As noted in Part One, the Supreme Court had two cases involving Puerto Rico this term.  The first, decided, last Thursday was the more philosophical of the two cases — focusing on Puerto Rico’s status under the Constitution.  The ink was barely dry on that opinion when the Supreme Court issued the second opinion — dealing with the more immediately practical question of how bankruptcy law applies to Puerto Rico’s debt.

As a general matter, the Constitution gives Congress the power to enact a “uniform” law governing bankruptcy — a process that allows private individuals, businesses, and even government to restructure (and in some cases partially reduce) their debts.  As the fact that it is one of the enumerated powers in the original text of the Constitution shows, bankruptcy is not a new concept and predates the United States.  The Bankruptcy Code (Title 11 of the United States Code) is divided into chapters with different chapters applying to different entities and the circumstances of that entity — one for businesses that just want to wind up their affairs, one for businesses that want to try to continue, one for private individuals, and one (which applies here) governing the debts of municipalities (Chapter 9).

This case involved three different provisions.  First, section 109 defines who qualifies as a debtor for the purposes of the bankruptcy code.  In light of concerns raised in earlier times, the bankruptcy code gives state governments (which generally create the laws establishing municipalities within their state) the ability to decide which, if any municipalities, in that state can use the bankruptcy code to restructure that municipalities debt.  Second, section 101 defines the terms used throughout the bankruptcy code.  Of most significance to this case, section 101 defines “state” as including D.C. and Puerto Rico as a state except for the purposes of defining whether a municipality can be a debtor under Chapter 9.  Finally, section 903 recognizes that states control their municipal government buts bars states from enforcing state laws restructuring the existing debt of municipalities unless a creditor agrees to the restructuring.  The argument in the case was whether Puerto Rico was a “state” for the purposes of Section 903 — thereby barring Puerto Rico from passing its own law restructuring the debt of its political subdivisions.

Puerto Rico — noting that it was not a state for the purposes of designating eligible municipalities under Section 101 and therefore did not have any municipalities which qualified as debtors under Section 109 — argued that, since it was not subject to Chapter 9 at all, that the provisions of Chapter 9 barring it from enacting any state bankruptcy-type laws should not apply to it.    Simply put, the Supreme Court held that the purpose of Section 903 was to bar state bankruptcy laws regardless of whether a State opted to allow its municipalities to file for bankruptcy under Chapter 9.  (Neatly gliding past the point that Congress had effectively opted for both D.C. and Puerto Rico to not allow their political subdivisions to file for bankruptcy.)

The effect of this decision is to put Congress in the same role for Puerto Rico’s struggling municipal governments (including municipal utilities) in the same role that state governments play in the rest of the country — again emphasizing that, under the U.S. Constitution, by whatever name, territories are a second class form of government subject to the whim of Congress.  While the Constitution does not expressly require Congress to have a path to statehood for every territory (and specifically enshrines the District’s permanent inferiority), the Northwest Ordinances enacted under the Articles of Confederation envisioned that the territories would be admitted to statehood “at as early periods as may be consistent with the general interest.”

Puerto Rico has been a territory of the United States for almost 120 years.  Based on population, it would be entitled to approximately five representatives in the House if it became a state (more than 20 existing states).  Whomever wins in November will have to face that the current circumstance of Puerto Rico is wrong in every possible sense.  Congress should give Puerto Rico the option of immediate statehood or immediate independence.  The time for territorial status has long since expired.