U.S. Supreme Court Hears Puerto Rico Bankruptcy Case

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The U.S. Supreme Court will decide later this year if Puerto Rico can use federal bankruptcy laws to alleviate its current debt crisis. / photo courtesy of U.S. Supreme Court

The U.S. Supreme Court heard a crucial case this week that may settle whether Puerto Rico can use federal bankruptcy laws to alleviate its $72 billion in debt.

Puerto Rico argued that it should be able to allow its municipalities and certain agencies to file for Chapter 9 federal bankruptcy protection – or at the very least be able to enact its own quiebra criolla to help its municipalities and agencies.

It was a lively discussion with Justice Sonia Sotomayor pouncing on the opposition, mostly creditors or bond holders, and Justice Ruth Bader Ginsburg breaking through the gobbledygook with direct statements or questions.

“Why would Congress put Puerto Rico in this never ­never land? That is, it can’t use Chapter 9, and it can’t use a Puerto Rican substitute for Chapter 9”? Ginsburg asked.

Indeed, why? The island’s municipalities and agencies have always been able to file for bankruptcy – until 1984, when Congress excluded Puerto Rico (and the District of Columbia) from Chapter 9 under a bankruptcy law revision. Nobody knows why.

It’s a Black Box

“It is a black box. …There is no legislative history directly on point either way,” said Christopher  Landau, arguing in favor of Puerto Rico, implying it’s a mystery.

Puerto Rico Legislature’s sought relief two years ago by approving an island bankruptcy law, but was shut down by a Boston federal court, effectively denying Puerto Rico any bankruptcy protection.

Justice Elena Kagan, who seemed to change her mind during the arguments – favoring Puerto Rico – hinted at a backhanded attempt to strip the island of certain powers.

It’s an “extremely kind of cryptic odd way to make such a major change,” she said of the 1984 congressional change. “I mean it’s almost like  somebody doesn’t want everybody to recognize what a major change is being made.”

The creditors’ attorney Mathew McGill argued that Congress intended to lock out Puerto Rico. “Congress for a long time has micromanaged Puerto Rico’s debt,” McGill stated, adding that at the time of the 1984 bankruptcy revision Puerto Rico already had $9 billion in debt.

McGill pointed out that over 20 states also exclude their municipalities from Chapter 9 bankruptcy, implying Puerto Rico is no different. To which Ginsburg shot back, “But that’s up to the state. It’s up to the state to make that decision. Puerto Rico isn’t given that option.” McGill conceded the point, saying “Well that – well, that is, of course, true.”

Keep the Lights On – Water Too

He said the idea is for Puerto Rico to “come to Congress.” But Congress, divided along party lines, appears reluctant to help Puerto Rico, equating any help with a rescue or “giveaway.”

Sotomayor likened the situation to Puerto Rico trying to keep the lights on. “So you think Congress intended to stop Puerto Rico … from passing emergency legislation that said don’t shut off the lights tonight,” she said. “[T]hat Congress intended that that kind of temporary provision could only be subject to Congress, who may be on recess, who might be wherever it is, that it could not do that?”

Puerto Rico’s attorney seized the opportunity on rebuttal to remind the Supreme Court that people’s lives are at stake. Over 3 million people live in Puerto Rico.

“But this is also a flesh-and-blood situation in Puerto Rico,” Landau said. Puerto Rico is “facing a crisis in providing essential services to its citizens. … [T]hat’s the question: [w]hether people in a village in Puerto Rico will be able to get clean water.”

The court will announce its decision on the case, known as Puerto Rico v Franklin Cal. Tax-Free Trust, later this year.

˜˜Maria Padilla, Editor

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