NiLP Note: Attorney Nelson Torres-R
os raises an interesting legal question about status of Puerto Rico's massive debt problem. Because of the technical nature of his argument, we asked Juan Cartagena, President and General Counsel of LatinoJustice PRLDEF to comment on the efficacy of his argument, which appears at the end of this Guest Commentary. Cartagena currently chairs the Puerto Rico Working Group of the National Hispanic Leadership Agenda (NHLA).
Is Puerto Rico's Debt Illegal?
Exploring the Application
of Litchfield v. Balloy
By Nelson Torres-Ríos (October 27. 2015)
For the past several months, we have been targeting Congress as the only entity to solve the Puerto Rico debt crisis. Members of the Puerto Rican community are requesting an amendment to chapter 9 to include Puerto Rico. Chapter 9, however, while a step in the right direction, can only help alleviateno more thant 30% of the debt.
At a panel discussion on this issue during the October 14th Unidos Por Puerto Rico convening in Orlando, Florida, no one brought up an issue that had been burning in me for the past several weeks. Some recognized that Puerto Rico has been overspending while others pointed to the Krueger Report as proposing "good suggestions" to lift Puerto Rico from the current crisis. Nonetheless, this is the same report that calls for further austerity measures and putting the final nail in the coffin of the Puerto Rican people. They failed to realize that this crisis is the sole creation of the federal government. Yes, its' sole creation.
Given the gravity of the situation, and the numerous conferences I have attended, I was waiting to hear someone question the legality of the debt. I waited and waited, but not a single person brought it up. During the Orlando panel discussion, I suggested that the most effective approach would be to look at what the law provides.
The Constitution of the Commonwealth of Puerto Rico states, under Article VI Section II, the following:
No direct obligations
of the Commonwealth for money borrowed directly by the Commonwealth evidenced by bonds or notes for the payment of which the full faith credit and taxing power of the Commonwealth shall be pledged shall be issued by the Commonwealth if
(ii) any amounts paid by the Commonwealth in the fiscal year next preceding the then current fiscal year for principal or interest on account of any outstanding obligations evidenced by bonds or notes guaranteed by the Commonwealth exceed 15% of the average of the total amount of the annual revenues
The purpose of this constitutional limit is to protect against onerous debt that stems from the natural and probable consequence of excessive and out of control spending. For the most part, this constitutional limitation has been ignored by various administrations on the island.
To exacerbate the problem, under Puerto Rican Law 91, May 2006, the island's legislature confirmed that for several decades Puerto Rico has incurred these debts to operate its government without identifying effective and transparent methods to repay it. The debt was described as "extra constitucional," in other words, in violation of the constitutional limit. As a result, a special fund known as Fondo de Interes Apremiante (FIA) was created to cover the debt. Several months later, these efforts were enforced by the creation of a subsidiary of the Banco Gubernamental de Fomentoknown as COFINA (Corporación del Fondo de Interés Apremiante de Puerto Rico) to issue bonds and identify other mechanisms to refinance the debt. The failure of these efforts, the island's territorial status, and Congress' underfunding and unequal treatment of Puerto Rico have conspired to create the debt crisis that we have today.
Nearly a decade later, the Puerto Rico Fiscal & Economic Growth Plan prepared by the Working Group for the Fiscal and Economic Recovery of Puerto Rico claimed that the debt service as a percentage of the total revenue has far been exceeding the 15% the constitution allows, and for the next few years, it is going to exceed double the amount. These debts, as such, have been incurred in clear violation of Puerto Rican constitutional law.
In plain English, this debt is illegal. Why should the Puerto Rican people pay for an illegal debt? Under what legal argument do the hedge funds think they are entitled to payment?
Congress' role underlies this fiscal crisis: it turned Puerto Rico into a bond haven with triple tax exempt bonds. If you continue to colonize a territory of 3.5 million U.S. citizens who fight your wars, pay into federal programs and is underfunded by billions of dollars, demands a non-territorial status giving them sovereignty to control their economic and political destiny and are ignored, the territory will not have any option but to minimize the gaps in services by continuing to borrow.
Current efforts from the island's present administration have called for a commission to audit the debt from all the sources in their entirety. A recent initiative authored by Natal Albelo of the Puerto Rico House of Representatives outlines the strategy to restructure the debt and proposes an independent commission to operate autonomously. The commission shall include private citizens from different sectors with a specific goal to audit and distinguish debts that were incurred legally from debts that were incurred in violation of the law. This should be our starting point.
