The Global Lawyer: why is history repeating in Puerto Rico's debt case?

It makes perfect sense that bondholders such as Aurelius Capital are doing all they can to sabotage the plan of Puerto Rico's financial oversight board to restructure the island’s $124bn in debt and pension liabilities. After all, they are likely to get only 64 cents on the dollar and, in a breakthrough for progressive finance, secured creditors would take a backseat to unfunded pensioners (see The Global Lawyer: ‘Puerto Rico Plan creates a hurricane in the world of public debt’, August 2019).

So why are Puerto Rican public unions and municipalities arguing side by side with the bondholders in asking the US Supreme Court to declare the oversight board unconstitutional? The first answer is that the country’s beleaguered people are in no position to endure more austerity. Most can’t make ends meet – even before the pension trims and utility hikes on offer by the oversight board – and cities may soon need to cut essential services.

With the birth rate plummeting and emigration to the US mainland soaring, advocates fear the elderly remnant will be crushed. We are all moved by sincere pleas for a devastated people, and complexity demands humility. But in a case where pensioners line up beside Aurelius Capital, one party is being naïve, and the Global Lawyer doubts it is the one represented by law firm Gibson, Dunn & Crutcher.

In arguing that every action by the overseers is “helping bondholders, not people”, the Puerto Rican advocates seem deluded. Surely the people won’t be better off if vulture funds recover 100 cents on the dollar? The deeper answer is that when federal overseers impose a plan on Puerto Rico (even if they’d love to do the same for Pennsylvania), they are perceived as imperial overlords backed by an historically racist court. Indeed, at argument on October 15, the lawyer for the power authority union, Jessica Mendez-Colberg, called on the justices to overrule a line of racist precedents known as the Insular Cases.

Whatever one may think about her economics, she was absolutely right about her legal history. In 1899, a Harvard Law Review article warned against extending the civilised constitution to “the ignorant and lawless brigands that infest Puerto Rico”. Though the Supreme Court didn’t sound quite so much like Donald Trump’s Twitter feed, it wasn’t exactly subtle. The 1901 Insular Cases held that the full protections of the US Constitution cannot cover a territory that isn’t on a certain path to statehood due to the differing “modes of thought” of its “alien races”. 

A half-century later, Justice Frankfurter called the Insular Cases “as unrelated to the world of today as the one-hoss shay is to the latest jet airplane”. Now, another half-century has passed; jet planes are no longer the height of modernity, and no one has heard of the 'one-hoss shay'. Yet the Insular Cases remain good law. In 2016, a lower court cited them to temporarily deprive Puerto Ricans of the right to gay marriage.

“It's amazing the Insular Cases are still in place after almost 120 years,” says San Juan counsel Carlos Hernandez López. “They were decided by the same court that decided Plessy v Ferguson [which upheld the constitutionality of racial segregation in 1896], with the same motivation. The people of Puerto Rico expect more from the Supreme Court.”

In the Puerto Rican debt litigation, the Insular Cases were so central in the lower courts that the First Circuit said they “hover... like a dark cloud”. But in Washington, DC, the oversight board was careful to avoid them. At oral argument, the chief justice suggested it would be improper to overrule the Insular Cases because they weren’t before the court.

The power union’s lawyer, Ms Mendez-Colberg, saw this moment coming. She correctly pointed out that the unsecured creditors relied extensively on the Insular Case line in their Supreme Court brief. She also correctly noted that – only in 2018, in the travel ban case – the chief justice himself reached out to overrule the Japanese internment case of Korematsu v US even though he admitted it had “nothing to do” with the case at hand, because it was morally repugnant.

At oral argument, Justice Kavanaugh rescued the chief justice from this deft ambush by changing the subject. In the written opinions, one hopes that Justice Sotomayor won’t let the chief justice off so easy. Whatever the fate of Puerto Rico’s oversight board, the court should seize the occasion to repudiate another piece of its racist history. As Ms Mendez-Colberg observed, the motto carved in the marble of the court's lintel promises “equal justice under law” to all Americans. 

Michael D Goldhaber serves as US correspondent for the International Bar Association. He has been tracking the world’s largest disputes since the turn of the millennium. Email: michael.goldhaber@gmail.com