May 17 was a historic day for both Puerto Rico and the United States, as the U.S. District Court there held its first hearing on the island's bankruptcy, thus officially starting the first case under the Puerto Rico Oversight, Management and Economic Stability Act, more commonly known as PROMESA, enacted by Congress in 2016.
This law created a process combining elements of traditional Chapter 9 and 11 bankruptcies that will permit U.S. owned territories to adjust their debts. Previously, U.S. law did not give territories the remedy used by state municipalities such as Detroit to restructure their debts.
Puerto Rico, an island obtained by the United States after the 1898 Spanish American War, is the first territory to use this process, expected to have far reaching implications not only for the island and its inhabitants, but also across the U.S. financial markets and pension systems.
This process is regulated in Title III of PROMESA, and it's presided by New York district judge Laura Taylor Swain. She was appointed to the case by Supreme Court Chief Justice John Roberts, who, under PROMESA, is the person authorized to select the Judge.
The Title III process differs from a traditional bankruptcy case in several aspects. PROMESA establishes that a 7-person Oversight Board, whose members were recommended by Congress and officially selected by President Obama in 2016, will act as the island's representative.
However, this does not mean that the Board is required to act in the island's best interests, as PROMESA does not impose any fiduciary duties to it. It mainly requires the Board to develop a plan that helps Puerto Rico achieve fiscal responsibility and eventually regain access to capital markets.
Furthermore, PROMESA gave the Board's members immunity for all actions they carry under the Act, and they can override Puerto Rico's laws and elected officials.
Under Title III, the Board will work with Puerto Rico's creditors to renegotiate the island's debts. Once this is done, they will present a Debt Adjustment Plan to the court for approval. This Plan will be approved if it complies with the requirements set in Section 314 of PROMESA.
One requirement of note is the one in Section 314(b)(6), which establishes that the plan will be approved if it "is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan."
This section is likely to give Judge Taylor Swain more power over Puerto Rico than she would have in a traditional Chapter 9 bankruptcy process, under which a similar plan would be approved if it "is in the best interests of creditors and is feasible". It is unknown why this additional requirement was added to Title III.
In order to protect the best interests of the creditors, the Court is authorized to allow the Oversight Board to interfere with Puerto Rico's political or governmental powers and alter its properties, revenues or the use of its income producing properties.
This Section gives powers to the Board that are unique in U.S. law, as, they appear to give it the ability to, for example, potentially dispose of Puerto Rico's assets and properties and have a say in the way the island government provides basic services to its 3.5 million residents, even though it was not elected to do so by the Puerto Rican people. Judge Swain seemed to be aware of this power during the hearing, when she remarked that this case must lead to a "better future" for Puerto Rico.