During the panel discussion in Orlando, I was the last panelist to present and was determined to make my case. I prefaced my presentation by stating that the debt is illegal. Forget Chapter 9. Given the scenario in Congress and the opposition, it would take 10 more visits from the Pope and a hula dance to get Congress to act. Holding the Puerto Rican Constitution in one hand with the Supreme Court case in the other, I explained that the debt was illegal and as such Puerto Rico should not be paying this debt.
There was an awkward silence in the room as if a secret had been revealed. The audience looked astounded and intrigued. I ended my comment by pointing out, analogizing, and providing the citation to the case that is directly on point. The U.S. Supreme Court in Litchfield v. Balloy, 114 U.S. 190, held the following:
"A provision in a constitution that municipal corporations shall not become indebted in any manner nor for any purpose to an amount that exceeds its limit therein forbids implied as well as expressed indebtedness, and is as binding on a court of equity as on a court of law."
The court went on to say:
"a bill in equity for the return to the plaintiff of specified, identical monies borrowed by a municipal corporation from him in violation of law will not support a general decree that there is due from the municipality to him or her a sum named which is equal to the amount borrowed."
The Court is clearly saying that an ultra vires transaction cannot be upheld by the court. Judge Rhodes, who presided over the Detroit Bankruptcy case, explained that a significant portion of Detroit's debt was obtained illegally and as such, Detroit only had to pay a fraction of the debt.
Why are we not exploring this option? Representative Natal estimates that a near 75% of the debt incurred by COFINA may have been obtained illegally.
Instead, the panelists decided to continue arguing for Chapter 9 protection with one making reference to the Krueger Report. That report and the Centennial Group (hired by hedge funds and made up of IMF staff to study the debt) have suggested further austerity measures in education and the sale of $4 billion worth of public buildings to pay the debt.
The Supreme Court in Litchfield, as if sent from heaven, held the following to a similar suggestion:
"The idea of pursuing and reclaiming specific property into which money has been used, that theory discards the idea of a debt and pursues the money into the property and seeks the property not as the property of the city to be sold to pay a debt, but as the property of the complainants into which his money, not the city's, has been invested for the reason that there was no debt created by the transactions. The money received on the bonds having been expended, with other funds raised by taxation, to impose the amount thereof as a lien upon these public works would be equally a violation of the constitutional prohibition. The holders of the bonds, and the agents of the city are criminal participants in the act of violating that prohibition."
Hermano/as puertorriqueño/as, más claro no canta un gallo
. We should be addressing this issue from a legal perspective as well. This debt is illegal and as such, like the unconstitutional debt in Detroit, Puerto Rico should not have to pay it.
is an attorney admitted in New York and New Jersey and an Assistant Professor at Hostos Community College. He can be reached at email@example.com.
By Juan Cartagena
LatinoJustice PRLDEF (October 25, 2015)
Torres-Rios is correct in raising the question about the legitimacy of Puerto Rico's debt ab initio, and he joins a number of others who have questioned the legal foundation of portions of the debt. Recently, Natasha Ora Lycia Bannan, President of the National Lawyers Guild (and Associate Counsel at LatinoJustice PRLDEF) raised international human rights principles that challenge the enforceability of "odious debt," that is, debt passed on from one regime to the other where the former incurs debt that has no clear "benefit to the people." It's an international law principle that has been around for centuries and may have played a part in the U.S. position not to incur the debt of Puerto Rico or Cuba after the Spanish American War. Closer to Washington, D.C. U.S. Senator Bernard Sanders is on record this month in demanding that "if any debt was issued to creditors in violation of Puerto Rico's constitution, it must be immediately set aside."
So the general point that Torres-Rios is making by citing the provisions of Puerto Rico's constitution should be on the table - his research is why I arranged for him to be invited to the Orlando Unidos Por Puerto Rico conference. Whether the argument will prevail as a matter of law is something more complicated. Generally, federal courts rely on the interpretations of the highest courts of a state when interpreting state constitutional provisions --- and have even requested advisory opinions. Such rationale should apply in the context of a territory of the U.S. So the narrower question is what have Puerto Rico's courts said about Torres-Rios' arguments. Puerto Rico is a civil code jurisdiction - closer to France than a common law jurisdiction closer to England - and as such court interpretations cannot be matched up so easily when compared to U.S. federal or state courts.
But all of this goes to the details and the larger point that Torres-Rios raises would be among the arguments that the Commonwealth or other stakeholders (note I didn't say bond-holders) would raise in any enforceable court proceeding to restructure the debt --- be it in a new legislative path towards bankruptcy courts or through other court imposed vehicles.