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SCOTUS Kills Puerto Rican Debt Plan as Gov. Appeals to U.N.

By Casey C. Sullivan, Esq. on June 13, 2016 1:00 PM

The Supreme Court ruled this morning that Puerto Rico cannot rely on its own bankruptcy legislation in order to restructure its public utility debt. In a five-to-two vote, from which Justice Alito abstained, the Court held that the federal Bankruptcy Code pre-empted Puerto Rico's attempts to deal with its public debts under its own bankruptcy laws -- even though the Code excludes Puerto Rican municipalities from its protections.

The ruling comes as Puerto Rico grapples with a fiscal crisis caused, in part, by $72 billion dollars in outstanding public debt, $20 billion of which is from its public utilities. The defeat follows another blow to Puerto Rico's limited independence, dealt out by the Supreme Court last Thursday. There, the Court ruled that Puerto Rico's sovereignty, at least as far as prosecutorial powers were concerned, stemmed from Congress, not the island's people. In response, Puerto Rico's governor has said he will bring his complaints regarding Puerto Rican self-government to the United Nations.

Not a State, but a State Anyway

Puerto Rico occupies a unique and complicated place in American's political structure. It is not a state and not fully a colony. Its people are American citizens, but cannot vote in federal elections (in any meaningful way) when living in Puerto Rico. It has its own constitution and laws, but does not have the status of an independent state.

That complicated status has twice been the subject of Supreme Court rulings in the past two weeks, both of which have resulted in limiting self-governance for the Estado Libre Asociado. On Thursday, the Court ruled that Puerto Rico was not a state-like sovereign for purposes of the dual-sovereignty doctrine, meaning it could not prosecute criminals already tried in federal courts, as states can.

But while Thursday's ruling made Puerto Rico not a state when it came to sovereignty, today's ruling was that Puerto Rico was a state, at least so far as Chapter 9 of the Bankruptcy Code is concerned -- and despite the fact that Congress had specifically amended the Code in 1984 to exclude Puerto Rico from Chapter 9's benefits.

Chapter 9 of the Bankruptcy Code allows municipalities to restructure their debts in bankruptcy. It's the chapter of the code that permitted Detroit, for example, to begin restructuring $18-20 billion in its public debts. In a 1984 amendment to the law, Congress changed the definition of state to exclude Puerto Rico "for the purpose of defining who may be a debtor under chapter 9."

All the Drawbacks, None of the Benefits

Puerto Rico interpreted that exclusion to mean that Puerto Rico was no longer a "state," not just for Chapter 9, but for the Code's preemption clause as well. That clause prohibits states from creating their own municipal bankruptcy plans. Puerto Rico's exclusion, the island argued, allowed Puerto Rico to create its own debt restructuring law, which it did with 2014's Puerto Rico Public Corporations Debt Enforcement and Recovery Act.

The Supreme Court, however, took a different view. In a majority opinion penned, as predicted, by Justice Thomas, the Court ruled that Puerto Rico's exclusion from Code was much more limited.

Puerto Rico has long been considered a state under the Bankruptcy Code, the Court explained, and the 1984 amendments did not change that, outside of the narrow exclusion from defining who may be a debtor. "Puerto Rico is no less a 'State' for purposes of the pre-emption provision than it was before Congress amended the definition," Justice Thomas wrote.

To Congress, or the U.N.

The ruling puts increased pressure on Congress to act on Puerto Rico's financial crisis. Congress is currently considering legislation that would establish a federal control board to manage the island's debt.

But even that plan is controversial, as it too would impose severe limits to Puerto Rican self-governance. Under the legislation, a panel of seven members would be appointed by politicians, including the president, that Puerto Rico cannot vote for. Those seven would have veto power over decisions made by Puerto Rico's elected government, if the panel thought they could hurt the island's ability to repay its debts. And only one member of the panel would have to be a Puerto Rican resident.

Meanwhile, Governor Alejandro Garcia Padilla has requested the opportunity to bring Puerto Rico's case to the United Nations Special Committee on Decolonization, to argue that the Supreme Court's ruling on Puerto Rican sovereignty last Thursday undermines Puerto Rico's right to self-government. In a statement, he writes:

[T]he opinion is contradictory because it recognizes the self-government powers that Puerto Rico enjoys, which the Court reiterates are similar to those of the states, and, at the same time, draws the source of that self-government, in specific cases, to the sovereignty of Congress, not to the sovereignty of the people of Puerto Rico.

This dichotomy must be clarified, because in the 21st century, it is unacceptable for the United States, the international community and Puerto Rico that the political sovereignty of a people depend on the opinion of another people's legislature, even if only for the criminal prosecution of its citizens.

Should Garcia Padilla testify before the committee's June 20th session, expect today's decision to be condemned in similar terms.

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