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The GOP Punts on Puerto Rico – Stay Tuned for the “Supremes”

December 17, 2015 Blog

With Puerto Rico just days away from a potential $1 billion default, the Republican controlled Congress turned its back on the island commonwealth this week by failing to include any provisions for a much needed bankruptcy proceeding into the federal spending bill.

“Republican leaders in Congress told Puerto Rico’s nearly bankrupt government to drop dead on Tuesday,” wrote Daily News columnist Juan Gonzalez. “Despite feverish efforts by the White House and congressional Democrats to insert a provision into the federal spending bill that would allow the Caribbean island territory to tackle its massive $72 billion debt through bankruptcy restructuring, top Republicans in the Senate scuttled it at the last minute.”

“Their refusal now leaves Puerto Rico just two weeks away from the biggest municipal bond default in American history,” according to Gonzalez.

Municipal bankruptcy laws do not apply to Puerto Rico.

On January 1, nearly $1 billion in Puerto Rico debt service payments come due, noted Gonzalez and a number of other journalists. There is next to no possibility for Puerto Rico’s government to meet those obligations. Indeed, the only way for Puerto Rico’s government to make those bond payments is to further decimate basic services to the island’s 3.5 million U.S. citizens, according to Gonzalez.

And just as Puerto Rico is scrambling to avoid a debt default and economic catastrophe on the island, the United States Supreme Court by June will decide a major issue affecting the island’s debt and the question of its ability to have some form of bankruptcy protection.

The U.S. Supreme Court has agreed to accept the case that will determine whether the Island Commonwealth can authorize its public utilities, or PREPA, to seek bankruptcy restructuring.

In 2014, Puerto Rico passed a local debt-restructuring law, which was then struck down by two lower federal courts. That law would have allowed some public agencies to ask bondholders to accept losses on the securities they hold. The law that is being challenged would affect about $22 billion of the $70 billion in debt that Puerto Rico is seeking to impose losses on for holders, according to Michelle Kaske, who has been following the Puerto Rico debt crisis for Bloomberg.

“The U.S. Supreme Court’s decision to review a Puerto Rico local debt-restructuring law rejected by a lower court risks prolonging negotiations with creditors to reduce the island’s debt obligations just as the commonwealth says it is running out of cash,” according to Kaske’s report.

She continues: “The high court earlier this month said it would hear an appeal by the commonwealth to reinstate an island law that would allow some public agencies to ask bondholders to accept losses on the securities they hold. Restoring the law would give the commonwealth additional leverage as it negotiates with mutual funds, hedge funds” and other institutions, Kaske reported.

The lower courts argue that Puerto Rico does not have the authority to create such a law. According to those decisions, the law is in conflict with the United States federal bankruptcy law, which has preeminence or priority over any local law challenging the federal bankruptcy authority.

Any decision by the U.S. Supreme Court would likely be issued at the earliest in June. By that time, PREPA may have already defaulted on hundreds of millions of dollars of debt payments due to bondholders.

Puerto Rico’s debts and problems go well beyond those of its public utility and other public agencies. Puerto Rico is losing thousands of taxpayers each month, who are fleeing to the U.S. mainland. In addition to a shrinking tax base, there is a “brain drain” where younger people and professionals are leaving the island for work. That leaves Puerto Rico with an older population. They are mostly retired folks who are not paying taxes and are suffering huge losses in their investment portfolios and retirement nest eggs, particularly those which contain UBS Puerto Rico Closed End Funds.

While a decision from the U.S. Supreme Court could shed some light on the legalities of Puerto Rico’s restructuring law, it is unlikely to rescue Puerto Rico from its impending financial disaster. The only help which could save the Island might be Congressional action to allow it to file for bankruptcy. And Congress this week emphatically told Puerto Rico that bankruptcy was out of the question.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit