Act and the exclusion of Puerto Rico
from Chapter 9 is that there is no currently available legal
regime for Puerto Rico's public corporations to restructure
their obligations. The lack of clear legal authority has
created an environment of uncertainty that makes it difficult
to address Puerto Rico's fiscal challenges.
First, the credit markets require a risk premium to
compensate for this uncertainty. This, in turn, will make it
more expensive for public entities in Puerto Rico to borrow
money in the future.
Second, investors may have little appetite for Puerto
Rico's upcoming bond issuance, which is essential to provide
the central government and GDB with liquidity.
Third, the lack of a clear legal framework to restructure
the obligation of our public corporations undermines the
central government's objective of making public corporations
self-sufficient.
Fourth, the absence of a clear legal framework depresses
economic growth, and it makes long-term planning nearly
impossible.
Finally, if the public corporations default on their
obligations and there is no clear legal regime, creditors may
attempt to exercise remedies by appointing a receiver and
asking the Energy Commission to raise utility rates. This could
trigger years of litigation and create liquidity pressures,
exacerbating Puerto Rico's overall fiscal situation.
I would like to stress that no decision has been made as to
whether any public corporation intends to file under Chapter 9,
should it become available, and the Commonwealth and the GDB
see Chapter 9 only as an option of last resort. In any event,
Chapter 9 would not apply to debt issued directly by the
Commonwealth.
Chapter 9 establishes a legal regime that is already
understood by suppliers, creditors, and investors. It would
provide an orderly process requiring good faith negotiation
under the supervision of an experienced judge.
I would like to thank the Subcommittee for giving me the
opportunity to participate in this hearing, and I am looking
forward to your questions.
[The prepared statement of Ms. Acosta follows:]
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__________
Mr. Marino. Thank you.
Director Donahue?
TESTIMONY OF ROBERT DONAHUE, MANAGING DIRECTOR, MUNICIPAL
MARKET ANALYTICS
Mr. Donahue. Thank you very much.
I will point out I am the only nonlawyer on this panel
today.
Voice. Your mike is not on. I am sorry.
Mr. Issa. They won't even turn the mic on if you are not a
lawyer in this room. [Laughter.]
Mr. Donahue. Might as well just leave now. For the record,
I am----
Mr. Issa. I noticed you didn't go to Harvard Law and do the
Review. So, clearly, you have got a problem at the Harvard end
of it, too. [Laughter.]
Mr. Donahue. Thank you. I am well aware.
But I do have over 15 years of experience covering Puerto
Rico, have been down to the island many times. I have worked
for three of the largest municipal bond investment management
firms, during which time I have approved thousands of
securities, made recommendations and analysis to buy billions
of dollars of Puerto Rico debt over that time, buy and sell
Puerto Rico debt.
I am not going to repeat a lot. I think Melba's testimony,
it depicted very fairly the current situation in Puerto Rico.
But what I will do is try to talk from the market perspective.
Despite the territory's worsening situation, I have seen an
allocation of risk in Puerto Rico bonds in the investor base.
Prudent municipal investors, many of our clients, have sold the
municipal bonds to reduce--and reduced their exposure. Fitch
Research has said that municipal bond mutual funds have
declined their exposure to Puerto Rico by 65 percent, and now
those funds only earn 33 percent.
Now a large and increasing portion of the island's debt is
owned--is held by and its future access to capital is really
reliant on a different class of opportunistic investors.
Trading in Puerto Rico bonds throughout this process over the
last several years of downgrades and bad news headlines,
beginning with the Barron's article back in 2013, has remained
active, allowing for significant price discovery and trading
opportunities as risk averse owners of municipal bonds--you
know, folks who own municipal bonds, typically, they put munis
just right up with Treasuries and agencies as the most pristine
bonds.
And their shareholders expect that, and they have rotated
out of these bonds as the situation has devolved. We have seen
rises and falls in bond prices, and yields have reached certain
levels. But what we recognize is that is the evidence, a common
trait of a healthy market.
I am here today to express our opinion, based on my
experience in our work with our clients, over 300 clients. We
represent the largest dealers and the largest investors and
everybody in between, to the retail bondholder in Peoria. We
believe that the current framework under which these public
corporations can restructure is very uncertain.
Specifically, the trust indenture, which I think we will
talk about today, provides an untested and wholly inadequate
legal framework that is unsuitable for the highly complex
financial restructuring among a diverse group of stakeholders.
It is with this backdrop that this legislation is being
considered, and we believe that H.R. 870 provides a technical
fix to the bankruptcy code. It simply extends the same
framework allowed to 50 States to Puerto Rico's governmental
instrumentalities.
I want to make a key point here. Puerto Rico itself cannot
declare debt. It is the instrumentalities in Puerto Rico.
Number two, it reduces the near-term likelihood that Puerto
Rico will request external assistance.
Number three, it sets no adverse precedent from what we can
see for the broadening of municipal bankruptcy that may
destabilize the municipal bond market, the Nation's best source
of efficient, low-cost infrastructure funding. Importantly, and
I emphasize this, H.R. 870 opens no doors to State bankruptcy,
which we do not support.
Number four, it will not, in and of itself, pose an
incremental systemic risk to the broader capital markets.
And number five, it establishes a basis by which the island
can finally begin to focus on efforts to foster economic growth
for enduring fiscal stability.
We believe Chapter 9 is a high-impact way for Congress to
provide Puerto Rico with a standardized, orderly, uniform legal
framework guided by an existing body of case law in an
appropriate arm's length venue. It amends an existing flaw in
the bankruptcy code, as was stated earlier, with no expenditure
of fiscal dollars.
This is not a bailout. It is not a panacea. It is not a
precedent for further Chapter 9 filings elsewhere. This is
merely a technical fix.
Your approval of this bill will not create the perception
in a municipal market or among issuers that Puerto Rico's past
failings have been absolved. And we can talk about that, and I
appreciate your comments earlier and agree with everything you
said.
Your approval is not likely to encourage other
municipalities to borrow irresponsibly, knowing that they could
later restructure their debts in bankruptcy. We point out that
Chapter 9 bankruptcies are extremely rare and always a last
resort. They are painful for everybody, especially the elected
officials, given the high cost and the associated stigma to it.
For citizens of Puerto Rico, it is critical to get this
right now. Once granted the right to use Chapter 9, Puerto
Rico's leaders, I implore them to use this powerful tool
thoughtfully and cautiously. Specifically, the island's leaders
must take great care--and Senator Bhatia is here today--in
crafting enabling statutes in a fair and equitable manner, with
good faith to preserve creditors' rights and the island's long-
term need for affordable capital.
MMA, to restate, strongly opposes bankruptcy in any form by
a municipality. However, this is the best option among a
limited set of unattractive options. We speak to many market
participants on a daily basis, and most of these people in the
letters that were pointed out earlier agree with our
perspective, and the legal scholars that we have spoken with
agree with this perspective.
Thank you so much for asking me to testify today, and I
look forward to your questions.
[The prepared statement of Mr. Donahue follows:]
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__________
Mr. Marino. Thank you.
Attorney Mayer?
TESTIMONY OF THOMAS MOERS MAYER, ESQ., PARTNER AND CO-CHAIR,
CORPORATE RESTRUCTURING AND BANKRUPTCY GROUP, KRAMER LEVIN
NAFTALIS AND FRANKEL, LLP
Mr. Mayer. Thank you, Mr. Chairman. Thank you, Chairman
Marino, Ranking Member Johnson, Committee Ranking Member
Conyers, and Members of the Subcommittee, for inviting me to
testify on H.R. 870.
My name is Thomas Moers Mayer, and I represent funds
managed by Franklin Municipal Bond Group and Oppenheimer Funds,
Inc. They are not newcomers to Puerto Rico. They are among
Puerto Rico's most loyal and largest investors. They are not
recent purchasers of this debt.
These funds own approximately $1.6 billion of bonds issued
by PREPA, and we oppose H.R. 870. We believe it will cause more
harm than good for millions of Americans. About 9.5 million
U.S. taxpayers invest in municipal bonds either directly or
through funds like Franklin and Oppenheimer. And as noted,
Puerto Rico is the third-largest issuer of municipal bonds.
This bill would affect $48 billion of bonds.
Notice I said $48 billion. The other $25 billion, to get
you to the total $73 billion, that is held by all the funds who
support this bill. They want it to apply to everybody other
than them.
Puerto Rico bonds are tax exempt in every State of the
Union. That is why they are held by men and women nationwide,
and they are that way because Congress made them that way. It
is probable that more citizens invest in Puerto Rico bonds than
live in Puerto Rico.
Most of these investors are individuals over 65. Most have
incomes under $100,000. These people live on Main Street, not
Wall Street. H.R. 870 hurts these people because Chapter 9 is
not good for bondholders.
Exhibit B to my testimony shows how badly Chapter 9 hurt
investors in Detroit, Stockton, Valeo, and Jefferson County. I
disagree with Professor Pottow's description of Detroit and
would be happy to answer questions in connection with that but
will not take more time now.
PREPA itself does not need Chapter 9. It can fix itself. It
can raise revenues. PREPA has not raised its base rate in 26
years. That is the rate that pays for everything other than
fuel and purchase power.
