Puerto Rico and the Netherworld of Sovereign Debt Restructuring

33 Pages Posted: 17 Mar 2017 Last revised: 5 Apr 2017

G. Mitu Gulati

Duke University School of Law

Robert K. Rasmussen

University of Southern California Gould School of Law

Date Written: March 20, 2017

Abstract

Puerto Rico has incurred debt well beyond its ability to repay. It attempted to address its fiscal woes through legislation allowing the restructuring of some its debt. The Supreme Court put a stop to this effort, holding that Congress in the Bankruptcy Code barred the Commonwealth from enacting its own restructuring regime. Yet all agreed that the Bankruptcy Code did not provide anything in its place. While Congress quickly enacted PROMESA in an attempt to address the Puerto Rico’s fiscal ills, we explore in this paper whether Congress has the power to bar Puerto Rico from enacting a restructuring mechanism and not offer an alternative. We submit that the answer is no. When it comes to a state, the Supreme Court has held that the power to issue debt necessarily implies the power to restructure that debt. Congress can preempt that power, so long as it puts something in its place. To preempt and leave nothing, however, runs afoul of our federal system. The same reasoning, with greater force, applies to Puerto Rico. The federal government entered into a compact with the citizens of Puerto Rico, granting them, among other things, the power to issue debt. Puerto Rico implicitly received the power to restructure this debt. Congress could offer a substitute to any regime that Puerto Rico might enact, but it cannot leave the Commonwealth without any means to address its fiscal affairs.

Keywords: Puerto Rico, bankruptcy, sovereign debt, contract law, constitutional law

JEL Classification: F34, F33, G33, H63, H74, K12, K33

Suggested Citation

Gulati, G. Mitu and Rasmussen, Robert K., Puerto Rico and the Netherworld of Sovereign Debt Restructuring (March 20, 2017). USC CLASS Research Paper No. CLASS17-13; USC Law Legal Studies Paper No. 17-11; Duke Law School Public Law & Legal Theory Series No. 2017-24. Available at SSRN: https://ssrn.com/abstract=2934058 or http://dx.doi.org/10.2139/ssrn.2934058

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Robert K. Rasmussen

University of Southern California Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089-0071
United States
213-740-6473 (Phone)
213-740-5502 (Fax)

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