The underlying purpose of bankruptcy legislation is to allow a debtor to free
him or herself from the excessive weight of debt. In other words, people can
continue with their lives. So, if it is in the interest of society as a whole that
people do not become prisoners of a debt spiral, thus unable to be productive
members of society, preventing government institutions from shutting down and not
being able to provide necessary services should be that much higher in the order
of priorities. As a matter of fact, in a short article providing an overview of
the purpose of chapter 9 bankruptcy the administrative office of the US courts
states the following, and I quote "the purpose of chapter 9 is to provide a
financially distressed municipality protection from its creditors, while it
develops and negotiates a plan for adjusting its debt. Reorganization of the
debts of a municipality is typically accomplished either by extending debt
maturities, reducing the amount of principal or interest, or refinancing the
debt by obtaining a new loan" end of quote.
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now you may have noticed that the word municipality has popped up repeatedly in
our discussion so far that's because it's a central concept in chapter 9
bankruptcy according to merriam-webster the accepted in general definition of
this word is the following in a quote a primary urban political unit having
corporate status and usually powers of self-government end of quote
but of course Congress sometimes decides to reject reality and replace it with
its own so in Section 101 of the US Bankruptcy Code they enacted their own
definition of municipality and I quote a political subdivision or public agency
or instrumentality of a state and if quote the administrative office of the
US courts adds clarity to this definition and I quote again the
definition is broad enough to include cities counties townships school
districts and public improvement districts it also includes revenue
producing bodies that provide services which are paid by users rather than by
general taxes such as bridge authority highway authorities and gas authorities
and of quote the fact that the term is so wide and encompassing is appropriate
given the fact that only a municipality may vial for chapter 9 bankruptcy relief
therefore it seems logical to include as many vital government institutions as
possible in order to prevent any of them from being unable to provide their
service to the general public due to their indebtedness but being a
municipality is not enough section 109 C of the US Bankruptcy Code states the
following requirements and I quote an entity may be a debtor under Chapter 9
of this title if and only if such entity one is a municipality two is
specifically authorized in its capacity as a municipality or by name to be a
debtor under such chapter by state law or by a governmental officer or
organization empowered by state law to authorize such entity to be a debtor
under such chapter and if quote this text also known as the Gateway provision
is vital for the case of Puerto Rico what section 109 C is clearly stating is
that even if a government instrumentality falls under the
definition of municipality it will not have
since the chapter 9s protection unless it is authorized to do so by the state
to which it belongs in other words state governments are empowered to allow or
prohibit their political subdivisions to file chapter 9 bankruptcy states hold
the key to the door through which municipalities must go through in order
to attain chapter 9s protection so put simply chapter 9 bankruptcy is a way for
financially burdened government agencies or government instrumentalities to seek
help from the US Bankruptcy Court and address serious fiscal issues in order
for such institutions to have access to set protection they need to fall under
the definition of municipality and have been granted permission by the state
they belong to but guess just guess who doesn't have
access to chapter 9 bankruptcy that's right
Porto Rico and that's because in 1984 the bankruptcy amendments and federal
judgeship Act was passed amending the US Bankruptcy Code and among the many
alterations made one amendment would prove to be both baffling and profoundly
important for Puerto Rico's future section 421 J of the Act states the
following and I quote section 101 of title 11 of the United States code is
amended by inserting the following state includes the District of Columbia and
Bertha regal except for the purpose of defining who may be a debtor under
Chapter 9 of this title end of quote as we could observe what
that ago specifically removed from the definition of the term state in regards
to its ability to allow its political subdivisions to seek chapter 9
bankruptcy protection incredibly enough no one and I really mean no one is able
to explain why Congress decided to approve this amendment there is no
legislative history that directly addresses it
no one knows in reaction to this and the same year that the rating agencies
downgraded protocol's bonds to non-investment grade in 2014 protocol's
legislature enacted the Puerto Rico corporation debt enforcement and
Recovery Act or lay para complement o con as dudas y para la recuperación de
las corporaciones pública de Puerto Rico said law created a debt modification
procedure allowing public utilities to suggest changes to the terms and
conditions of their outstanding debt this process was not unilateral but
rather required consensus among the debtor and most of its creditors what
