Not your run-of-the-mill bankruptcy.

Bankruptcy is one of those areas of the law that a lot of attorneys who practice in the area may feel is so routine, they’ve seen it all. At the very least they may think that there is no problem the rules don’t clearly cover. Of course, every now and then, a case will come along that disproves that. Puerto Rico v. Franklin California Tax-Free Trust, No. 15-233, (U.S. June 13, 2016) is one of those cases where it seems like nothing that is happening is routine.

In Puerto Rico v. Franklin, the Court had to decide some fairly unusual issues. To begin with, Puerto Rico has long been treated as a state for purposes of the bankruptcy code; but since 1984, Puerto Rico has been excluded from the definition of a debtor under Chapter 9, the chapter relative to municipal bankruptcy. This means Puerto Rico cannot authorize its municipalities to file a bankruptcy under Chapter 9. Aware of this Catch-22, Puerto Rico fashioned protection for its utilities when it passed the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. A group of the utilities’ creditors brought suit to enjoin the utilities from filing under the Act, steadfastly arguing that the U.S. bankruptcy code must apply.

Reviewing the arguments of the parties, the Supreme Court found it had no choice but to agree with the creditors. Federal law takes precedence and that law states that Puerto Rico cannot supplant the Bankruptcy Code with a novel remedy for its utilities, regardless of the fact that the utilities have no other remedy. Their conclusion is that Puerto Rico is a “state” subject to the bankruptcy laws and may not create their own laws to deal with municipal bankruptcies; however, Puerto Rico is also not a “state” for purposes of allowing municipalities to seek protection under the Code. The law, as written, provides that only Congress can decide whether Puerto Rico’s utilities may file for bankruptcy protection. Despite the urgency of the situation, the Court may not re-write the Code.

Without the ability to deal with creditors under the protection of the bankruptcy code, the utilities will not be able to deal with suppliers of fuel and other commodities necessary to keep producing power. Further, creditors may resort to self-help remedies, such as repossession of assets, to satisfy their debts. Neither of these options look good for the Puerto Rican citizens that depend on these utilities for daily living.

For other information about the less common issues that can arise when dealing with underpayments with the IRS, we invite you to review the links below to Legal Issues from Litigation Pathfinder.