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An Arbitral Solution: A Private Law Alternative to Bankruptcy for Puerto Rico, Territories, and Sovereign Nations

Melika Hadžiomerović
85 Geo. Wash. L. Rev. 1263

Puerto Rico is excluded from bankruptcy relief under the U.S. Bankruptcy Code. As a result, Puerto Rico’s ability to restructure its debt is severely hindered and almost resulted in a humanitarian crisis in 2016. The problems for Puerto Rico’s government, including a scarcity of interim financing and holdout creditor litigation, exacerbated Puerto Rico’s dire financial situation while draining funds that could have been used to pay creditors. Although the recent passage of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) has temporarily capped some of these issues, PROMESA does not offer full Chapter 9 bankruptcy protection and presents issues for Puerto Rico’s long-term debt restructuring and its ability to assert a democratic form of government. This lack of bankruptcy protection is also a problem for U.S. states and territories that lack direct restructuring relief under Chapter 9 or PROMESA. Sovereign nations face similar concerns because there is no international bankruptcy court for nations.

This Note offers a private law alternative to bankruptcy that could have empowered Puerto Rico, and other government entities like it, without having to wait on a divided U.S. Congress or international community to act. By borrowing solutions from Chapters 9 and 11 of the U.S. Bankruptcy Code and solutions often proposed in sovereign debt restructuring scholarship, this Note creates a private, contractual framework to help Puerto Rico and other unincorporated territories restructure their debt while working within the boundaries of PROMESA. This Note’s proposed framework exports restructuring disputes to arbitration to create mock bankruptcy proceedings for government debtors such as U.S. states and territories. Although this Note concerns Puerto Rico’s restructuring crisis, it also explores the greater applicability of its arbitral framework to other governmental entities that are not afforded bankruptcy protection, such as other U.S. territories, U.S. states, and nations.

Read the Full Note Here.