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COMMONWEALTHOFPUERTORICO th17rdAssembly3Session Legislative Regular

SENATEPUERTORICO

P.S.____
March2014 PresentedbySenatorsRosaRodriguezandPowerNadal ReferredtotheCommitteeon____________________

LAW
To create the "Restructuring Act Public Corporations", to provide for the restructuring process to be followed in the event of insolvency prosecutor of a public corporation, establish its applicability and scopeandtoestablishtheprocesstobefollowedinsuch cases,.,andexpresstheirtranslationintoEnglish

EXPLANATORYMEMORANDUM
The Legislature of Puerto Rico understands prevailing delete the existing legal uncertainty about a possible economic insolvency of public corporations. Such uncertainty has undermined investor confidence in the government, thus affecting access to financing bypubliccorporationsandtheCommonwealth.Facedwithapotentialfiscalinsolvency,the least onerous remedyisthatbothemployeesandcreditorstonegotiateaplantofacilitatethe restructuring of financial obligations. This measure provides us with a well designed methodthatwilladdressthesesituationsinanefficientandorganizedmanner. Legislation regardingfinancialinsolvencyisamongthemostimportantlegalrulesof a jurisdiction. The U.S. Constitution authorizes Congress to establish laws regarding this matter. However, states are not without tools to address the issue of economic insolvency. The Commonwealth of Puerto Rico has legal access to these tools because for these particular issues has the same level of autonomy and a federatedstateequivalenttreatment.

ExaminingBoardvFloresdeOtero,426U.S.572,594(1976). Governments, in the exercise of their police power of the state(policepower)have within their power to pass legislationtoaddresstheinsolvencyoflegalandnaturalpersons. As part of that power is the power of the courts to appoint trustees to administer insolvent companies. Similar legislation is widely accepted in the states, and has been particularly important in the liquidation and reorganization of companies in the technology industry. Mann, "An Empirical Investigation of LiquidationChoicesofFailedHighTechFirms",82 Wash. ULQ 1375 (2004). The existence of these remedies seeks to eliminate the legal uncertaintyabouttherightsofcreditorsthatissodetrimentaltothebusinessenvironment. The only law in our legal systemthatcatersinsolvencyisChapterXVIIoftheCivil Code. However, this rule is outdated and lacks the necessary procedural law to be implementedeffectively. In deference to the fiscal autonomy of the Commonwealth of Puerto Rico, federal law does not occupy the field in this area. The usual federal remedies are not available to restructurethedebtofpubliccorporationsandmunicipalitiesofPuertoRico. The Constitution of the United States in its Section 8,ArticleIempowersCongress to establish uniform laws on economic insolvency. However, for centuries the Supreme Court of the United States has recognized that while this power is not exercised by Congress, statesarenotpreventedfromlegislatingonthesubject.SturgesvCrowinshield,17 U.S. 122, 196 (1819). Once Congress passed legislation on thesubject,heheldthefieldin relation to debtorsthatarecoveredbyfederallaw.However,federallawexplicitlyexcludes Puerto Rico Chapter 9 of the Bankruptcy Code. 11 USC 101 (52). This chapter contains the means to restructure the debt of municipalities, which for purposes of this Chapter includespubliccorporations.TheonlywaythatPuertoRicowouldbeunabletolegislateon the subject, in theabsenceoffederallaw,iswhethertheBankruptcyCodepreventsit.Such impairment, governed by the doctrine of "occupied field", not presumed if not explicit. Altria Group, Inc. v.Good,555 U.S. 70, 76 (2008). If Chapter 9 does not apply to Puerto Rico, it could hardly be concluded that the field is occupied in the case of public corporations.

The Supreme CourtoftheUnitedStateshasdecidedthatwastheintentofCongress invest the Commonwealth of Puerto Rico of rights and similar to a federal state authority. The First Circuit Court of Appeals has ruled that Puerto Rico is sovereign, that was the main consideration that motivated the Supreme Court in AsburyPark. U.S. v. AndinoLopez,831F.2d1164,1168(1st.Cir.1987),cert.denied486U.S.1034(1988). Consequently, this Legislature has the power to make a law directed to give certainty to creditors on the possibility of restructuring the debt of eligible public corporations. Existing loophole in our system creates uncertainty unacceptable. Under these circumstances this Legislature hereby establishes a system to reorganize debts and obligations, support the federal legislation sopermits.Sturgesv.Crowinshield,supraBrown v.Smart,145 U.S. 454, 457 (1892), International Shoe Company v.Pinkus,278 U.S. 261, 264 (1929). The restructuring of these government debts can benefit both public corporations as bondholders receiving the certainty it provides a specific legal framework for this. AsburyPark,316 U.S. 502, 504 (1942), cited with approval in U.S. Trust Co. . of New York v. New Jersey 431 U.S. 1, 28 (1977). This Act aims toimplementthisauthority of the CommonwealthofPuertoRicowithintheframeworkofitsconstitutionalrelationship withtheUnitedStatesofAmerica. This Act creates a process for eligible public corporations to restructure their debts under the supervision of the Court and consensus with creditors. That way we can protect our public corporations whilefulfillingourobligationtothecreditors.ThisActincorporates the scrutiny demanded the Supreme Court of the United States at U.S. TrustCo.,supra to modifydebtagreements.Thus,thepublicinteresttohaveefficientpubliccorporationswhile therightsofthebondholdersandothercreditorsareprotectedisprotected:..

