In a move by the Federal government that the Wall Street Journal describes as “unprecedented,” a federal oversight board created by the U.S. Congress is putting the Commonwealth of Puerto Rico under bankruptcy protection, invoking what is known as “Title III.” This is a debt restructuring plan that is carried out under the auspices of the court. It is similar to Chapter 9 of the U.S. Bankruptcy Code, which is used by municipal and county governments as well as other public institutions and entities.
The most famous example of a Chapter 9 bankruptcy proceeding was that of Detroit, which filed in 2013. At that time, the City of Detroit was in debt to the tune of around $19 billion. It was the largest such bankruptcy in U.S. history – but that was proverbial “chump change” compared to Puerto Rico’s estimated debt of approximately $73 billion. As this case moves forward, it will represent the largest bankruptcy ever experienced by the U.S. municipal bond market, estimated to be worth $3.8 trillion.
Technically, the Title III procedure is not a bankruptcy, as Puerto Rico – because of its unique political status – is ineligible for protection under Chapter 9 of the U.S. Bankruptcy Code. This legislation was passed in Congress and signed into law by President Obama last year. Under Title III, the manner in which the case goes forward will be under the control of a U.S. District Judge, appointed by Chief Justice John Roberts, rather than a bankruptcy judge. Since this process has never been used before, there is no real precedent for the case – meaning that whomever Roberts appoints for the job will have a great deal of control over Puerto Rico’s future.