Puerto Rico Debt Crisis: Trying to Reconcile Sanchez-Valle with the Puerto Rico Bankruptcy SCOTUS Opinions: Some Preliminary Thoughts

4 Pages Posted: 17 Jun 2016

See all articles by Pedro A. Malavet

Pedro A. Malavet

University of Florida Levin College of Law

Date Written: June 15, 2016


The Supreme Court of the United States issued its long awaited opinion in Sanchez-Valle v. Commonwealth of Puerto Rico last Thursday, June 9, 2016. (Case no. 15-108, 579 U.S. ___ (2016). The six-justice majority ruled, in an opinion authored by Justice Kagan, that although “Puerto Rico today has a distinctive, indeed exceptional status as a self-governing commonwealth” (slip op. at 12) it lacks the “inherent sovereignty” (slip op. at 8) possessed by states and Indian tribes (slip op. at 9) to prosecute criminal offenses. Accordingly, prosecutions for the same criminal acts by both federal and local authorities on the island violate the Double Jeopardy Clause of the Fifth Amendment to the Constitution of the United States.

Without referencing the Insular Cases of the 1901 Term, the majority described Puerto Rico’s political status after the Spanish American War and the Treaty of Paris that ended it as that of a territorial possession under the Territorial (or Territory) Clause of the Constitution of the United States (U.S. Const., Art. IV, § 3, cl. 2). In cases dating to the early part of the 20th century, the court “reasoned that whereas ‘a State does not derive its powers from the Unites States,’ a territory does: The Philippine courts ‘exert[ed] all their powers by authority of’ the Federal Government.” (Slip op. at 11, citing Grafton v. United States, 206 U.S. 333, 354 (1907) brackets and internal quotes original). The same rule was applied to Puerto Rico in Puerto Rico v. Shell Co. (P.R.), Ltd., 302 U.S. 253, 265 (1937). In Sanchez-Valle, the Supreme Court concludes that “Puerto Rico’s transformative constitutional moment [that created the Commonwealth in 1952] does not lead to a different conclusion.” (slip op. at 15).

The majority in Sanchez-Valle states that “the United States and Puerto Rico have forged a unique political relationship, built on the island’s evolution into a constitutional democracy exercising local self-rule.” (Slip op. at 2). The court adds: “Following [the enactment of its constitution of] 1952, Puerto Rico became a new kind of political entity, still closely associated with the United States but governed in accordance with, and exercising self-rule through, a popularly ratified constitution”. (Slip op. at 12). But whatever “local self-rule,” “autonomy,” or “political sovereignty” Puerto Rico may have, it does not have inherent sovereign power because: “But one power Congress does not have, just in the nature of things: It has no capacity, no magic wand or airbrush, to erase or otherwise rewrite its own foundational role in conferring political authority. Or otherwise said, the delegator cannot make itself any less so — no matter how much authority it opts to hand over.” (Slip op. at 17).

Just this week, on Monday, June 13, 2016, the Supreme Court issued another opinion about Puerto Rico, Commonwealth of Puerto Rico, et al. v. Franklin California Tax-Free Trust, et al. The opinion ruled that Puerto Rico was a “State” for purposes of preemption of its own bankruptcy laws by Federal bankruptcy rules, but that the exception that allows “States” to designate debtors is expressly limited to exclude Puerto Rico. Interestingly, neither the majority nor the dissenting justices use the terms “self-rule,” “political sovereignty,” “autonomy” or reference the Territorial Clause at all in their opinions.

So, my initial reaction after reading these two opinions relating to Puerto Rico is that I understand clearly that, despite its reluctance to reference them, the court is not willing to overrule the Insular Cases of 1901 and will continue to apply the rule first articulated by the White plurality in Downes, which was later adopted by a unanimous Supreme Court in Balzac. This conclusion is further supported by the court’s refusal to hear the American Samoa citizenship decision by the D.C. Circuit, as also announced on June 13. (The court declined to issue cert. to review Tuaua v. United States, 788 F.3d 300 (D.C. Cir. 2015) (ruling that citizenship clause of the 14th amendment is not a fundamental right guaranteed to residents of unincorporated territories); cert. denied, no. 15-981. Therefore, Congress continues to have plenary authority to legislate in regard to the U.S. territorial possessions outside the very limited number of fundamental right guarantees for the territorial citizens.

But I am left puzzled. If Puerto Rico does not have “inherent sovereignty” distinct from that of the United States, does its debt not then ultimately belong to the United States? I am inclined to predict that the Supreme Court can and will find some sort of “economic sovereignty” in Puerto Rico, otherwise, the U.S. treasury may have to pay the vulture funds. Additionally, the Treasury role may be subordinate to any requirement in the debt instrument itself that local Puerto Rican assets, including local tax revenues, pension funds and government infrastructure holdings, must first be exhausted for repayment before recourse to any federal funds may be sought.

Which brings me to the next question: Was it legal for Puerto Rico to incur the debt at all? Professor “Nelson Torres-Ríos [of Hostos Community College in New York, has] brought up the 1885 Litchfield v. Ballou case, which held that bonds created in violation of a municipal debt limit do not have to be repaid.” To the extent that whatever local rule Puerto Rico has is based on the 1952 Constitution, what, then, is the significance of its prohibition of deficits or of debt in excess of the 15% of government revenues limit provided in that constitution? Does Congress, pursuant to its Territorial Clause plenary authority over the financial affairs of its colony, have the ability expressly to oblige Puerto Rico to pay any debt, even if incurring it was originally illegal? Has it already attempted to do so in the so-called PROMESA statute?

HR-5278, PROMESA text of the bill passed the House by a vote of 297-127 on June 9, 2016 and it was received by the Senate on June 13, 2016 and referred to the Committee on Energy and Natural Resources.

Well, this should keep me busy producing scholarship for at least the next decade or so.

Keywords: Puerto Rico, SCOTUS, U.S. Territorial Possessions, Territorial Clause, Territory Clause, Puerto Rico Debt, Corporate Welfare

JEL Classification: A12, A13, A14

Suggested Citation

Malavet, Pedro A., Puerto Rico Debt Crisis: Trying to Reconcile Sanchez-Valle with the Puerto Rico Bankruptcy SCOTUS Opinions: Some Preliminary Thoughts (June 15, 2016). Available at SSRN: https://ssrn.com/abstract=2796250 or http://dx.doi.org/10.2139/ssrn.2796250

Pedro A. Malavet (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

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