ENACTEDBYTHELEGISLATUREOFPUERTORICO Section 1 the "Law on RestructuringofPublicCorporations"iscreated,knownin Englishas"PublicCorporationRestructuringAct"foritsEnglishtextreadasfollows:

"PUBLICCORPORATIONACTRESTRUCTURING Article1EligiblePublicCorporationunder.. The CourtofFirstInstance(SuperiorPart),uponpresentationofaResolution Article2ora petition byacreditorunderArticle3willbeempoweredtodeclareacorporationeligiblefor a public planunderArticle10iffromthefactspresentedtoitandafterapublichearingitso specify. A public corporation Shall be eligible Under This Act if (i) it is unable to pay its debts from its own means Peak Gust Becomedueor(ii)itsliabilitiesExceeditsassets.The venue for said Shall be proceeding in the Court of First Instance (Superior Part) wherethe headquarters of said public corporation is located. All Creditors of the public corporation Shall be made parties of the proceedings to be published by notice in Such Manner and Given as ordered in the Rules of Civil Procedure. Also Notice Shall be posted in the web page of the public corporation and of the Puerto Rico Government Development Bank. Any creditor of the public corporation May Appear and assert his rights. .ProceedingsAll Relating to the debt of the public corporation Shall be consolidated in the proceeding Describedinthisarticle. Article2ResolutionofEligibility. The Board of Directors, Trustees or other person or Persons with ultimate Control over a public corporation can pass resolution declaring eligible to Themselves Under This Act, subject to the process spelled out in Article 1. If the Governor so authorizes it, said resolutionwillbefiledintheCourtofFirstInstance(SuperiorPart) Article.3.PetitionbyaPrivateCreditor. Upon the verified petition of any Creditors of a Public Corporation, made on Behalf of .

Themselves and all other Creditors of the public corporation, for a declarationofeligibility Under This Act, the Court of First Instance (Superior Part) after a public hearing May initiateproceedingsunderArticle1 Article.4ContentofResolution. TheresolutiondeclaringeligibilityunderArticle2Shallstate: (1) the Reasons Why thepubliccorporationiseligibleUnderThisActandWhether ornotitisCausedbylackofliquidity, (2)recommendationsastotheinterimmanagementofthepubliccorporation, (3 recommendations as to a plan for restoring solvencyifpossible,andComplying withExistingObligationsandliquidationIFNECESSARY ..)Article5ContentofthePetitionbyaPrivateCreditorallege. InthepetitionDescribedinArticle3theCreditorsShall (1 ) That the public corporation is or will be unable to pay in full the terms According To Their claims Proposed to be adjusted or composed and perform its publicfunctionsandpreserveitsincome, (2)itsrecommendationRegardingaplanfortheadjustmentorcompositionofdebts, (3) and its recommendation is Substantially That Measured by the capacity of the publiccorporationtopay,isintheinterestsofalltheAffectedCreditorsthereby,and isnotdetrimentaltootherCreditorsofthepubliccorporationPower.. Article6oftheCourt. The Court Shall have all powers Necessary and proper fashion to provisional remedies, issue orders, supervise the Board of Receivers, appoint experts, approve a final plan and