Puerto Ricans pay less for electricity than Hawaiians. They
pay less than New Yorkers. PREPA could raise its base rate
tomorrow, and consumers would still pay less than they did 6
months ago because fuel costs are down.
PREPA could also collect what it is owed. The Commonwealth
and its municipalities owe PREPA more than $828 million, and
they have been in arrears for years. PREPA would be self-
sufficient if the Commonwealth let it operate as a self-
sufficient entity, as opposed to a piggybank for the rest of
the island.
Instead of paying for its power, Puerto Rico wants Chapter
9 to force a bailout on the backs of PREPA bondholders, and
that is not right. And let me be clear. If you are a taxpayer
that owns PREPA bonds, a law that takes your savings to support
PREPA is just as much a taxpayer bailout as something that
raises your taxes.
Puerto Rican law already provides an alternative to Chapter
9, a receivership. A court in Puerto Rico will pick the
receiver and will control the receiver, and the receiver will
keep the lights on. But the receiver can also collect from the
government and raise rates and run PREPA as a self-sufficient
entity.
And I have heard the question why shouldn't Congress give
Puerto Rico the same access to Chapter 9 as the States? And
there are three reasons.
First, as the panel has already noted, millions of
individuals nationwide invested in Puerto Rico bonds after
Congress denied Puerto Rico access to Chapter 9. H.R. 870
breaks faith with those men and women.
Second, Congress chose to give Puerto Rico bonds a
nationwide tax exemption enjoyed by no State. So Puerto Rico's
bonds are overwhelmingly held outside of Puerto Rico. My own
clients include funds for taxpayers in California, Georgia,
Michigan, New York, Pennsylvania, and Virginia.
Puerto Rico's use of Chapter 9 would damage far more out of
Commonwealth investors. That is why Puerto Rico should not have
access to Chapter 9.
And finally, Puerto Rico is not a State. Puerto Rico enjoys
benefits that no State receives. Its residents do not pay
Federal income tax. But out of Commonwealth investors, they do
pay Federal income tax. They pay it on everything other than
their tax-exempt bonds.
Chapter 9 would expropriate value from taxpaying investors
outside of Puerto Rico to benefit nontaxpaying residents inside
Puerto Rico. Without changes to Chapter 9, H.R. 870 just hurts
millions of investors. We don't think it is sufficient to
address the Commonwealth's problems. We think it provides more
harm than good.
I am happy to answer any questions the panel may have.
Thank you.
[The prepared statement of Mr. Mayer follows:]
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ATTACHMENTS
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__________
Mr. Marino. Thank you.
I am going to start out by asking a couple of questions. I
normally don't do this, but I am very much looking forward to
what you have to say, each of you. But I want to start with
Attorney Mayer.
What is the downside of going into allowing Puerto Rico, if
it chooses to go into Chapter 9, would it not financially
benefit more, as opposed to going into a traditional
bankruptcy, finding out what the assets are, liquidating them--
if there is anything to liquidate--and paying off the
creditors?
Mr. Mayer. No, Congressman. There is no way to liquidate a
municipality or a governmental corporation. The choice of
Chapter 9 or not Chapter 9 really does not deal with
liquidation or not. It deals with who runs the process.
And what Puerto Rico wants to do is ensure that the
Commonwealth runs the PREPA restructuring for the benefit of
the Commonwealth to the expense of its investors.
Mr. Marino. There is something there of worth. Are you--do
you not agree with me that there is some entity, some substance
there that has a financial value to it?
Mr. Mayer. I am sorry, Congressman. I am not sure I
understand the question.
Mr. Marino. Well, if Puerto Rico chooses to go into a
Chapter 9 and into a restructuring, what do you account for or
how would you account for any value that the corporations, such
as the electric company, may or may not have?
Mr. Mayer. The electric company has value because it
collects for electricity it sells to rate payers, and it has
pledged those revenues to the investors in its bonds. And it
has also agreed, like every other comparable utility, that if
the revenues are insufficient, it will raise the rates.
That is the value that is in PREPA right now. It is that is
the value, the ability to sell electricity at a rate.
If Chapter 9 happens, the court in Chapter 9 has no power
to make PREPA do anything. That is clear from the structure of
Chapter 9.
Mr. Marino. So the only thing the electric company can do
is raise rates. It can't sell assets?
Mr. Mayer. The electric company has the ability to sell
assets to the extent provided by Puerto Rican law. Chapter 9
doesn't give it any more or less power to sell assets.
Mr. Marino. Thank you.
President Acosta, could you--do you remember my question? I
want to know the difference between financially bankruptcy and
allowing Chapter 9?
