FULL STORY: SCOTUS Rules PR’s Bankruptcy Law Invalid

by Gil Hall,  gil@prnewsroundup.com
Published: 20160613 1333

The Supreme Court of the United States ruled Monday that the Commonwealth of Puerto Rico lacks the ability to create its own bankruptcy laws for its municipalities and public corporations.

In 2014 Puerto Rico created its own law to restructure some of its debt, arguing that it was permitted to do so since Congress had removed it from the federal code. Franklin filed a lawsuit challenging that contention.

In its decision in “Commonwealth of Puerto Rico et al v. Franklin California Tax-Free Trust et al” the majority of the justices sided with Franklin, ruling that the federal bankruptcy code still applies in its entirety–even though that has the effect of leaving   the Commonwealth wholly without the ability to restructure its debts.

No state can itself declare bankruptcy. Chapter 9 of the United States bankruptcy code, however, authorizes states to permit their municipalities and certain public entities to file for bankruptcy protection.

In 1984 the Commonwealth and the District of Columbia were expressly denied the ability to permit their agencies to file for bankruptcy, but were not removed entirely from the bankruptcy code. The majority of the justices ruled that by removing them only in part Congress had made clear its intent that the bankruptcy code itself still be applicable. 

In a 15-page opinion surprisingly free of argot, Justice Thomas writes 

[T]he Federal Bankruptcy Code preempts state bankruptcy laws that enable insolvent municipalities to restructure their debts over the objections of creditors and instead requires municipalities to restructure such debts under Chapter 9 of the [bankruptcy] Code.

Justice Thomas was joined in the majority opinion by Justices Kagan, Breyer, Kennedy, and by Chief Justice Roberts. Justice Alito recused himself from consideration of the case.

The dissenting opinion, written  by Justice Sotomayor and joined by Justice Ginsburg, addresses not only their interpretation of the legal minutiae, but also what it means for Puerto Rico to be excluded from all forms of bankruptcy:  

Because Puerto Rican municipalities cannot access Chapter 9’s federal bankruptcy process, however, a nonfederal bankruptcy solution is not merely a parallel option; it is the only existing legal option for Puerto Rico to restructure debts that could cripple its citizens…. [T]he government and people of Puerto Rico should not have to wait for possible congressional action to avert the consequences of unreliable electricity, transportation, and safe water—consequences that members of the Executive and Legislature have described as a looming “humanitarian crisis.

On Friday the United States Congress approved HR 5278  (aka, “PROMESA” that does substantially what Sotomayor suggests.

The bankruptcy ruling comes on the heels of the Court’s ruling last week in Sánchez Valle, in which the justices declared that Puerto Rico does not have sovereignty for purposes of prosecuting criminal cases if such a case would subject the defendant to “double jeopardy“.

The two SCOTUS rulings and Congress’ PROMESA vote are all significant blows to Puerto Rico’s identity and its authority to self govern:

  1. Sánchez Valle questions the viability of the Commonwealth itself. 
  2. Today’s bankruptcy case affirms Congress’ exclusive role in determining  Puerto Rico’s access to debt  restructuring.  
  3. If passed as currently drafted, PROMESA would implement a control board to supervise all of the Commonwealth’s fiscal matters, thus potentially overriding decisions made by locally elected officials.


Updates: 20160614 084146  1. to clarify that Puerto Rico & DC were removed from key sections of the bankruptcy code, but not all of it. 2. add nut graph on background of Franklin.


Additional coverage:

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Recommended Citation: Gil Hall, “SCOTUS Rules PR’s Bankruptcy Law Invalid”


About Gil Hall

Currently writing book on PR crises. Working title: "Los Pertrechos: the Story of an Economy". Polyglot prone to prolixity in English, German &, Spanish. Based between San Juan and North Carolina. MBA/MHA.