Puerto Rico’s fate is now up to Roberts
In a ‘jarring break,’ chief justice to name judge for bankruptcy
A little-noticed provision in a bill signed into law in 2016 places the fate of Puerto Rico in the hands of the Supreme Court’s chief justice.
After Puerto Rico filed for the equivalent of bankruptcy protection this week, the immediate question was which judge would be appointed to oversee the case.
Turns out that’s up to Chief Justice John Roberts.
The Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) signed by then-President Obama gives Roberts the power to appoint a U.S. district court judge to oversee the bankruptcy-like case involving a U.S. territory.
That was a “jarring break” from traditional municipal bankruptcies, which are overseen by bankruptcy judges, said Melissa Jacoby, a University of North Carolina law professor, in a recent paper studying the topic.
One significant difference is that district court judges, unlike bankruptcy judges, are political appointees.
As other municipal bankruptcies have demonstrated, the judge in control of the case retains significant sway over the outcome.
For example, bankruptcy judges ruled that Stockton, Calif., had the legal right to cut pensions during their Chapter 9 bankruptcy cases. Detroit took advantage of that power and negotiated pension cuts with disgruntled retirees.
Roberts’ views on municipal debt issues are unclear. But in a case that came before the court and decided last June, Roberts joined a 5-2 decision that rejected Puerto Rico’s attempt to establish its own legal procedure akin to municipal bankruptcy.
“Why would it be irrational for Congress to say, all right, this is the system we’re going to apply to all the states, but when it comes to Puerto Rico, if they want changes, we want them to come to us, partly because Congress has a different sort of relationship with Puerto Rico than it has to all the other states?” Robert asked a lawyer for the territory.
After years of economic distress, ballooning debt, bloated bureaucracy and tax hikes on the island, Puerto Rico’s oversight board on Wednesday asked a federal court for protection from its creditors under a debt-cutting process created by PROMESA, dubbed Title III.
The oversight board appointed to lead the U.S. territory back to fiscal sustainability declared in a court filing that it was “unable to provide its citizens effective services,” crushed by $74 billion in debts and $49 billion in pension liabilities.
The fierce legal battle that’s about to ensue will involve a fight over which creditors deserve to be paid the most.
That may ultimately require the judge in control of the case to make tough decisions, distinguish between creditors, referee disputes with little legal precedent and possibly decide whether retirees will endure cuts to their pensions and health care.
Previous municipal bankruptcies have demonstrated that judges exert considerable influence over the outcome, even though the law prevents them from ordering municipal debtors to sell assets or spend money in a certain way, Jacoby said.
Puerto Rico’s case could even result in a debt-cutting plan implemented over the objection of creditors, known legally as a “cram down,” Jacoby said. The judge would decide whether that’s fair.
In municipal bankruptcies, governed by Chapter 9 of the bankruptcy code, the chief judge of the circuit court in which the debtor files for court protection must appoint a U.S. bankruptcy judge from within that circuit to oversee the case.