Ms. Acosta. I don't necessarily agree with Mr. Mayer's
answer. I mean, Chapter 9 is a process that is known. It is an
orderly process, provides predictability, and the community
knows that process and is a rule and oversight by the judge, an
experienced judge.
In the case of a receiver, which is what we are talking
about, the powers are extremely limited. It is just to try to
raise the rates. I mean, you have seen certainly the Energy
Commission that was recently created around the company. I
understand that it doesn't have any right or any power to sell
property. If there is any need for entering a financing, for
example, a debtor in possession financing to help PREPA move
along, this person doesn't have that right.
On the other hand, and certainly, you know, going--using
the receivership process, I mean, that could entail a huge
amount of litigation from everybody. We could have problems
with the entities that actually provide fuel for PREPA, and I
think it is a total disorderly process.
Chapter 9 definitely is a much better process than going
through the receiver, and it is a process that is known. The
receivership process is not known.
Mr. Marino. Thank you.
Professor Pottow, how do you account for or is there a way
to account for the worth of the assets, and I will use that
word loosely, compared to a traditional bankruptcy?
Mr. Pottow. It is a good question. It is an important
concern because it highlights basically the difference between
Chapter 9 and Chapter 11. Because if we have a traditional
company we think of, we could sell off the assets piecemeal.
That is what liquidation bankruptcy is. Or we can try to keep
it together to keep that going concern value, which is the
premium that is basically the sum is--or the whole is greater
than the sum of its parts, right? And you are going to forfeit
that if it gets busted up and sold out together.
Now with a public debtor, you can't bust up and sell, say,
like a city. There is no city to liquidate or sell. You can't
really do that. I mean, there is parking garages and stuff that
it owns, but you know, there is no sort of going concern.
And so, that is why Chapter 9 has more of a focus on
corralling the people together and using the procedural
elements of the bankruptcy code, which bankruptcy judges are
pretty used to doing, which is getting people together. There
was a lot of mediation in the Detroit bankruptcy. And so, it is
capturing more of the process value of eventually getting the
parties to agree what they are going to do.
Mr. Marino. Thank you.
My time has expired, and I now yield to the gentleman from
Georgia, Mr. Johnson.
Mr. Johnson. Thank you.
Professor Pottow, in the absence of Chapter 9, what
incentives exist to encourage consensus among various
creditors?
Mr. Pottow. Not much. I mean, it is sort of like a state of
nature where, you know, you litigate to try to get what you
think you are entitled to under your contract or your bond
indenture. And some people can get recovery and some people
can't, depending what it is.
It is an atomistic process, and it is sort of basically the
principle is why we have bankruptcy systems, why the World
Bank, the IMF, all the advice-giving institutions for countries
around the world say if you want to foster investment, you have
to have a comprehensive debt resolution regime when things go
bad.
So we want to have these sorts of bankruptcy regimes to
help investors.
Mr. Johnson. Yes, Mr. Mayer, you want to respond to that?
Mr. Mayer. Yes. Congressman, there is no possibility the
creditors can run in and grab assets and sell them. The law
doesn't provide for that under any circumstance.
The only question is, will PREPA maximize its value either
by raising rates or by collecting the debts that is owned by
the Commonwealth?
Mr. Johnson. Well, certainly, under a Chapter 9, in
accordance with a plan of reorganization, that collecting
accounts receivables, elevating or upping the rate for the
service, creating more cost efficiencies, all of those things
can be a part of the--or they can be raised as issues by
debtors or, excuse me, creditors under a Chapter 9. Is that
correct?
Mr. Mayer. No. Actually, Congressman, it isn't. That is one
of the problems with Chapter 9.
Mr. Johnson. Okay. Well, let me ask Professor Pottow, would
you disagree with that?
Mr. Pottow. I think there is a bit of truth in both of
those things. I think that there is no power for a bankruptcy
judge to order something like changing the rates, okay, because
the Chapter 9 tries to protect this sovereignty of the
respective entity. That said, the bankruptcy judge does have
the capacity to decide whether there has been negotiation in
good faith as a precondition to availing yourselves of the
Chapter 9 protection.
And so, if I were a creditor objecting to, say, the utility
that was going in, I would say they haven't made a good faith
attempt if they haven't raised their rates. Those arguments you
can bring to Chapter 9.
Mr. Johnson. All right. Thank you, Professor.
And I would love to have this exchange between you both,
but I feel compelled to first request unanimous consent to
include in today's hearing record a number of documents that we
have received from various organizations, academics, investment
firms, and businesses, among others.
