Sunday, May 1, 2016

BREAKING Puerto Rico Will Declare Bankruptcy Tomorrow (Sort Of) and the Legal Nightmare It Will Launch

Puerto Rico will default on a bond payment tomorrow. The governor has declared a debt moratorium for the island's Govt. Development Bank.

The debt moratorium is being declared rather than a bankruptcy because the island is not allowed to technically file bankruptcy.

Politifact explains the fascinating history that prevents from Puerto Rico declaring bankruptcy :
Mystery surrounds whether, back in 1984, the former senator from South Carolina knowingly deprived Puerto Rico of bankruptcy protections that every U.S. state enjoys.

It’s crunch time for Puerto Rico. The island territory needs to pay bondholders $422 million on May 1. It doesn’t have the cash, it can’t use bankruptcy to reschedule its payments, and Congress seems unlikely to craft a solution in time to avoid a massive default...

In a 2015 ruling, the judges of the 1st Circuit Court of Appeals provided some very helpful background.

In March 1984, the House passed its version of a bankruptcy bill. That version did not have the Puerto Rico exemption.

Then on May 21, 1984, the judges wrote that Thurmond introduced the package of changes that included the text at the center of this controversy.

"On the day that he introduced the amendment, Senator Thurmond addressed the Senate to explain several of its numerous stipulations, yet said little about the newly added Puerto Rico exemption," the judges wrote.

In fact, we went through the Congressional Record for that day (thank you, Internet Archive). Thurmond said less than little. He said nothing.

The record shows that after Thurmond’s amendment, the exemption became part of the final legislation.

While this seems to point the finger at Thurmond, there’s more to this story.  Aside from introducing the overall amendment, Thurmond might not have had much to do with the text. It had been introduced four years before, and not in the Senate, but in the House.

Experts question whether Thurmond actually understood the significance of the amendment. To see why, we have to go back to 1978.

That year, Congress gave the bankruptcy law a complete overhaul. As often happens with major legislation, various gaps and ambiguities emerged and, in 1979, the Senate passed a bill to tidy up the loose ends. Among the dross, the Senate defined states to include Puerto Rico, the District of Columbia and any territory or possession of the United States.

That legislation moved over to the House, and here the trail becomes murky. Bankruptcy law professor Stephen Lubben at Seton Hall University traced the twists and turns in a 2014 article.

"In July 1980, the House Judiciary Committee returned with an ‘amendment’ to the Senate bill that struck the entire Senate text and replaced it with the Judiciary Committee’s desired text, including a new definition of ‘state,’ " Lubben wrote.

The House version, under Democratic control, had the Chapter 9 bankruptcy exclusion for Puerto Rico and the District of Columbia.

That bill never passed, but in April 1981, Lubben found that the exclusion language "resurfaced" in the Senate.

"This exclusion was never discussed by Congress, at least publicly, and the language apparently simply materialized as a result of the House Judiciary Committee’s extensive revision of the 1979 Senate ‘technical corrections’ bill," Lubben wrote.

Lubben told us that the text in Thurmond’s 1984 amendment "was essentially the same language that was kicking around since 1980."

"It’s not even clear that the parties even understood what was going on," Lubben said. "The only thing we can say for certain is the change happened without a whole lot of thought behind it."...

A final mystery — if you’ve followed the trail this far, you will notice that in 1984, the House version of the bill didn’t have the Puerto Rico exclusion. The logical question is, why was it dropped when the House was the first to add it in 1980?

We wish we knew.

Bottom line: Because Puerto Rico can not technically declare bankruptcy the declared "moratorium" sets up a legal nightmare that may result in the  people of Puerto Rico being squeezed for the irresponsible borrowing of its government.



  1. Declaring bankruptcy is the right thing do to so of course there is a snag in the process.

  2. First off, I have ZEEERO sympathy for the government of Puerto Rico. But that having been said, all this nit-picking about what is law and what is not begs the question: "What about the 14th amendment? Or the 16th?" It seems like the legality of these is somewhat up for debate. Let's have one.

  3. They shouldn't have structured all that debt as student loans.

  4. Whether one can declare bankruptcy or not, if the money's not there it's not there.