anyotherpowerNecessarytoFulfillitsrole Article.7.BoardofReceivers. The public corporation That hasbeen Declared eligible Under This Act Shall, while the proceedings go on, be Administered by a Board composed of Receivers of five members. The Governor Shall name 2oftheMemberswiththeadviceandconsentoftheSenate,and the Court Shall name 3. The CourtShallthepowersandDutiesEstablishandsupervisethe Board of Receivers and Shall Have the Power to issue orders as to execute its role Necessary Article.8.PoweroftheCourttomodifycontracts,ProcessesandConsolidateissuestays. (A ) The Court Shall Have the Power tomodifythepriceproviderandcontentofcontracts or any other Obligations of the public corporation. In doing so the Court will not impair contractual Obligations Significantly Unless it is reasonable and Necessary to serve an importantpublicpurposepurpose. (b)Fortheministeringpurposesofthisarticle,includesanimportantpublic (1) the obligation to Comply with Existingcontracts,evenifimperfectlyinviewof presentand Circumstances.(2) the stability and continuity of essential public infrastructure, utilitiesandservices (c) The Court Shall Have the Power to ConsolidateWithinthecaseanyproceedingrelated to a debt of the public corporation or the payment thereof. It will Also have the power to stayproceedingsothersuch.. Article9GoodFaithoftheBoardofReceivers.

The Board of Receivers Shall act in the best interest of the Creditors and the public corporation Article.10.Theplan. In any proceeding under Article 1 When the public corporation you hasbeen eligible Declared, after a hearing on the plan Proposed or on the plan as modified by order and if Such plan as Proposed or modified is approved in writing by Creditors Representing seventyfive per cent in amount of the indebtedness and thereby Affected by the public corporation and the commission,theCourtauthorizeandapproveSuchJunadjustmentorif the Court Determines composition (1) That the public corporation is unable to pay in full the terms According To Their claimsProposedtobeadjustedorcomposed,andperformits public functions and preserve the value of property subject to taxation, (2) That the adjustment or composition is Substantially Measured by the capacity of the public corporation to pay, (3) That it is intheinterestofalltheAffectedCreditorsthereby,and(4) ThatitisnotdetrimentaltootherCreditorsofthepubliccorporationCreditors,... Article11ApprovedplanbindingonallSubstitutedObligations The plan of adjustment so Authorized and approved under Article 10 Shall be forthwith and without any further action of any kind binding upon all the Creditors included in the plan, whether or not They Appear in the proceeding. In so far as said Provides for the substitution of any new plan bonds, notes or other Obligations of the public corporationin place of any outstanding bonds, notes or other Obligations, or claims then outstanding, Such substitution Shall be effected fromandafterdateSuchMaybefixedasinSuchorder. In the event a plan That Shall be Authorized and approved pursuant to this Act the Court

Shall Retain jurisdiction of Such proceeding and thereafter no creditor Whose claim is included in Such adjustment or composition Shall be Authorized to bring any action or proceeding of any kind or character for the enforcement of his claim except With the permission of the Court and then only to recover and enforce the rights Given him by the adjustmentorcomposition.. Article12Powertoliquidate. reorganization Should not prove possible, the May Courtordertheliquidationofthepublic corporation. . In so doing it will secure the Creditors of the public corporation the greatest possibledegreeofrepayment"Section Restructuring Act Public Corporations. 2 is created the" "to your Spanish text readas follows:"ANACTRESTRUCTURINGCORPORATIONPUBLIC "Article1.PublicCorporationEligible. The Court, Superior Court, upon the filing of a resolution under Article 2 of this Act or a request by a creditor under Article 3 of this Act, may declare a public corporation eligible for a Plan under Article 10 if the facts presented at a public hearing that eligibility is determined. A public corporation shall be eligible under this Act if (i) is unable to pay its debts when their own expire or (ii) its liabilities exceed its assets. Such a processiscarried out in theUpperChamberoftheCourtwheretheheadquartersofthepubliccorporationare located. All creditors of the corporation shall be part of the process for notification to be posted and filled out the same way they order the Rules of Civil Procedure. Notice is also placed in the website of the publiccorporationandtheGovernmentDevelopmentBankfor

Puerto Rico. Any creditor of the public corporation may appear and exercise their rights. All processes related to the debt of the public corporation were consolidated intheprocess describedinthisArticle.. Article2ResolutionEligibility .'sBoard of Directors, Trustees and another person or persons with ultimate control overa public corporation may approve a resolutiondeclaringeligibleunderthisAct,subjecttothe process described inSection1ofthisActauthorizestheGovernorIfso,thisresolutionshall befiledintheSuperiorCourtoftheCourtofFirstInstancejurisdiction.. Article3requestforPrivateCreditor. The Court may initiate the process described in Section 1 to make a declaration of eligibility, after conductingapublichearing,underArticle1attherequestofanycreditorof acorporationpublishes,made hisnamecreditorsandotherpubliccorporation ...Article4ContentResolution TheresolutiondeclaringeligibilitypursuanttoSection2shallstate: (1) the reasons why the public corporation is eligible under the provisions of thisActandifor causednotbylackofliquidity (2) recommendationsontheinterimadministrationofthepubliccorporation (3) recommendations if necessary on a plan to restore solvency if possible, fulfilling existing obligationsorliquidatedifneeded.. Article5ContentPrivateCreditorPetitioncreditors. ThepetitiondescribedinArticle3shallarguethatthe (1) corporation is issued or will be unable to pay according to its terms be adjusted to their

