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First Circuit Affirms Ruling Rejecting Puerto Rico Bankruptcy Law

The First Circuit Court has affirmed a lower court ruling striking down a Puerto Rican bankruptcy law, holding that Chapter 9 of the the federal bankruptcy code preempts the U.S. territory’s law.

In rejecting the insular law, the court acknowledged defendants’ claim that this result leaves Puerto Rico without relief.  The opinion also noted that Congress may provide a remedy: “Although [federal law] denies to Puerto Rico the power to authorize its municipalities to pursue federal Chapter 9 relief, Puerto Rico may turn to Congress for recourse. Indeed, Congress preserved to itself that power to authorize Puerto Rican municipalities to seek Chapter 9 relief. Puerto Rico is presently seeking authorization or other relief directly from Congress.”

The First Circuit concluded that “[i]n denying Puerto Rico the power to choose federal Chapter 9 relief, Congress has retained for itself the authority to decide which solution best navigates the gauntlet in Puerto Rico’s….We must respect Congress’s decision to retain this authority.”

On February 6, 2015, Judge Francisco Besosa of the U.S. District Court in Puerto Rico stuck down the Puerto Rico Debt Enforcement and Recovery Act, which sought to provide some insular agencies with authority to restructure their financial obligations. The judge ruled that the territory’s law is preempted by the Federal Bankruptcy Code, provided for by the U.S. Constitution’s Bankruptcy Clause, and found the new law also likely to contradict the Constitution’s Contracts and Takings Clauses.

Upon passage of the territory’s law, Puerto Rico’s Government Development Bank explained 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.”

In a concurrence, Judge Juan R. Torruella  agreed that Puerto Rico’s Recovery Act is invalid, but noted that Puerto Rico’s exclusion from the Federal Bankruptcy Code is “equally invalid” and unconstitutional.  “Not only do [amendments made the the Federal Bankruptcy Code in 1984] attempt to establish bankruptcy legislation that is not uniform with regards to the rest of the United States, thus violating the uniformity requirement of the Bankruptcy Clause of the Constitution, but they also contravene both the Supreme Court’s and this circuit’s jurisprudence in that there exists no rational basis or clear policy reasons for their enactment.”

Judge Torruella also took issue with what he calls “the majority’s proposal that Puerto Rico simply ask Congress for relief,” calling such a suggestion “preposterous given Puerto Rico’s exclusion from the federal political process.”  He concluded:

“The majority’s disregard for the arbitrary and unreasonable nature of the legislation enacted in the 1984 Amendments showcases again this court’s approval of a relationship under which Puerto Rico lacks any national political representation in both Houses of Congress and is wanting of electoral rights for the offices of President and Vice-President. That discriminatory relationship allows legislation — such as the 1984 Amendments — to be enacted and applied to the millions of U.S. citizens residing in Puerto Rico without their participation in the democratic process. This is clearly a colonial relationship, one which violates our Constitution and the Law of the Land as established in ratified treaties.”

Read the First Circuit opinion here.

Read about the lower court’s ruling here.

We appreciate Zealot51’s catching the typo, now corrected, and we agree that “the Boston-based United States Court of Appeals for the First Circuit, which handles cases originating in Puerto Rico and four northeastern states” is a fuller description of the First Circuit.  


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