On Sunday May 22, 2016, Congressmen Rob Bishop and Sean Duffy published a note in the National Review trying to defend the PROMESA bill against its conservative opponents. Although I agree with them that PROMESA is not technically a bailout, there are other parts of the article of which respectfully, I take umbrage. The two paragraphs before last state:
Under Chapter 9, creditors are afforded only limited protections while local governments retain complete control over their finances and have the exclusive authority to propose plans to adjust their own debt. Under PROMESA, the Oversight Board — mandated to achieve fiscal responsibility and access to capital markets for the island — must facilitate consensual negotiations with creditors, require Puerto Rico to balance its budgets, and produce audited financial statements. Only if Puerto Rico and its creditors fail to reach a consensual deal, and after balanced budgets and audited financials, may the Board vote — with a supermajority of five out of seven members — to authorize the courts to oversee an orderly restructuring process. Even then, the Board retains the sole authority to propose plans to adjust Puerto Rico’s debt, which can only be confirmed by a court if they are in the best interest of creditors.
Finally, PROMESA treats all creditors fairly by upholding both the U.S. Constitution and the Puerto Rican constitution. The Oversight Board will honor creditor contracts, protecting the integrity of existing lawful priorities, classes, and liens. PROMESA also includes built-in protections ensuring states can never use this as a precedent, debunking claims this act will cause “market contagion” or legal precedent.
Let’s take the first paragraph. The authors correctly distinguish Chapter 9 from PROMESA by pointing out the Control Board, not the PR Government, control the finances and has the exclusive authority to propose the plans to adjust the debt pursuant to Sec. 314. But PROMESA does not mandate that PR have balanced budgets or have audited financial statements in order to request bankruptcy like protection. Section 206 of PROMESA states:
SEC. 206. OVERSIGHT BOARD DUTIES RELATED TO RE10
(a) REQUIREMENTS FOR RESTRUCTURING CERTIFI CATION.—The Oversight Board, prior to issuing a restructuring certification regarding an entity (as such term is defined in section 101 of title 11, United States Code), shall determine, in its sole discretion, that—
(1) the entity has made good-faith efforts to reach a consensual restructuring with creditors;
(2) the entity has—
(A) adopted procedures necessary to de
liver timely audited financial statements; and
(B) made public draft financial statements
and other information sufficient for any interested person to make an informed decision with respect to a possible restructuring;
(3) the entity is either a covered territory that has adopted a Fiscal Plan certified by the Oversight Board, a covered territorial instrumentality that is subject to a Territory Fiscal Plan certified by the Oversight Board, or a covered territorial instrumentality that has adopted an Instrumentality Fiscal Plan certified by the Oversight Board; and
(4)(A) no order approving a Qualifying Modification under section 601 has been entered with respect to such entity; or
(B) if an order approving a Qualifying Modification has been entered with respect to such entity, the entity is unable to make its debt payments notwithstanding the approved Qualifying Modification, in which case, all claims affected by the Qualifying Modification shall be subject to a title III case.
(b) ISSUANCE OF RESTRUCTURING CERTIFICATION.—The issuance of a restructuring certification under this section requires a vote of no fewer than 5 members of the Oversight Board in the affirmative, which shall
satisfy the requirement set forth in section 302(2) of this Act.
As one can see, nowhere is the word “audited” appear when in reference to financial statements and nowhere is the phrase “balanced budget” appear in the first paragraph of the above quotation. Hence, it is incorrect that they are prerequisites to a restructuring of the debt.
If we examine the last paragraph quoted, PROMESA maybe does uphold the US Constitution but it is doubtful it upholds the PR constitution or protects “the integrity of existing lawful priorities, classes, and liens.” PROMESA does require that the Fiscal Plan the Government of PR presents to the Board to “respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act” (PROMESA sec. 201(b)(N)). Section 314(b)(6) of PROMESA also requires for the confirmation of the any restructuring plan that it “is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan.” However, if one examines the language of 314(b)(6) it only mandates the Court to consider this effect of non-bankruptcy law on the claim. Moreover, Section 314(c) clinches the issue:
(c) CONFIRMATION FOR DEBTORS WITH A SINGLE CLASS OF IMPAIRED CREDITORS.—If all of the requirements of section 1129(a) of title 11, United States Code,
incorporated into this title by section 301 other than section 1129(a)(8) are met with respect to a plan—
(1) with respect to which all claims are substantially similar under section 301(e);
(2) that includes only one class of impaired claims; and
(3) that was not accepted by such impaired class, the court shall confirm the plan notwithstanding the requirements of such section 1129(a)(8) if the plan is fair and equitable and does not discriminate unfairly with respect to such impaired class.
This section is what is called the cramdown section. In other words, notwithstanding Section 314(b)(6), which does not exist in 11 U.S.C. 1129, if the conditions in Section 314(c) exist, the Court may confirm a plan that impairs General Obligation bonds, which, without a doubt, are protected by Article VI, sections 2 and 8 of the Puerto Rico Constitution.
As to built in protections from States using the PROMESA procedure, no doubt they cannot be used but nothing prevents future Congress from enacting a bill similar to Chapter 9 where a state can VOLUNTARILY enter and restructure its debt, including General Obligation bonds.
Inconsistencies such as these do not help to alleviate the misgivings many conservatives have about PROMESA.