They include a letter from the National Bankruptcy
Conference, expressing support for substantively identical
version of H.R. 870 that Mr. Pierluisi introduced in the last
Congress; a statement from Ken Klee, professor emeritus at UCLA
School of Law; also a letter in support from Jim Spiotto, a
well-respected expert on municipal bankruptcy law; and a letter
in support from an ad hoc group of 32 financial institutions,
for the record. And----
Mr. Marino. Without objection.*
---------------------------------------------------------------------------
*Note: The material submitted by Mr. Johnson is not printed in this
hearing record but is available at the Subcommittee and can also be
accessed at:
http://docs.house.gov/Committee/Calendar/
ByEvent.aspx?EventID=103021.
[A list of the submissions follows:]
__________
Mr. Johnson. And I will yield the balance of my time to Mr.
Pierluisi.
Mr. Pierluisi. Thank you for yielding.
I will address a couple of the points raised by Mr. Mayer
in the time remaining, and perhaps I will have another
opportunity later in the hearing.
I noticed that you are appearing not in your personal
capacity, but rather as counsel to two investment firms. So I
am not surprised that your position is inconsistent with the
National Bankruptcy Conference's position on my bill.
But I see a couple of things that are really troubling here
in your statements. For example, you state that use of Chapter
9 by any of Puerto Rico's public corporations will cause more
harm than good for both millions of Americans invested in
Puerto Rico bonds and for the Commonwealth.
Most bondholders and investment experts disagree with your
claim that passage of this bill would be bad for holders of
Puerto Rico's $70 billion in public debt. And the argument that
the bill is bad for Puerto Rico is even more difficult to
understand. As we have said, everybody in Puerto Rico is in
agreement across party lines. You are basically saying that we
are well intentioned, but wrong, that we are not actually
acting in Puerto Rico's best interest, but that your clients
are. Makes no sense.
Now much of your testimony also deals with Chapter 9,
disparaging Chapter 9. But this is not a hearing on Chapter 9,
which has been the law of the land for decades. I am sure we
could deal with Chapter 9 at any point in time.
Now it is incredible, really, that your clients, Franklin
and Oppenheimer, you have stated would not oppose the
application of Chapter 9 to Puerto Rico if Congress made
Chapter 9 a fairer statute, which would only take a few
changes. This is a critical admission. You are basically saying
we think the law Congress enacted for the 50 States is
imperfect. If it is improved, then and only then we would
support its extension to Puerto Rico. That is not persuasive.
My time ran out, but you can--you can comment on my
statements.
Mr. Mayer. Yes, Congressman. We do think Chapter 9 is an
imperfect bill. We are concerned about the investors in the $48
billion of government debt, who bought it when Chapter 9 was
not available. And that is our principal concern.
We do believe that it will prove shortsighted for Puerto
Rico to use Chapter 9, if given. You are correct that Puerto
Rico wants to use Chapter 9. Chapter 9 is a value transfer
mechanism. It transfers value from bondholders to
municipalities.
It is, therefore, not surprising to me that Puerto Rico is
in favor of using Chapter 9.
Mr. Marino. Thank you.
The Chair now recognizes the gentleman from California,
Congressman Issa.
Mr. Issa. Mr. Mayer, I just want to make sure I understand
the effect of if we grant retroactively Chapter 9 to Puerto
Rico. One, you mentioned that $25 billion or so, a subset of
the $73 billion, would not be covered. So, by definition, those
would be paid in full with no concessions. Is that correct?
Mr. Mayer. If Puerto Rico had the resources to pay them,
yes, that is correct.
Mr. Issa. Well, if they don't have to pay $40 billion in
full, they would, by definition, potentially be better off
financially?
Mr. Mayer. Puerto Rico believes, clearly, that it would be
better off if it did not have to--if its instrumentalities did
not have to pay that $48 billion.
Mr. Issa. Right. So if they don't have to pay the $48
billion, two things happen. One, they don't have to change the
institutions that have been artificially subsidizing, if you
will, electricity and other utilities. And the quality of the
bonds remaining would go up, right?
Mr. Mayer. Yes, the holders of those bonds----
Mr. Issa. Okay. So there is winners and losers, and Mr.
Donahue, you mentioned, you know, that there was some people
had speculated. But there are speculators who will win if we
grant this, in addition to speculators who may or may not win.
So leaving the speculation aside, I am just going to ask a
couple of easy tough questions. If we treat Puerto Rico like a
State and say go ahead and tell your municipalities that you
can do this, aren't some of those, if you will, municipalities
effectively state entities, which in most States would have the
full faith of the State?
In other words, in California, some of this debt would be
State debt. But aren't we saying to all the States, structure
your debt so that all your debt can be covered by Chapter 9 if
possible? People were saying there was no effect on the States,
but some is bankruptable. Some is nonbankruptable. In a sense,
what we are really saying is encourage, if you will, States to
do the same thing Puerto Rico has done.