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obligations,fulfilltheirpublicdutiesandpreservetheirincome, (2) theirrecommendationsforaplantoadjustitsobligations,and (3) its recommendations are a substantial relation to the capacity of the public corporation to pay, are in the interests of affected creditors and are not detrimentaltotheinterestofothers creditorsofthepubliccorporation.. Article6AuthorityTribunal. The Tribunal shall have all powers necessary and appropriate to provide provisional remedies,issueorders,monitortheCommitteeofTrusteesappointedunderthisAct,appoint expertsandapproveaFinalPlananyotherpowernecessarytofulfilltheirduties. Article7.CommitteeofTrustees. The public corporation has been declared eligible under this Act shall, whiletheycontinue the proceedings, be administered by a Board of Trustees composed of five (5) members . The Governor shall appoint two (2) of the members with the advice and consent of the Senate, and the Court shall appoint three (3) of them. The Court shall establishthepowers and duties and supervise the Committee of Trustees and shall have power to issue the necessaryorderstoexecutetheirrole.. Article 8 Power of Court to modify contracts, consolidate processes and issue injunctions. (1) TheTribunalshallhavethepowertomodifytheprovisionsandcontentsofanycontract or other obligations of the public corporation. In doing so the Court does not significantly impair contract unless it is reasonable and necessary to serve an important publicinterestobligationsincludes:.

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(2) ForpurposesofthisArticle,animportantpublicinterest a. Obligationtofulfillexistingcontracts,albeitimperfectlyinlightoftheand b. circumstances.stabilityandcontinuityinfrastructure,utilitiesandessentialpublicservices (3) The court shall have power to consolidate within the procedures underArticle1anycase involving debt eligible public corporation or payment of suchdebt.Alsohasthepowerto stopotherrelatedprocedures. Article9.BuenaFeoftheTrustCommittee. TheCommitteeofTrusteesactinthebestinterestofcreditorsandthepubliccorporation..'s Article10Plan. InanyproceedingunderArticle1,inwhichthepubliccorporationhasbeendeclaredeligible, after a hearing on the proposed plan or any subsequently amended, and if the plan as it has been proposed or amendedbeapprovedbycreditorsrepresentingseventyfivepercent(75%) of the amount of the obligations affectedbytheplanandthepubliccorporation,theTribunal may authorize and approve the plan if it determines that (1) the public corporation is unable to pay its obligations under the terms to be adjusted, and perform their public functions preserving the value of their taxable property, (2)adjustingthedebtissubstantiallyrelatedto the ability of the public corporation to pay, (3) the plan is in the interest of all affected creditors and (4) it is not to the detriment of other creditors of the public corporationcreditors... Article11approvedPlanisbindingonallreplacedobligations The authorized and approved under Article 10 adjustment plan will, no other action ofany type, binding on all creditors included in the plan, whether or not part of the necessary

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procedures. To the extent that theplanprovidesforthereplacementofbonds,notesorother obligations of the public corporation instead of bonds, notes or other obligations already issued, such substitution will take place and be effective from thedatespecifiedintheplan. In the event that a plan authorized and approved under this Act, the Court shall retain jurisdiction over this process and in subsequent retain jurisdiction over this process and thereafter no creditor may file an action or proceeding of any kind to enforce their claim except with the permission of the Court and only to recover and enforce rights under the plan.. Article12Branchtosettle. Failing this reorganization, the Court may order the liquidation of thepubliccorporation.In doingsoIwillallowcreditorsofthepubliccorporationthegreaterrepaymentpossibleof." "Section3 . Translation . Had conflict between the English version and Spanish RestructuringActPublicCorporations"willprevailEnglishversion.. Section 4 Saving Clause . Such legislation shall be construed as, and have the maximum extent possible, within the federal constitutional law and the supremacy of the BankruptcyCodeoftheUnitedStates.. Section 5 Separability. Although one or more articles, sections, paragraphs, subparagraphs, sentences or clauses of this Act is declared unconstitutional or invalid, the remainderoftheActshallcontinueinfullforce.. Section6Effective.ThisActshalltakeeffectimmediatelyafterapproval.