thought he goes legislature even went so far as to create a court supervised
restructuring process that merit chapter 9 and 11 of the US Bankruptcy Code but
as expected it was not long until a group of investment funds brought suit
against political and many government officials to enjoin the enforcement of
Puerto Rico's Recovery Act the case is called Puerto Rico versus Franklin
California tax free trust and is an absolutely convoluted horror the central
question to this case was the following does the preemption provision applied to
Puerto Rico a simple question to which the Supreme Court of the United States
provided a very labyrinthine answer both sides of the case gave opposite answers
based almost entirely on the definition of the term state Porto Rico in this
case the petitioning party interpreted the definition of state to exclude it
altogether from chapter 9 thus placing it beyond its preemption provision
giving Bordeaux regal the ability to enact its own municipal bankruptcy
scheme in the other hand the investment funds as a respondent party believed
that the definition only stripped pathetical from its ability to
specifically authorize its municipalities to seek chapter 9 relief
as recorded by the Gateway provision however their argument continues but
thought ago is no less a state for purposes of the preemption provision
thus barring political from being able to enact its own municipality bankruptcy
scheme while at the same time closing off access to chapter 9 bankruptcy
protection the majority opinion favours of respondents argument and concludes
that the bankruptcy codes gateway provision has a narrow effect to
eliminate porticoes ability to allow its municipalities access to chapter 9
bankruptcy but nevertheless kept intact its preemption provision over put the
Freegal specifically the majority opinion delivered by Justice Thomas
offer the following reasoning and I quote we interpret Congress's use of the
who may be a debtor language in the amended definition of the state
mean that Congress intended to exclude Puerto Rico from this Gateway provision
delineating who may be a debtor under Chapter 9 portico therefore is not a
state for purposes of the Gateway provision so it cannot perform the
single function of the state under that provision to specifically authorize
municipalities to seek chapter 9 relief as a result what articles municipalities
cannot satisfy the requirements of chapter 9s Gateway provision until
Congress intervenes the definition specifies that what article is not a
state for the purpose of defining who may be a debtor under Chapter 9 the text
of the definition extends no further the exception excludes sport Oracle only for
the purpose of the Gateway provision but there it goes no less a state for
purposes of the preemption provision than it was before Congress amended the
definition had Congress intended to alter this fundamental detail of
municipal bankruptcy we would expect the text of the amended definition to say so
end of quote in other words within the same legislation where 30 goal is and at
the same time is not a state this is the only way one can justify the majority's
legal thesis in their eyes Congress has decided that pathetical cannot be
considered a state for the purpose of the Gaber provision but is nonetheless
among the states in regards to their impediment to create their own municipal
bankruptcy scheme what did he go somehow occupies two different legal spaces at
the same time but not everyone was convinced by this logic defying argument
justice Sotomayor joined by Justice Ginsburg fired the dissenting opinion
and that uses a contextual view on the matter the crux of her legal thesis is
the following chapter 9s preemption provision cannot apply to both article
due to the fact that chapter 9 only applies to states that can decide to
whether or not authorize its municipalities to request
seds chapters protections the dissenting opinion provides the following arguments
in favor and I quote to understand why section 903 does not preamp the Recovery
Act it is important to consider that statutory provision in context section
903 says that states continue to possess those powers not implicated by the
bankruptcy itself by noting that this chapter I
chapter nine does not limit or impair the power of a state to control its
municipalities section 903 however also subjects that broad reservation to an
exception articulated in the preemption provision that the Court now says bars
porticos Recovery Act but this distribution of power between the state
and the bankruptcy court is irrelevant to Puerto Rico because what that Rico's
municipalities cannot pass through the section 109 C gateway of chapter 9
nothing in the operation of a chapter 9 case affects Port Authority goes control
over its municipalities and if this preamble does not and cannot apply to
Puerto Rico it follows that section 903 is provisional qualifying that
reservation of power to the States does not apply to Puerto Rico either end of
quote however justice Sotomayor logic fell on deaf ears with articles thus
shut out of chapter 9 protection while at the same time unable to take matters
into its own hands in other words where Torico can neither seek help nor help
itself that's it for today but remember if you have any questions or you want to
suggest some future content you can always write in I put there to come
forward at gmail.com as always thank you for your time thank
you for listening you give me love with