Supreme Court rules Puerto Rico lacks power to implement local bankruptcy law

Well that didn’t take long. In yet another setback for the administration of governor Alejandro Garcia Padilla, the Supreme Court of the United States has ruled against Puerto Rico, this time in the Puerto Rico v. Franklin California Tax-Free Trust, establishing that the territory lacks the power to implement its local municipal bankruptcy scheme.

Held: Section 903(1) of the Bankruptcy Code pre-empts Puerto Rico’s Recovery Act. Pp. 5–15. 9d9

The case hinged on whether Congress’ exclusion of Puerto Rico from the Chapter 9 bankruptcy debtor definition of a state, meant that Chapter 9 in its entirety did not apply to the territory, and therefore did not preempt it from adopting its own local version.

In a five to two ruling the court established that even though Puerto Rico may not use Chapter 9 to restructure debts of its municipalities and utilities, because it is not a state, for purposes of being barred from enacting bankruptcy laws, it is defined as a state. Confused yet?

The case sheds further light on the confusing arrangement of the 1984 law that reformed the United States bankruptcy scheme, and the inexplicable reasoning behind excluding Puerto Rico for part, and not for all.

In addition, the ruling makes it very clear that Puerto Rico’s only way to deal with its economic crisis is by going to Congress, currently considering HR 5278, or PROMESA, in the Senate after being approved in the House of Representatives last week.

If the Supreme Court stops releasing successive opinions about Puerto Rico less than a week apart, we will be able to draft our in-depth analysis on the cases and their repercussions (just kidding, we are done with Puerto Rico cases as far as the Supreme Court is concerned). Stay tuned for more.