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Noah Feldman: Puerto Rico — A quasi-colony
June 18, 2016
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Last week the Supreme Court insulted Puerto Rico by saying its people aren’t sovereign. This week the court added injury to the insult, denying Puerto Rico access to federal bankruptcy laws that would have created a path to recovery for its struggling utilities.

The decision on Monday passed the ball to Congress to change the law or arrange a bailout. At the same time, it underscored the outrageousness of Puerto Rico’s distinct legal status as a quasi-colony: the commonwealth will have to lobby a Congress in which its residents, US citizens all, have no representation.

The underlying legal situation always posed a high hurdle for Puerto Rico, which in 2014 passed a Recovery Act to enable municipalities and utilities associated with the commonwealth to declare bankruptcy. A federal district court and then the US Court of Appeals for the First Circuit both struck down the Puerto Rico law as invalid under the federal bankruptcy code.

Federal bankruptcy is available to municipalities within the 50 states. Puerto Rico had the same capacity between 1933 and 1984. But that year, Congress amended the law to exclude Puerto Rico from using chapter 9, part of the code that authorises states to let their municipalities go bankrupt.

Puerto Rico owes some $73 billion, a good chunk of it through its utilities, which are equivalent to municipalities for bankruptcy purposes. The stakes of its attempted bankruptcy were therefore extremely high.

Justice Sonia Sotomayor, the court’s lone member of Puerto Rican descent, dissented in the bankruptcy case as she did in the earlier one about sovereignty. At the oral argument in March, she had pretty much admitted that federal law prohibited Puerto Rico from using the federal bankruptcy code. But she argued that the same law should be interpreted to allow Puerto Rico to make its own bankruptcy rules.

Her position went even further than that of First Circuit Judge Juan Torruella, who is not merely of Puerto Rican descent but is himself Puerto Rican. Torruella concurred in the appellate court’s decision against the commonwealth, writing separately only to express his outrage with the state of the law, not to endorse a creative way out of it.

In Monday’s opinion for the court, Justice Clarence Thomas went with the plain meaning. In practice, the court’s holding means that only Congress can alter the situation in which Puerto Rico finds itself. That’s good news for Puerto Rico’s creditors, at least for the moment. In principle, they are due 100 cents on the dollar. (Of course if Puerto Rico defaults, that’s another matter.)

Sotomayor’s dissent began by clarifying the consequences of the court’s holding. Without bankruptcy, she wrote, Puerto Rico and the utilities “will be unable to pay for things like fuel to generate electricity, which will lead to rolling blackouts.” Other vital public services “will be imperiled,” she continued, “including the utilities’ ability to provide safe drinking water, maintain roads, and operate public transportation.”

She then laid out the same creative-but-doubtful reading of the law that she urged at oral argument. As a matter of statutory language it’s hard to sustain. But Sotomayor argued that the reason to read the law this way was to enforce Puerto Rico’s sovereignty. Otherwise, she said, Puerto Rico’s government “is left powerless and with no legal process to help its 3.5 million citizens.”

Sotomayor also pointed out in a footnote that no one knows why Congress denied Puerto Rico the bankruptcy option in 1984.

Justice Ruth Bader Ginsburg joined Sotomayor’s dissent. That’s a bit surprising, given that Ginsburg tends to be a stickler for the letter of the law.

The importance of the case has nothing to do with the technicalities of statutory interpretation. It has to do with Puerto Rico’s bizarre, indefensible legal status. As the Supreme Court once embarrassingly put it, the commonwealth is legally “foreign in a domestic sense.” This self-contradictory formulation captures the legal strangeness of the island.

Puerto Rico’s unique position matters for two reasons. First, Congress almost certainly couldn’t deny just one state the right to put its utilities into bankruptcy. States are entitled to equal dignity and equal legal treatment. Puerto Rico, in contrast, can be put at a disadvantage that makes no sense as a matter of policy or law.

Second, Puerto Rico is at a unique disadvantage in lobbying Congress to change, because its citizens can’t elect congressmen or senators.

In this sense, Puerto Rico is a quasi-colony, a political entity governed by a country that doesn’t allow its citizens to participate equally in national decision-making. True, Puerto Ricans are US citizens and can vote if they leave the island, as Sotomayor’s parents did. But that’s no substitute for self-government, whether through independence or statehood.

Tribune News Service

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