Mr. Donahue. Well, I think in my testimony----
Mr. Issa. Because these are--this is not a State, and some
of these assets are not municipal assets. They are Puerto Rican
assets, and so they are a subset. But they are not really a
political subset in the sense of a city, right?
Mr. Donahue. No. I just think when Puerto Rico gets this
right--if Puerto Rico gets this right, it is going to craft an
enabling statute, and that is going to define who is within and
who is without.
Mr. Issa. Okay. Well, let us just assume for a moment that
Puerto Rico will broadly do it in order to get the greatest
relief because I suspect in their own best interests, they will
do that.
Let me just ask a question, Professor Pottow. Okay. Since
you are the Harvard, you know, scholar here, if I understand
correctly, Puerto Rico has two ways in which they could cure
this by their own vote today. They could ask for and vote for
statehood, in which they would be covered by Chapter 9, or they
could ask for and vote to become independent, in which case
they would have the right to do this on their own as an
independent Nation. Is that correct in simplistic terms?
Mr. Pottow. Well, we are getting to the margins of my
knowledge as a bankruptcy expert. But if----
Mr. Issa. Well, if they were an independent country, they
are not covered by our laws, and if they are a State, they
would be covered by State law that already effects Chapter 9,
right?
Mr. Pottow. The international law of secession is very
complicated about what the obligation--if they had preexisting
obligations and they became a separate sovereign state, it is
not clear that they could walk away from those obligations.
That is a touchy area.
But the other point you make----
Mr. Issa. Well, we will ask Fidel about it. So we will
change that for a second, and we will just assume that if they
become a State, they would be covered by 9. They have that
ability----
Mr. Pottow. If they are a sovereign unit----
Mr. Issa. They have repeatedly done it.
Mr. Mayer, I am going to focus really on something
straightforward. The District of Columbia went into a form of
receivership. The Congress looked and said we will do a lot of
things for you, but you are going to have to straighten out
your act, and they did over a period of time.
Bankruptcy does not do that. Why should we look at
pervasive problems and allow them to be bankrupted out from
underneath without the reforms that would prevent it from
happening in the future, separate from the question of some of
your citizens in my State and the Chairman's State, in the
Ranking Member's State, obviously could be big losers?
Mr. Mayer. It is a very good question, Congressman. And
here, there is an interesting distinction between Puerto Rico
and every other municipality, which is if you take Detroit as
an example, or New York or the District of Columbia, each of
those insolvency situations, whether a bankruptcy or not, they
featured a form of oversight from a governing body.
The State of Michigan imposed an oversight board on
Detroit. New York went through its own financial emergency
oversight board. D.C. has the same. There is no comparable
mechanism for Puerto Rico, and none is contemplated.
Mr. Issa. Thank you.
Thank you, Mr. Chairman.
Mr. Marino. Thank you.
The Chair now recognizes the gentleman from Michigan, the
Ranking Member of the full Committee, Congressman Conyers.
Mr. Conyers. Thank you, Mr. Chairman.
I appreciate the presence of Jose Serrano of New York, who
has been following this very carefully, and the gentleman from
Puerto Rico, Mr. Pierluisi, who has introduced this bill
before. This is not new. And I would just like to welcome
especially our professor of law from the University of
Michigan, Professor Pottow.
Now let me start off with you, Professor. What would happen
if H.R. 870 isn't enacted? What would be the likely result,
especially for the electric company, PREPA, but for others in
general?
Mr. Pottow. Sorry, I didn't hear the critical part. Did you
say if it was or was not enacted?
Mr. Conyers. If it was not enacted.
Mr. Pottow. If it is not enacted, then we will, I predict--
I don't follow it as closely--these people will have a default
at some point that they will not be able to service the debt.
And then it is at a certain point, you can't draw blood from a
stone. So you can't get--you can wave a contract and say, ``I
have an entitlement to be paid.'' But if they can't pay you,
they can't pay you.
And that is why we have restructuring systems like
bankruptcy to decide what concession is and what debt service
is available. And I will say this for the financial oversight
boards, which Puerto Rico apparently doesn't have right now,
there is a circularity because Michigan has the financial
oversight boards as one of the preconditions before you are
allowed to file for Chapter 9.
So I could conjecture that if Puerto Rico were allowed
access to Chapter 9, it might set up some sort of financial
oversight board system, too, that creates those steps.
Mr. Conyers. Thank you.
Now Mr. Mayer claims that Chapter 9 doesn't offer a
certainty and, matter of fact, it is the wild west. Are you
prepared to make any comment or observation about that?
