PUERTO RICO: An Introduction to Dispute Resolution: Bankruptcy

The Year in Review from a Bankruptcy Perspective

The COVID-19 global pandemic and its extended lockdown period has affected the already frail economy of Puerto Rico, and will most likely trigger an increase of bankruptcy filings in the upcoming months. As of June 2020, bankruptcy filings decreased to 2,618, when compared to the 3,805 cases in 2019, representing a reduction of 31.2% of filings, but it is expected that those numbers will increase. The majority of the cases filed have been under Chapter 13 of the Bankruptcy Code (individual wage-earners bankruptcy), with 1,488 filings, followed by Chapter 7, with 1,112 filings. There have only been 16 cases filed under Chapter 11 business reorganisations, and two cases under Chapter 12 (farmers and fishermen).

Despite the trends in other jurisdictions, the impact of COVID-19 is difficult to gauge at this time. Some economists consider that many small and medium size businesses will be lost permanently and that some sectors of the economy, such as retail, will change significantly and emerge with different structures.

To counterbalance the effect of COVID-19, numerous stimulus measures have been enacted to ameliorate the financial crisis of the economy. For example, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law to protect the American people from the public health and economic impact of COVID-19. The CARES Act provide stimulus measures and various temporary modifications to Chapter 7 and Chapter 13 cases.

According to the most recent certified Fiscal Plan for Puerto Rico, Congress has allocated $13.9 billion to address the effects of the COVID-19 pandemic. The principal allocations appear to be categorised as follows: (a) $3.45 billion for Pandemic Unemployment Assistance; (b) $3 billion for Recovery Rebates for individuals; and (c) $2.24 billion from the Coronavirus Relief Fund.

In terms of the bankruptcy cases, the CARES Act modified the definition of “current monthly income” to exclude payments made under the National Emergencies Act with respect to COVID-19 and protect and benefit Chapter 13 debtors who did not have confirmed plans as of the date of enactment of the CARES Act, and future Chapter 13 debtors. The CARES Act also included provisions allowing Chapter 13 debtors with confirmed Chapter 13 plans to seek modifications due to COVID-19-related hardships, and extend the plan period up to 7 years after the first payment under the original confirmed plan became due (as opposed to the current maximum 5-year plans).

As of today, we have seen an increased number of moratoriums being requested for mortgage payments, and requests for deferred payments in other types of consumer debt, such as auto loans, credit cards, and student loans.

At the local level, the Bankruptcy Court has also taken measures to facilitate modifications, such as its General Order 20-07, of April 23rd, 2020, modifying the automatic stay for a debtor seeking a loss mitigation option, including loss mitigation, loan modification, forbearance agreements or repayment plans or moratoriums, for the purpose of accommodating the modification process.

Given the challenges caused by COVID-19 to other sectors of the economy, including airlines, major retail chains, and oil companies, among others, we expect an increase in distressed situations, and businesses struggling to stay afloat and pay their debts.

Retail is one of those sectors that has been most affected by the pandemic. Decreasing consumer demand, reduced entertainment spending, and stay-at-home orders mandating that businesses remain closed continue to take their toll in an already fragile retail industry that has been struggling for the past several years as consumers seek product/brand differentiation and pivot to online shopping. Retailers that were already struggling before the pandemic began are beginning to crumble and are seeking bankruptcy protection at the corporate level. Bear in mind that Puerto Rico recently underwent severe damages after the passing of Hurricane Maria in 2017. In the last few months, we have seen Chapter 7 or 11 filings of companies in the consumer sector, including stores and fitness centres, among others. Some retailers have filed for bankruptcy protection. Retailers who have not declared bankruptcy have already announced an unprecedented number of store closings which, as the pandemic drags on, are expected to grow exponentially and disproportionately affect commercial real estate such as malls.

In these kinds of cases, there have been increased controversies related to the impossibility to comply with contractual obligations and even stipulated modifications to loans. Specifically, they have been moving courts to modify settlements and transactions reached before the pandemic. It is reasonable to believe that this will become a common trend in the following year. Under Puerto Rican law, this is not a simple task. Contracts in Puerto Rico may only be modified through mutual consent or under the judicial doctrine of rebus sic stantibus. Since the passing of Hurricane Maria, the Bankruptcy Court for the District of Puerto Rico and the US District Court for the District of Puerto Rico have had to interpret the doctrine on several occasions. There are seven requirements that must be met, and failure to meet even one dooms the request: (1) an unforeseeable event has risen; (2) as a result thereof, there is an extraordinary difficulty or aggravation of the conditions surrounding the concession to be made by the debtor, so that it becomes significantly more costly for him to comply with his obligation; (3) the contract does not have a random nature or be of pure speculation, with which the parties wanted to foresee in a certain way, the possibility of the event; (4) the parties’ actions are free of deceit and there are other mechanisms to address the problem; (5) the contract is of successive tract or is related to a future moment, so that it has a certain duration; (6) it also being necessary that such a circumstance show some signs of permanence; and (7) the interested party must move the court for relief. The recent case of In re Chase Monarch Int’l Inc., 581 B.R. 715, 722 (Bankr. D.P.R. 2018), reconsideration denied, 2018 WL 2970730 (Bankr. D.P.R. June 10, 2018), aff’d 2019 WL 8375999 (D.P.R. 2019), reconsideration denied, 2020 WL 1746030 (D.P.R. Apr. 8, 2020) (Dominguez, D.J.), analysed, discussed and declined to apply the doctrine of rebus sic stantibus to the termination of a lease due to damages caused by Hurricane Maria in Puerto Rico. The Bankruptcy Court expressly stated that while “Hurricane Maria was a remarkable meteorological phenomena, severe in its scope, [it is] not altogether unexpected given Puerto Rico’s geographic location and indeed not the cataclysmic event recounted in the debtor’s motions”. Id., 581 B.R. at 722. This doctrine, of course, must be applied on a case by case basis.

