Newspaper article International New York Times

Puerto Rico Fights for the Right to Go Bankrupt ; at U.S. Supreme Court, Island Argues It Has Few Options for Debt Relief

Newspaper article International New York Times

Puerto Rico Fights for the Right to Go Bankrupt ; at U.S. Supreme Court, Island Argues It Has Few Options for Debt Relief

Article excerpt

In court on Tuesday, Puerto Rico argued that its exclusion from Chapter 9 in the bankruptcy code leaves the island with few financial options.

Debt-laden Puerto Rico went toe to toe with its creditors at the United States Supreme Court on Tuesday, arguing that it had been wrongly locked out of the bankruptcy courts, the only place it could reasonably expect to restructure its crushing debt.

"We've talked a lot about legal principles," said the lawyer Christopher Landau, summing up his arguments on behalf of the commonwealth. "But this is also a flesh-and-blood situation in Puerto Rico."

Hanging on the outcome, he said, were questions like "whether people in a village in Puerto Rico will be able to get clean water."

Puerto Rico is struggling with $72 billion in debt and has been saying for more than a year that it needs to restructure at least some of it under Chapter 9, the part of the bankruptcy code for insolvent local governments. But Puerto Rico cannot do so, because Chapter 9 specifically excludes the commonwealth, although it is unclear why.

In 2014, the island tried to get around that exclusion by enacting its own version of a bankruptcy law, designed for its big public utilities, which account for about $26 billion of the total debt. But that attempt ran afoul of yet another provision of the code, which says that only Congress can enact bankruptcy laws.

"Congress has shut the door," Mr. Landau said. "There is no door for Puerto Rico, and no key for Puerto Rico."

Many of the justices' questions, and the parties' responses, involved possible rationales for tying Puerto Rico's hands, as Congress went out of its way to do in 1984. Its amendment that year also barred the District of Columbia, without leaving any legislative history or indication of intent.

"Why would Congress preclude Puerto Rico from Chapter 9?" asked Chief Justice John G. Roberts Jr.

"Why would Congress put Puerto Rico in this never-never land?" asked Justice Ruth Bader Ginsburg. "Why in the world? What explains Congress wanting to put Puerto Rico in this anomalous position of not being able to restructure its debt?"

"It's the question that everyone asks when they pick up this case," Mr. Landau said.

He and the lawyer representing Puerto Rico's creditors, Matthew D. McGill, agreed that no one knew for sure, but both offered theories.

Mr. McGill said the 1984 amendment was not all that mysterious if you considered that Congress had a long history of micromanaging Puerto Rico's indebtedness. He cited a 1917 federal law that specifically limited the amount of debt that Puerto Rico could take on, which remained in force until Puerto Rico ratified its own constitution in 1952.

He also said that Congress had tacitly encouraged the widespread purchasing of Puerto Rican debt, by permitting Puerto Rico to market its bonds as triple-tax-exempt in all American states and cities. …

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