Commentary: “No Way Out?,” or “When Can You Be Partially a ‘State’?”: Supreme Court Strikes Down Puerto Rico Recovery Act

Yesterday, in Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, the U.S. Supreme Court took away the last existing option for Puerto Rico to restructure its debt, unless Congress steps in, according to a commentary by Prof. Charles Tabb of the University of Illinois College of Law. The Court, by a 5-2 vote, with Justice Thomas writing the majority opinion, struck down the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (“Recovery Act”), a law enacted in 2014 to enable Puerto Rico’s public corporations to restructure their debt. The Court held that Puerto Rico’s Recovery Act was preempted by § 903 of chapter 9 of the Bankruptcy Code – even though Puerto Rico is explicitly excluded from authorizing its municipalities to seek chapter 9 eligibility. Puerto Rico’s extreme fiscal crisis has been front-page news, with the Commonwealth owing over $70 billion in debt, $2 billion of which must be paid in less than three weeks, on July 1. The reality is that Puerto Rico has no apparent way to pay that debt. It almost certainly will default, with possibly severe consequences for its citizens, unless some form of debt restructuring is authorized. Just last week, the House of Representatives passed a rescue bill, known by its acronym as PROMESA (the Puerto Rico Oversight, Management, and Economic Stability Act), which has now gone to the Senate for consideration. After yesterday's Supreme Court opinion, that rescue bill is, as of now, the only hope for the essentially bankrupt Commonwealth.