On the macro level, Puerto Rico has continued to prosecute a reorganisation process under PROMESA. During these months, there has been increased activity by the Puerto Rico Fiscal Agency and Financial Advisory Authority, or AAFAF, and the Public-Private Partnerships Authority, or P3 Authority, with regards to restructuring inside and outside of the Title III court completion of significant P3 projects. There are numerous matters that still need to be resolved in the Title III cases related litigation including the Commonwealth/Public Buildings Authority/Employee Retirement System/Puerto Rico Highways and Transportation Authority plan of adjustment; the COFINA appellate work; the ERS litigation; the Clawback claim litigation/HTA litigation; the HTA plan of adjustment; the Act 29 litigation; and the claims administration/contract assumption and rejection, among others. There is also significant work with regards to PRASA, or PREPA, and the possibility of Title VI restructuring work involving other governmental entities, creditor negotiations, and forbearance extensions among others.

Our Firm 

Ferraiuoli’s Bankruptcy and Creditors’ Rights Practice Group has been recognised by Chambers Latin America since 2010 publication. Our team is comprised of renowned practitioners with a comprehensive knowledge of distressed situations and bankruptcy law, and an unrivalled passion for what we do.

We provide high quality and comprehensive legal advice and representation to industry-leading private and publicly owned companies, as well as financial institutions, on corporate, tax and regulatory issues, among many others. Ferraiuoli provides these services to clients in Puerto Rico, the U.S. mainland, as well as the Caribbean and Latin America.

At Ferraiuoli, our attorneys work in teams, as appropriate, with stateside and international advisors and counsels with a commitment to pursuing the business goals of our clients in a responsive and cost-effective manner. Our approach is based on discipline, a value-added focus and effectively closing a transaction. Several of our attorneys hold dual professional licences and are authorised to practise in the states of New York, Florida, Texas and California, in addition to being authorised to practise in the Commonwealth of Puerto Rico and the U.S. Federal Courts System. Key members of the Bankruptcy and Creditors’ Rights Practice Group are the following:

Sonia Colón is a Capital Member and Chair of the Bankruptcy and Creditors’ Rights Practice Group. She practises primarily in the areas of bankruptcy and creditors’ rights. She frequently represents creditors and lenders in in-court and out-of-court restructurings in Puerto Rico and Florida. Sonia advises clients as to insolvency related transactions, such as workouts, restructuring of financial transactions and tracing funds, fraudulent conveyance actions, acquiring bankruptcy assets, and securing diverse types of financing agreements during a bankruptcy case. In addition, Sonia lectures locally and nationally on various aspects of bankruptcy, particularly on Chapter 11 and 9 issues, and is frequently quoted in various business publications and bankruptcy journals. Mrs. Colón is fluent in Spanish and English, and has working knowledge of Portuguese.

Gustavo Chico-Barris is a Senior Member with the firm’s Bankruptcy & Creditors’ Rights Practice Group, the Dispute Resolution Group/Commercial Litigation Division and the Insurance Practice Group. Gustavo currently serves as an Adjunct Professor of Bankruptcy Law with the University of Puerto Rico School Of Law. As a bankruptcy practitioner, Gustavo excels at finding quick and practical solutions. His experience as a professor also allows him to be thorough and intricate in complex bankruptcy disputes and contested matters.

Other members of the Bankruptcy and Creditors’ Rights Practice Group are Josean Diaz, Camille Somoza-Castelló, and Frances Brunet Uriarte

Ferraiuoli’s Bankruptcy and Creditors’ Rights Practice Group work together with lawyers at our full-service firm bringing experience and support to the representation of clients regarding the different issues that often arise in insolvency. We assist clients in jurisdictions nationwide with out-of-court workouts, reorganisations, and bankruptcy proceedings. Our clients span a broad range of industries, including institutional lenders, investors, equity holders, and bonding and insurance companies, in all aspects of bankruptcy and workouts. We have represented clients in matters related to Puerto Rico’s fiscal crisis, including Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).