The Lawletter Vol 41 No 10
On June 13, 2016, in Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, 136 S. Ct. 1938 (2016), the United States Supreme Court was asked to decide whether the Commonwealth of Puerto Rico should remain a "state" for purposes of 11 U.S.C. § 903(a), the subsection of Chapter 9 of the United States Bankruptcy Code that states that "a State law prescribing a method of composition of indebtedness of such municipality may not bind any creditor that does not consent to such composition." This issue came to the Court on an injunction proceeding by bondholders suing the Puerto Rico government to enjoin the application of the Puerto Rico Corporation Debt Enforcement and Recovery Act (the "Puerto Rico Act"). Enacted by Puerto Rico in an effort to deal with its extraordinary financial crisis and, specifically, to create its own bankruptcy scheme to restructure the debt of its insolvent public utilities. The bondholder's issue was presented in federal court notwithstanding an amendment to the Code to exclude Puerto Rico from the definition of a "state." See 11 U.S.C. § 101(52).
The U.S. Supreme Court held that Puerto Rico remained a "state" under 11 U.S.C. § 903(1) and concluded that, as such, federal bankruptcy law preempted the Puerto Rico Act. This meant that Puerto Rico could not enact laws that allowed for the nonconsensual restructuring of municipal debt. Further, while 11 U.S.C. § 101(52) provides that Puerto Rico is not a "state" for purposes of being a debtor under Chapter 9 of the Bankruptcy Code, it cannot enact its own municipal bankruptcy scheme.
On June 30, 2016, just two weeks after the U.S. Supreme Court decision, President Obama signed into law the bipartisan Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") (Pub. L. No 114-187). The law imposed an immediate stay of all litigation over Puerto Rico's defaults and collection matters until February 15, 2017 and can be extended for up to 135 more days. The legislation requires the President to appoint members to a board to oversee Puerto Rico's debt restructuring efforts. The board will have broad authority in making fiscal decisions for the Puerto Rico government, and it can negotiate directly with the country's creditors.
Puerto Rico has been in a serious recession for almost 10 years, is experiencing more than $70 billion in debt, and has a poverty rate of 45%.