The unprecedented financial crisis in the Commonwealth of Puerto Rico has required an equally unprecedented response from both creditors and the U.S. government. With over $70 billion of indebtedness outstanding, Puerto Rico’s debt level is roughly seven times that of Detroit when it filed for bankruptcy. “Factbox—Puerto Rico versus Detroit: What’s Different?,” Reuters (May 3, 2017). Unlike Detroit, however, it does not have the benefit of U.S. Bankruptcy Code Chapter 9 to help it navigate through this calamity.
Chapter 9 of the Bankruptcy Code provides for and governs municipal bankruptcies.11 U.S.C. §§901-946. It does not cover states (or commonwealths), nor, due to a notable exception to the definition of “State,” does it cover municipalities or government corporations of Puerto Rico. In mid-2015 we discussed in this column an attempt by Puerto Rico to bridge this gap by enacting its own municipal debt adjustment and restructuring law called the Puerto Rico Corporation Debt Enforcement and Recovery Act. See Barbara M. Goodstein and Christophe Wassaf, “Puerto Rico Confronts a Dilemma of Constitutional Proportions” 254 N.Y.L.J. 25 (Aug. 6, 2015). But the U.S. Supreme Court in Puerto Rico v. Franklin Cal. Tax-Free Trust, 136 S. Ct. 1938 (2016), subsequently quashed that attempt, finding the act preempted by the U.S. Bankruptcy Code.
