Who Should Save Puerto Rico?

Today’s Supreme Court ruling offered two options: Congress or the Court.

Puerto Rico is in the middle of a debt crisis, driven in part by unsustainable debts of its public utilities.

The island is an unusual legal bind. In the 50 states, federal law allows municipalities and public utilities to enter into agreements with state governments to access bankruptcy processes. This happened famously in Detroit, where Michigan Gov. Rick Snyder imposed supervision on the city government in exchange for getting the bankruptcy go-ahead. In contrast, Puerto Rico lacks the greenlighting power of Michigan, but is provided no other way to access federal bankruptcy protection. Puerto Rico’s government tried to work around this by passing a territorial law in 2014 creating a parallel bankruptcy process.

Creditors challenged Puerto Rico’s new law, and the case made its way up to SCOTUS, where a majority and minority split on their approach.

The question was whether federal law is to be interpreted as dis-empowering Puerto Rico without offering an alternative. If yes, then Congress left a gap in the law that it must work to fix before Puerto Ricans can get relief. If not, then the Court must take it on itself to find a solution most consistent with the social purpose of bankruptcy protections.

Clarence Thomas (joined by a liberal-conservative Court majority of Roberts, Kennedy, Breyer, and Kagan) said yes:

Puerto Rico’s municipalities cannot satisfy the requirements of Chapter 9’s gateway provision until Congress intervenes… our constitutional structure does not permit this Court to “rewrite the statute that Congress has enacted.” … That statute precludes Puerto Rico from authorizing its municipalities to seek relief under Chapter 9. But it does not remove Puerto Rico from the scope of Chapter 9’s preemption provision. Federal law, therefore, pre-empts the [Puerto Rican 2014] Recovery Act.

Sonia Sotomayor (joined by Ginsburg) said no. The only justice of Puerto Rican descent on the Court, she wrote that what mattered most is the consequences on the ground:

When debtors face untenable debt loads, bankruptcy is the primary tool the law uses to forge workable long-term solutions. By requiring a debtor and creditors to negotiate together and forcing both sides to make concessions within the limits set by law, bankruptcy gives the debtor a “fresh start,” discourages creditors from racing each other to sue the debtor, prohibits a small number of holdout creditors from blocking a compromise, protects important creditor rights such as the prioritization of debts, and allows all parties to find equitable and efficient solutions to fiscal problems…

These concerns are starkly presented in the context of municipal entities like public utilities. While a business corporation can use bankruptcy to reorganize, and, if that fails, fold up shop and liquidate all of its assets, governments cannot shut down power plants, water, hospitals, sewers, and trains and leave citizens to fend for themselves. A “fresh start” can help not only the unfortunate individual debtor but also—and perhaps especially—the unfortunate municipality and its people…

For Sotomayor, leaving Puerto Rico in a legal vise was untenable and finding that the island had the ability to help itself was the correct interpretation:

Pre-emption cases may seem like abstract discussions of the appropriate balance between state and federal power.But they have real-world consequences. Finding preemption here means that a government is left powerless and with no legal process to help its 3.5 million citizens…

Congress could step in to resolve Puerto Rico’s crisis. But, in the interim, the government and people of Puerto Rico should not have to wait for possible congressional action to avert the consequences of unreliable electricity,transportation, and safe water—consequences that members of the Executive and Legislature have described as a looming “humanitarian crisis.” … Statutes should not easily be read as removing the power of a government to protect its citizens.

Is this just the latest instance of the Court majority “comforting the comforted” (the hedge fund creditors) and “afflicting the afflicted” (Puerto Rico), to paraphrase Ian Milhiser’s latest book on SCOTUS history? Perhaps. The Court majority seems to be putting legal formalism over consequentialism in at least two ways: ignoring gridlock in Congress, and ignoring the indignities Puerto Ricans are suffering.

But it’s also possible that a more parochial concern is at play. A close read of Thomas’ opinion reveals that the Court may be executing just the latest in a decades’ long turf war with Congress.

Let’s review. During FDR’s first year in office, Congress began considering legislation to empower municipalities to restructure their debts. The legislation passed in 1934 with bipartisan support.

But in 1936, the anti-New Deal Supreme Court struck down the law. As Thomas wrote:

Congress has tailored the federal municipal bankruptcy laws to preserve the States’ reserved powers over their municipalities. This Court struck down Congress’ first attempt to enable the States’ political subdivisions to file for federal bankruptcy relief after concluding that it infringed the States’ powers “to manage their own affairs.” Ashton v. Cameron County Water Improvement Dist. No. One, 298 U. S. 513, 531 (1936). Congress tried anew in 1937, and the Court upheld the amended statute as an appropriate balance of federal and state power. See United States v. Bekins, 304 U. S. 27, 49–53 (1938). Critical to the Court’s constitutional analysis was that the State had first authorized its instrumentality to seek relief under the federal bankruptcy laws…

The States’ powers are not unlimited, however. The federal bankruptcy laws changed again in 1946 to bar the States from enacting their own municipal bankruptcy schemes. The amendment overturned this Court’s holding in Faitoute Iron & Steel Co. v. Asbury Park, 316 U. S. 502, 507–509 (1942) (rejecting contention that Congress occupied the field of municipal bankruptcy law). In Faitoute, the Court held that federal bankruptcy laws did not preempt New Jersey’s municipal bankruptcy scheme, which required municipalities to seek relief under state law before resorting to the federal municipal bankruptcy scheme. Ibid. To override Faitoute, Congress enacted a provision expressly pre-empting state municipal bankruptcy laws.

In other words, Thomas’ opinion can be read as a memo to Congress: “if you’re going to go against us twice, then you solve the problem you created.”

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Just as a sidebar, there’s an interesting distinction between Thomas’ approach (“there’s a gap in the law – go fill it”) and international law. Many international legal forums, including investor-state dispute settlement at the World Bank, follow the non liquet doctrine. Translated out of Latin, this means adjudicators can’t find that no law is applicable to the case. Instead, they must construct a legal rule if the written law appears vague or incomplete. The legal and political issues aren’t exactly parallel, but my prior belief would have been that the ability to find a gap in the law would benefit sovereign defendants. Thomas is proving that prior wrong!

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