The Perfect Storm Puerto Rico’s Evolving Debt Crisis Under PROMESA

Abstract

In 2015, domestic and international creditors were bracing for a historic financial event as the United States territory Puerto Rico teetered on the brink of catastrophic default. After almost a decade of economic headwinds, substantial money-borrowing, and poor fiscal management, Puerto Rico’s financial condition was quickly deteriorating. However, the island’s legal status as a territory made it impossible for the government to take advantage of the U.S. Bankruptcy Code to renegotiate its debt with institutional investors. After the Supreme Court denied the island’s own attempt to construct a restructuring process, Congress finally stepped in and enacted the Puerto Rico Oversight, Management, and Economic Stability Act in the summer of 2016. The Act, commonly referred to as PROMESA, creates a novel framework under which Puerto Rico can renegotiate its credit commitments and hopefully regain access to the credit market sometime in the future. In particular, PROMESA creates the Financial Oversight and Management Board (FOMB), which is an independent organization with oversight and approval authority over much of the Puerto Rico bankruptcy process.

However, because PROMESA as a legislative act is new and untested, several interesting questions arise as to the law’s infrastructure around accountability of entities such as the FOMB. These questions are especially salient as Puerto Rico is the first U.S. territory to become insolvent; therefore, how these bankruptcy proceedings unfold will serve as important precedent for other territories or municipalities that may find themselves bankrupt.

This Note focuses on the FOMB and whether stakeholders, such as creditors or Puerto Rican citizens, can judicially challenge the fiscal decisions made by the FOMB throughout this restructuring process. While this Note ultimately concludes that stakeholders may not have a strong legal argument to reverse the FOMB’s financial determinations in court, it also proposes that stakeholders may be more successful in appealing to congressional representatives to ensure that their voices are heard and their interests are accounted for throughout these unprecedented proceedings.