How did you use your knowledge of reorganization and governance to solve Puerto Rico’s problems with its public corporations?

New York business solutions, governance, restructuring & bankruptcy attorney Martin Bienenstock of Proskauer Rose discusses how he advised Puerto Rico.

Contact Martin Bienenstock

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Phone: (212) 969-4530


Puerto Rico was perhaps an ultimate test of both abilities, brains, and imaginations because Puerto Rico found itself in a situation where some of its entities, which include the electric utility that’s called Prepa and its highway entity that’s called HTA could run short of cash like any private corporation. These corporations are owned totally by the commonwealth and they have various powers that private corporations don’t have. But they run businesses and they could run out of funds just like a private corporation.

The problem they had is that for reasons that seemed not apparent to anyone and there’s no legislative history explaining it, congress did not make Puerto Rico’s public corporations eligible to use Chapter 9 of the bankruptcy code like Detroit used it or other cities have used it or other districts have used it. So the question for Puerto Rico was how could we create a statute that Puerto Rico’s public corporations could use to restructure their debts? Turning out the lights in Puerto Rico is not an option. Shutting down the transportation systems is not an option. But how could we make sure it’s not an option given that only under the US Constitution only the federal government has the bankruptcy power and can authorize other entities to use it.

So what we did was we went back through history and we found what was done before there were any bankruptcy statutes passed by congress. And sure enough, for entities that were ineligible for congressional bankruptcy relief or for when there was no congressional relief available, different municipalities and governmental entities were allowed to construct their own bankruptcy statutes. To this day, banks and insurance companies are ineligible in large part to use the bankruptcy code, but he Supreme Court has rendered decisions approving reorganizations of them that are governed by state laws. So we created a Puerto Rico restructuring law that we thought passed the test and we think it does pass the test that the Supreme Court has applied.

We did it by number one providing that in addition to these public corporations having to pay creditors everything the creditors would get if they enforced their claims in litigation, over a subsequent 10-year period they have to get some of the corporation’s free cash flow to get future earnings. And we protected creditors by making sure if that if there were no bankruptcy law and they could enforce their claims they wouldn’t get more doing that than under our statute. So we think we created a statute that works. It’s been enacted. IT’s being used currently by one public corporation. It’s being attacked in court so we’re anxious to have it vindicated. But in the meantime, congress is now considering makes these entities eligible for Chapter 9 so one way or the other Puerto Rico’s public corporations should survive.