[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
      
      
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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

                              ----------                              

                           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:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                        __________
                        
    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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                               __________
    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.]
    
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