Supreme Court Invalidates Puerto Rico's Debt Restructuring Act

By Ephrat Livni, Esq. on June 13, 2016 | Last updated on March 21, 2019

If you want to feel better about your own money troubles, take solace in the woes of Puerto Rico. The Caribbean island, which is an unincorporated US territory, is struggling with its debt and enacted legislation that would allow it to restructure debt similar to entities that do have bankruptcy protection, like states.

But the US Supreme Court just ruled that Puerto Rico cannot be a debtor under bankruptcy law, so local legislation passed to restructure the territory's debt is invalid, pre-empted by the federal bankruptcy code. Technically, this a case about preemption, whose laws rule, federal or state. But Puerto Rico is not a state, so the case really highlights the complicated relationship it has with the US and its law. Let's consider the decision.

Debt Restructuring

Puerto Rico is struggling financially and passed a law -- the Puerto Rico Public Corporation Debt Enforcement and Recovery Act -- that would have enabled it to restructure the debt of public utility corporations without seeking creditor agreements. Portions of this legislation mirror Chapters 9 and 11 of the Federal Bankruptcy Code.

Opposition to that local act came from creditors of the public utilities, who feared that they would not be paid. They challenged its passage and succeeded. The Supreme Court's decision, written by Justice Clarence Thomas, invalidates the local law that would have allowed Puerto Rico freedom to restructure debt. It hinges on a clause in the bankruptcy code stating that Puerto Rico cannot be a debtor.

Technical Matters

The issues in the case are confusing, despite the seemingly simple conclusion. Technically, the high court was determining whether state law can preempt federal law, which it cannot. So, although Puerto Rico is not a state, there was debate about the relationship of its laws to federal law based on cases about states.

According to dissenting Justice Sonya Sotomayor -- whose parents came to the US from Puerto Rico before she was born -- this was an important matter, although it may seem merely technical. She wrote in a dissent, "Preemption cases may seem like abstract discussions of the appropriate balance between states and federal power. But they have real world consequences. Finding preemption here means that a government is left powerless with no legal process to help its 3.5 million citizens."

Debt Help

Puerto Rico is indeed in dire straits, with nearly half of its population living in poverty. But it may get help from the US in managing its debts. The US House of Representatives last week passed legislation creating a federal control board to help Puerto Rico handle its debt, and sent the bill to the Senate, reports Reuters. The White House has urged the Senate to act fast as Puerto Rico is supposed to make a $1.9 billion debt payment on July 1. Now don't you feel better about your financial situation?

Talk to a Lawyer

If you are having trouble managing your debts, get help. Talk to a bankruptcy attorney about your options. Many lawyers consult for free or a minimal fee and will be happy to provide guidance.

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