The territory of Puerto Rico, like the 50 States, cannot declare bankruptcy. States, however, can authorize sub-units of their governments, such as utilities or municipalities, to take advantage of the Federal Bankruptcy Code. This option does not exist in Puerto Rico, which, as a U.S. territory, is excluded.
In June of 2014, with its Government Electric Power Authority unable to meet debt obligations, the Governor of Puerto Rico proposed and the Legislative Assembly passed in less than one day a law purportedly enabling some Government corporations (agencies) to unilaterally dismiss their financial obligations. The law was named the Puerto Rico Debt Enforcement and Recovery Act.
Puerto Rico’s Government Development Bank explained at the time that “the government of Puerto Rico needs a new set of tools and a clear legislative path to help public corporations manage their debt,” and that the new law “makes the path to sustainability more certain.”
This certainty has proved to be elusive. On February 6, 2015, Judge Francisco Besosa of the U.S. District Court in Puerto Rico stuck down the new law, ruling that it is preempted by the Federal Bankruptcy Code, provided for by the U.S. Constitution’s Bankruptcy Clause, and finding it likely to be contrary to the Constitution’s Contracts and Takings Clauses.
Judge Besosa’s 75-page decision included a brief summary of the Federal Bankruptcy Code, observing that “Nothing in its legislative history indicates that Congress intended to exempt Puerto Rico from section 903(1)’s expressly universal preemption purview,” and concluding that “Congress’s decision not to permit Puerto Rico municipalities to be Chapter 9 debtors…reflects its considered judgment to retain control over any restructuring of municipal debt in Puerto Rico.”
In his ruling, Judge Besosa holds that the Debt Enforcement and Recovery Act is preempted by the Federal law and that, in the Judge’s words, it is “therefore unconstitutional pursuant to the Supremacy Clause of the United States Constitution.”
Article Six, Clause 2 of the Constitution, commonly known as the Supremacy Clause, provides: “The Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”
In short, Federal law reigns supreme in Puerto Rico. As in the States, a U.S. territory cannot enact a law that contradicts a Federal law. As this recent example demonstrates, the approach of the Debt Enforcement and Recovery Act — granting the territory authority at the expense of Federal power – is unconstitutional. It cannot be implemented. According to Judge Besosa, “[t]his is not a close case.”
Judge Besosa’s ruling is timely. Over a year ago, Congress enacted a law providing for a new plebiscite to be held in Puerto Rico, funded with $2.5 million in Federal resources, and requiring the United States Department of Justice to first approve the language to be used on the ballot to ensure that the options to be offered to voters “are not incompatible with the Constitution, laws, and policies of the U.S.”
The Justice Department’s oversight reflects decades of debate and dispute over the “Commonwealth” definitions included – or sought to be included – on previous plebiscite ballots in 1967, 1993 and 1998. No “Commonwealth” definition ever included on a plebiscite ballot has been accepted by Congress or the White House, although Federal approval is a prerequisite for moving forward with a “Commonwealth” plan.
Yet there is no need to go back far in history to review unconstitutional or nonviable “Commonwealth” options. The recently enacted bankruptcy law is proof that support remains in Puerto Rico for options that are not constitutional, and these options could be placed on a plebiscite ballot absent oversight by the U.S. Department of Justice. If a “Commonwealth” proposal is included on a ballot and wins, it would meet the same fate as the Debt Enforcement and Recovery Act.