The Financial Oversight and Management Board for Puerto Rico [official website] on Wednesday filed for bankruptcy protection [press release] for the territory following the expiration of provisions that had shielded it from litigation. The filing comes under Article 3 of PROMESA [text, PDF], a special law passed last year to allow Puerto Rico to manage its significant debt. The territory has created a fiscal plan [text] to address its debt and begun negotiations with many of its debt holders, but the board said the filing was necessary as a number of other creditors started filing lawsuits [Reuters report] against it earlier in the week:
Under PROMESA, the Government of Puerto Rico, with the Oversight Board’s support, has pursued voluntary negotiations and mediation in an effort to arrive at consensual agreements with its creditors. But the expiration Monday night of the stay against litigation provided by PROMESA makes the government vulnerable to lawsuits by its creditors. The voluntary filing under Title III would preclude those lawsuits while allowing the possibility of consensual negotiations to continue.
The debt crisis of Puerto Rico has been extensive and a severe worry to many around the world. In January, the US Court of Appeals for the First Circuit ruled [JURIST report] that a case brought by bondholders of Puerto Rico’s Employee Retirement System could proceed. Also in January a UN independent expert warned that increasing austerity measures to the American territory could threaten residents’ human rights [JURIST report]. In June the US Supreme Court ruled [JURIST report] 5-2 that Section 903(1) of the Bankruptcy Code preempts Puerto Rico’s Recovery Act. Last April the Puerto Rico legislature passed a bill [JURIST report] that allowed the island territory to enter into a state of fiscal emergency and begin the process toward a debt moratorium.