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Puerto Rico and the Netherworld of Sovereign Debt Restructuring

By G. Mitu Gulati (Duke Law School) and Robert K. Rasmussen (University of Southern California Gould School of Law)

Puerto Rico has incurred debt well beyond its ability to repay. It attempted to address its fiscal woes through legislation allowing the restructuring of some its debt. The Supreme Court put a stop to this effort, holding that Congress in the Bankruptcy Code barred the Commonwealth from enacting its own restructuring regime. Yet all agreed that the Bankruptcy Code did not provide anything in its place. Congress quickly passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in an attempt to address Puerto Rico’s fiscal ills by enacting a special proceeding to deal with Puerto Rico’s financial woes. The price Puerto Rico paid, however, was steep—the imposition of a control board to direct, in effect, the Commonwealth’s finances and any insolvency proceedings. In light of the conditions that gave rise to PROMESA, we explore whether, in the first place, Congress has the power to bar Puerto Rico from enacting a restructuring mechanism without offering an alternative. We submit that the answer is no. When it comes to a state, the Supreme Court has held the power to issue debt necessarily implies the power to restructure that debt. Congress can preempt that power so long as it puts something in its place. To preempt and leave nothing runs afoul of our federal system. The same reasoning, with even greater force, applies to Puerto Rico. The federal government entered into a compact with the citizens of Puerto Rico, granting them, among other things, the power to issue debt. Puerto Rico implicitly received the power to restructure this debt. Congress could offer a substitute to any regime that Puerto Rico might enact, but it cannot leave the Commonwealth without any means to address its fiscal affairs.

The full paper is available here.


For previous Roundtable coverage of Puerto Rico’s debt crisis, see “Puerto Rico Update: White House Weighs in with a Proposal,” “Puerto Rico Public Corporation Debt Enforcement and Recovery Act,” and “U.S. District Court Holds that Puerto Rico’s Recovery Act Is Unconstitutional.”

Written by:
Editor
Published on:
May 9, 2017

Categories: Bankruptcy Roundtable Updates, International and Comparative, Municipal BankruptcyTags: Mitu Gulati, PROMESA, Puerto Rico, Robert Rasmussen

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