U.S. territory wants Detroit-style treatment of its municipal debt, court says No

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What is Chapter 7 Bankruptcy?”


Puerto Rico is a territory of the United States, and as such, it wants to treat its debt like Detroit and other stateside municipalities—and like Uncle Sam himself. That is, it wants to spend into oblivion—or to the brink of bankruptcy—and then use bankruptcy or quasi-bankruptcy to bail itself out.

Puerto Rico Charlotte Bankruptcy Lawyer North Carolina Debt AttorneyThe island’s government agencies have amassed public debt to the tune of $73 billion. The woes are so great that political leaders are worried the commonwealth will be unable to meet its short-term debt obligations, which could jeopardize even basic “public-safety responsibilities” to the island’s 3.5 million residents, according to Bloomberg News.

Puerto Rico’s electric-power authority, Prepa, was working on a restructuring plan that could have caused bondholders to sustain substantial losses. Prepa is not the only struggling public utility, however, and Bart Mosley, co-president of Trident Municipal Research in New York, told Bloomberg that the island nation may soon be forced to undertake “something that looks like sovereign debt-restructuring at some point with the general-obligation debt.”

Last summer, the commonwealth passed what was, in essence, a local bankruptcy law, which provided the struggling utilities more leverage in its negotiations with creditors. On Feb. 6 of this year, however, a federal court struck down the law on the basis that it violated the United States Constitution because it allowed a state government to modify municipal debt.

Judge Francisco A. Besosa of the United States District Court for Puerto Rico invalidated the act—titled the Puerto Rico Public Corporations Debt Enforcement and Recovery Act—and enjoined the commonwealth from enforcing it.

In essence, Judge Besosa confirmed what states already knew: they cannot seek protection from creditors under federal bankruptcy law. As such, the ruling was seen as a victory for creditors—mainly investors and bondholders—because the debt-strapped utilities will be forced to work out their financial woes with them instead of being able to discharge some debts through bankruptcy.

Democrat Pedro Pierluisi introduced legislation last July that would allowed Puerto Rico’s water and highway utilities to reorganize under Chapter 9 of the United States Bankruptcy Code. Pierluisi is the island’s non-voting representative in the United States Congress.

Virginia Republican Rep. Bob Goodlatte indicated that Pierluisi’s bill would be considered by the House Judiciary Committee in the coming weeks. Pierluisi indicated to Reuters that he would be focusing his political efforts on providing Puerto Rico with access to Chapter 9 of the Bankruptcy Code, rather than insisting that it has the right to enact a local bankruptcy law.

Passage of his bill is seen as a long-shot, meaning the lurch Puerto Rico’s utilities find themselves in may continue for the foreseeable future.

If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.








Image Credit:

“Puerto Rico 01” by http://www.flickr.com/people/37244380@N00/ – http://www.flickr.com/photos/37244380@N00/289885850/in/set-72157594363287163. Licensed under CC BY-SA 2.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Puerto_Rico_01.jpg#mediaviewer/File:Puerto_Rico_01.jpg



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