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Puerto Rico To Get Chapter 9?

posted by John Pottow

Long overdue, in my opinion, HR 5305 has been introduced by Resident Commissioner Pedro Pierluisi.  The one-sentence law would allow the territory of Puerto Rico to join the definition of "State" and hence provide access to chapter 9 for its municipal and other entities.  (And no, the territory itself can't file chapter 9, so don't get your hopes up for that solution to its finances.)

It seems archaic and patronizing not to let the people of Puerto Rico authorize (or forbid) their public entities from using chapter 9.  In terms of the policy decisions involved -- some states refuse their entities to access chapter 9 -- it strikes me at least as eminently more sensible to let the government of that territory make that call rather than Congress.  Here's hoping to swift passage on what should be a non-contentious error correction to the Code.


Retroactive application could raise legal issues for quasi-secured revenue bonds. And perhaps not fair for pricing of all debt to change law after the fact.

Adam, did this come up when the Supremes decided no problem with priming liens, etc. (i.e., no taking)? My untutored hunch is that the enactment of a bankruptcy law isn't retroactive to pre-existing debts. E.g., debt incurred prior to 1898 were surely subject to the old Act, no?

U.S. v. Security Industrial Bank, 459 U.S. 70, 75 (1982). Property rights--lien rights up to value of collateral--cannot be impaired retroactively, but contractual rights (unsecured debt or deficiency) can be. Not quite sure how to classify a revenue bond. I would imagine it depends on whether it has a formal perfected security interest.

I can't remember the name of the case right now, but the S. Ct. ducked a constitutional issue in the early 1980s by holding that the section 522 provision rendering voidable non-possessory non-purchase money liens impairing personal property exemptions was prospective only. In other words, liens predating the 1978 Act were not voidable.

Sorry, Adam. That's the case to which I was referring.

See, I don't think chapter 9 has anything like lien-scrubbing of this sort, so I don't see this as posing a problem, even if -- and as Adam says, it's an open/neat question -- the revenue bonds are treated as "quasi-secured."

Regardless of how it might impact past obligations, this should be a potentially useful tool in the future. Of course, if they are already overextended, new debts would be priced with the added risk.

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