Mr. Pottow. Well, I am not sure I would call it the wild
west or even the wild Midwest. I think it is a fair observation
that Chapter 9 is a more fluid process with less structure than
a Chapter 11 precisely because we don't have that liquidation
scenario and alternative.
But to describe it as the wild west really depends on what
your reference point is. And if you think about sovereign debt
defaults, right, where there is no bankruptcy system, there is
nothing even approaching Chapter 9, that is a relatively
chaotic environment with litigation all over the place, legal
uncertainty, bond premiums pricing in that risk, and this has
risen to the level of the United Nations saying we have a
dysfunctional system. We have to try to do something.
So compared to that, Chapter 9 would be seen as like sort
of a stately, you know, game of bridge or something like that,
compared to the wild west. [Laughter.]
Mr. Conyers. Thank you so much.
I would like now to yield to the gentleman from Puerto
Rico, our very excellent colleague, Mr. Pierluisi himself, for
the balance of my time.
Mr. Pierluisi. Thank you, Mr. Ranking Member.
I have to say something for the record. This hearing is not
about political status. Mr. Mayer, you wrote that Puerto Rico's
citizens have repeatedly voted against statehood.
In 2012, in fact, the American citizens of Puerto Rico
voted to reject their current status, and more voters favored
statehood than any other status option. That was just 2 1/2
years ago.
I have a separate bill, actually, pending before Congress
that would provide for Puerto Rico's admission as a State. The
two main political parties in Puerto Rico may disagree on the
status issue, but we are united in support of this bill, which
is about bankruptcy access.
Now having said that, it is hard for me to understand where
your clients are coming from. Because--and I suspect that it
has to do with the fact that they have not only stakes in the
Puerto Rico power authority, but there are ongoing
conversations, negotiations, and perhaps what they are doing is
trying to buy some time here.
Because, frankly, if what you are saying is that it is
better to simply rely on the trust indenture agreement that was
used when the bonds were issued, I cannot see how that is
better than Chapter 9, even taking at face value all your
criticisms of Chapter 9.
And let me explain a bit of this. I am not a bankruptcy
scholar or expert, but I am a litigator. If you use that trust
indenture agreement, all you will be doing is actually suing
for collection, getting a receiver appointed, but you are not
going to be stopping a wide range of collection litigation from
other stakeholders. Could be suppliers, employees, pension
holders, the entity itself. The debtor which owes the money
might end up not paying you anything at all.
Chapter 9 provides a structured, orderly process in which
your clients could participate and have a say. In fact, the
requirements of Chapter 9, as you well know, make it so that
the power authority would have to even negotiate in good faith
with the creditors, your clients, among others, show that it is
insolvent, and so on and on and on.
So, again, it is hard for me to understand any principled
basis for objecting access to Puerto Rico to the law of the
land in America. This is a U.S. territory after all. This is
not a foreign country.
So those are my statements. I am sorry I ran out of the
time, and but if the Chairman allows it, I would like Mr. Mayer
to respond.
Mr. Mayer. May I respond, Mr. Chair?
Mr. Marino. Yes.
Mr. Mayer. Through 2013, the Commonwealth repeatedly denied
that it would ever seek access for itself or for any of its
instrumentalities the recourse of a bankruptcy or similar
court. It said it was committed to paying its debts. And on
that basis, my clients bought and continue to hold billions of
dollars of debt. We believe that PREPA can, in fact, pay its
debts.
And with respect to your other comments and with respect to
certainty of Chapter 9, let me briefly summarize Detroit from a
bondholder's perspective, and you will understand why we are so
concerned that it not apply in Puerto Rico. You had mentioned
other stakeholders.
In Detroit, as Professor Pottow noted, the pensioners got
95 percent. The general obligation bonds, which had never
before been touched in 70 years since the Great Depression,
they got cut by 25 percent. My clients, who had loaned the
money necessary to pay the pensioners, we got paid 13 percent.
So before people fall in love with certainty and how
Chapter 9 really provides bondholders with a say, the recent
experience is to the contrary.
Mr. Marino. Thank you.
The Chair now recognizes the gentleman from Rhode Island,
Congressman Cicilline.
Mr. Cicilline. Thank you, Mr. Chairman.
Mr. Mayer, I know that you said in your written testimony
that there were good reasons why Puerto Rico was excluded, the
bonds were given nationwide exemption. And I know that you,
Professor Pottow, if I am pronouncing that correctly, say it is
not even clear why the exemption was granted. So I would like
to sort of hear more from you on that because it seems to be
one of the central bases of the argument made by Mr. Mayer what
the context was for that distinction?
Mr. Pottow. Yes, I think it is an interesting theory. So,
academically, I would say that to suggest that the exclusion
was intentional because of the special tax exempt treatment for
Puerto Rican bonds, I think it is an unlikely explanation
because the tax exemption has existed for it since the early
part of the 19th century. I think going back to around 1917,
and this was an amendment in 1984.
