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93–528 PDF 2015

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 
(II) 

COMMITTEE ON THE JUDICIARY 

BOB GOODLATTE, Virginia, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

LAMAR S. SMITH, Texas 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

RAU ́ L LABRADOR, Idaho 

BLAKE FARENTHOLD, Texas 

DOUG COLLINS, Georgia 

RON DeSANTIS, Florida 

MIMI WALTERS, California 

KEN BUCK, Colorado 

JOHN RATCLIFFE, Texas 

DAVE TROTT, Michigan 

MIKE BISHOP, Michigan 

JOHN CONYERS, JR., Michigan 

JERROLD NADLER, New York 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

JUDY CHU, California 

TED DEUTCH, Florida 

LUIS V. GUTIERREZ, Illinois 

KAREN BASS, California 

CEDRIC RICHMOND, Louisiana 

SUZAN DelBENE, Washington 

HAKEEM JEFFRIES, New York 

DAVID N. CICILLINE, Rhode Island 

SCOTT PETERS, California 

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 

DOUG COLLINS, Georgia 

MIMI WALTERS, California 

JOHN RATCLIFFE, Texas 

DAVE TROTT, Michigan 

MIKE BISHOP, Michigan 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

SUZAN DelBENE, Washington 

HAKEEM JEFFRIES, New York 

DAVID N. CICILLINE, Rhode Island 

SCOTT PETERS, California 

DANIEL FLORES, Chief Counsel 
(III) 

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 
Page

IV 

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 
(1) 

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. 
2 

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:] 
3 
4 
5 

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. 
6 

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. 
7 

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:] 
8 
9 
10 
11 
12 

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 fasttracked, 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. 
13 

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 billionplus 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. 
14 

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 
15 

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 
16 

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. 
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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. 
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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. 
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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. 
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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 
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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? 
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*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. 

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.* 

[A list of the submissions follows:] 
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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, 
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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—— 
105 

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 
106 

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, negotia-
107 

tions, 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 
108 

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. 
109 

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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