I have written before on Puerto Rico’s financial situation and the possibility of a bankruptcy filing. Now, the island has effectively filed for bankruptcy. Earlier this month Puerto Rico sought relief under Title III of a federal law called the Puerto Rico Oversight, Management, and Stability Act, or PROMESA.
PROMESA allows Puerto Rico’s government to enter a bankruptcy like restructuring process. PROMESA created an oversight board and special provisions similar to Chapter 9 of the Bankruptcy Code. Chapter 9 is the section of the Bankruptcy Code that cities like Detroit have used in the past. The federal oversight board has been supervising the island’s finances since last year.
This is the first time that an American state or territory has sought what is essentially bankruptcy relief. According to its filing in federal court, Puerto Rico is “unable to provide its citizens effective services” because of the amount of debt. That debt is comprised of approximately $123 billion in pension obligations and other debt, and it far exceeds the $18 billion bankruptcy filed by Detroit in 2013.
Puerto Rico’s situation is a long time coming. It has an unemployment rate of 11.5% and has been in a decade long recession. Many creditors filed lawsuits against the island, prompting Puerto Rico’s request for relief from the court.
Supreme Court Chief Justice John Roberts appointed US District Judge Laura Taylor Swain of the Southern District of New York to preside over the incredibly complex case. Justice Roberts was required by PROMESA to appoint a District Court Judge, not a bankruptcy judge to the case. Judge Swain was a bankruptcy judge in the Eastern district of New York from 1996 until her appointment by President Clinton to her current District Court position in 2000.