So during the intervening half century, Puerto Rico had
been eligible, as far as we can best figure out, to use Chapter
9. So that is probably not it.
And in terms of the how widely held Puerto Rican debt is
around the country, our experience in Detroit was that there
was a lot of creditors from a lot around the country as well
for Detroit bonds. It wasn't just Michigan investors.
So I would give creativity points, but I don't think that
is probably what was going on. [Laughter.]
Mr. Cicilline. Thank you.
Mr. Donahue, Mr. Mayer says also that PREPA does not need
Chapter 9, that it can be fixed itself, and sort of made some
suggestions to Ms. Acosta about things that could be taken. Do
you share that view that this is something that could be
responded to internally by actions taken by PREPA that would
make bankruptcy unnecessary?
Mr. Donahue. I have looked at the trust indenture, you
know, and I am an investor. I have been an investor, and you
know, what do we really look at? We don't really factor
bankruptcy eligibility. You know, we are muni investors.
Bankruptcy is so rare and so isolated. So it is when I am
looking at an investment, I am not factoring what State is
eligible versus what State is not eligible.
When it comes to PREPA, I have gone through and looked at
their trust indenture, which dates back to 1974, and you know,
you pull out this old copy, and you look through it for the
word ``receiver.'' And the word ``receiver'' is mentioned twice
in there, and it is not very clear.
And so, the untested aspect of this, I would argue that
going the route of opposing Chapter 9 and going into what I
think is really the wild west is going through the provisions
of the trust indenture. It is completely inadequate, and I
think it is going to result in a race to the courthouse. We
have these forbearing credit agreements that are expiring next
month, and that could happen as soon as then.
So I think that the immediacy of this is right in front of
us and that that trust indenture, it is untested. I don't think
it was built for this type of a circumstance. They didn't know
PREPA was going to have over--close to $10 billion in debt.
So I think it is wholly inadequate, and I think it exposes
the market. Contrary to what Mr. Mayer says, I think it exposes
the market to more risk than less risk.
Mr. Cicilline. Thank you.
And I yield the balance of my time to Mr. Pierluisi.
Mr. Pierluisi. And adding to this, and I would like Mr.
Pottow to comment further--I think it is. Let me get closer to
the mike.
There was a statement made here before that this is all
about who runs the process. Well, not really, actually. When
you look at Chapter 9, you have a Federal bankruptcy judge in
charge. You have the bankruptcy court actually ensuring that
whatever plan, reorganization plan is issued is fair and
equitable to all the interested parties.
And but, of course, sometimes on a case-by-case basis,
particular stakeholders might do better than others. But the
one running the process is the bankruptcy court itself. The
debtor submits the plan but is subject to a wide range of
requirements and regulations.
Now so let me make that clear here. Apart from that, I
would like for the professor to deal with this issue about
Chapter 9 versus receivership under the trust indenture
agreement in Puerto Rico when there is no case law on it and
there is no automatic stay, which you have in bankruptcy court.
I would like you to comment further.
Mr. Pottow. I think that for the reasons Mr. Donahue said,
I think that the pricing of that, there would be concern with
the risk of the uncertainty of the receivership process. The
lack of a discharged power of also central oversight power by a
Federal judge would be troubling as well.
And I also want to underscore the point of consensus in the
Chapter 9 process. It is the data that was suggested here said,
look, these creditors only got 13 percent in the Detroit
hearing, the certificate of the COP creditors--and the workers
got 95 percent.
Well, that is--first of all, that was supported by the
funds themselves. They voted for the plan. And second of all,
the 13 percent was because there was serious allegation that
the debt was illegally issued, that they might have gotten zero
on the dollar. So 13 percent, if you think you are going to
lose that case, is pretty darned good.
Every different case is going to have different factors.
Every debtor is going to have different factors, and you are
trying to consider, you know, what happens if the PREPA
receivership and this indenture act from 1974 can do that? The
question right now, as I understand it, as you are citing,
should Puerto Rico be able to access the Chapter 9 system with
whatever strings it wants to put on for whatever entities are
in Puerto Rico for an individual?
And that, from the general bankruptcy perspective is, I
think, there is a straightforward answer.
Mr. Pierluisi. Thank you. I ran out of time.
Mr. Marino. All right. The gentleman's time has expired.
And this will conclude today's hearing. I want to thank all
of the witnesses for attending.
And without objection, all Members will have 5 legislative
days to submit additional written questions for the witnesses
or additional materials for the record.
This hearing is adjourned.
[Whereupon, at 12:53 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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