What Kind Of State Is Puerto Rico In?

“The law is a ass – a idiot”. That famous phrase from Charles Dickens’ Oliver Twist pretty much describes the situation Puerto Rico finds itself in when it comes to dealing with the crippling $70 billion debt that it currently owes. The economy is in pretty bad shape already and, if Puerto Rico does default on its debt, government employees will be let go and pensions and benefits will not be paid. So, an orderly restructuring through bankruptcy is the best alternative if it were possible. On Monday, the Supreme Court ruled in 5-2 decision that a law that Puerto Rico passed in 2014 that would have allowed Puerto Rico’s public entities to seek bankruptcy protection was in violation of the federal bankruptcy law.

US Bankruptcy Code allows a state to seek protection for its public entities but a 1984 amendment passed by Congress made it clear that the word “state” did not include Puerto Rico or other US territories.  On the other hand, federal law precludes “states” from enacting their own bankruptcy laws. Puerto Rico argued that the federal law’s use of the word “states” did not include Puerto Rico and therefore they were entitled to write their onw bankruptcy laws.  The Supreme Court did not agree. So, as far as the Bankruptcy Code goes, Puerto Rico is not a “state”; but as far as federal law goes, Puerto Rico is a “state”.  Puerto Rico is not covered by US bankruptcy law, but US law says it can’t write its own bankruptcy law. And if that’s not bad enough, because of this Supreme Court ruling, Puerto Rico will have to rely on a dysfunctional US Congress in an election year to change the law and allow bankruptcy in order to avoid the devastating effects of defaulting on their debt.