As noted by the Detroit Free Press, the essence of the island’s debt crisis is strikingly similar to the financial collapse of Detroit, which filed for bankruptcy in 2013 to escape a crushing debt load amid a severely diminished tax base. Of course, the major difference between Puerto Rico and Detroit, aside from the fact that one is a U.S. territory and the other an American city is that, as of now, Puerto Rico can’t legally file for bankruptcy — yet.

However, the groundswell of support for the island’s right to seek bankruptcy protection has increased as investors and politicians continue to struggle with Puerto Rico’s downward spiral into insolvency. The island nation has racked up more than $70 billion in bond debt and at least $50 billion in retiree promises, including pensions and health care, all as its population has declined; politicians just issued more and more debt to pay the bills.

Puerto Rico’s governor, Garcia Padilla has stated that the island’s debts are “unpayable” in full and stressed the need for Congress to change U.S. laws, allowing the commonwealth to enter into Chapter 9 bankruptcy. In an effort to help navigate the political and legal hurdles of an intractable Congress, Padilla hired the former U.S. bankruptcy judge who oversaw Detroit’s case, Steven Rhodes, to advise him on the commonwealth’s pursuit of Chapter 9 bankruptcy. Even as representatives for Puerto Rico’s creditors and the commonwealth continue to negotiate potential settlements, Rhodes has expressed his doubts as to whether anything short of bankruptcy will effectively stop the crisis.

“There are too many creditors,” Rhodes told the Free Press in an interview earlier this month. “Like Detroit, Puerto Rico can’t print money. So Puerto Rico’s insolvency is as much the creditors’ problem as it is the commonwealth’s problem.”

The commonwealth’s creditors, like those of Detroit — pre-bankruptcy — cast a wide net, including small retail investors, large mutual funds and hedge funds. At its peak, Detroit amassed more than 170,000 creditors, according to court filings. Puerto Rico faces smaller, yet as daunting numbers with one creditor, Rochester Fund Municipals, holding nearly $1.4 billion in sovereign debt, according to Thomson Reuters’ Lipper data.

News reports have noted that The White House has essentially nixed any type of financial bailout, but signaled that Congress should consider legislation granting Puerto Rico’s public entities the opportunity to file for municipal bankruptcy.

It’s been more than six months since Detroit emerged from bankruptcy protection, which shaved $7 billion of debt off its books and allowed the city government to free up badly needed cash for municipal services like police and fire protection, as well as blight demolition. The calamitous fiscal and social similarities between Detroit and Puerto Rico are pretty striking: too much debt with too little revenue to pay for debt servicing; a precipitous and sustained population loss; numerous creditors and gaping shortfalls in its pension obligations.

Because there is virtually no appetite in either Congress or The White House for a financial rescue package, bankruptcy is seemingly the only option left for the commonwealth and its 3.6 million inhabitants. Without money to pay its obligations, Puerto Rico’s residents will essentially be living on an island without power, health and safety services, and water. There seems little choice other than for Congress to act as the island’s government creeps closer to insolvency; in municipal bankruptcy law, insolvency is considered a necessary precursor to filing for Chapter 9.

As discussed in our previous blog posts on the subject, defendants have until February 10, 2016 to respond to preference complaints. While the response date may be extended (subject to certain limitations), our attorneys have been working diligently reaching out to as many potential litigants as possible and crafting an effective defense strategy.

Managing partner, Nate Resnick, has answered a few of the most asked questions we’ve received so far in order to help litigants make some sense of this lawsuit:

Q: How can Resnick Law help me fight the allegations made by the city in its lawsuit filing?

A: We have nearly 25 years of experience dealing with these types of cases. We are regularly in front of the same bankruptcy judges in this Bankruptcy court, and we have worked for other creditors in the City of Detroit’s Chapter 9 Municipal Bankruptcy case since it was filed in 2013.  We obtained very successful results for our clients.

Q: After the city’s bankruptcy exit, how is it now possible for the city to claim that other city officials made alleged preferential treatment toward some vendors?

A: There are provisions in the Bankruptcy Code that permit bankruptcy Debtors to seek recovery of payments made within 90 days of the filing of the bankruptcy case in 2013, but only under certain circumstances. It doesn’t seem fair, but the law does provide several defenses to these preference lawsuits.

Q: Is there a way to settle the claim versus having to litigate?

A: Yes, absolutely.  Cases can settle at any time, but the stronger the defense, the better likelihood for a favorable settlement for the client.

Q: Related to the previous question, is it in a defendant’s best interest to settle or go to court and fight the claim?

A: It depends on the strength of the case, defenses and the relative leverage and skill of the attorney advocating and doing the negotiating for the client.

Q: What advice would you offer potential defendants in this matter?

A: Hire an experienced and qualified bankruptcy attorney from Detroit immediately.  The deadline to answer the lawsuits is coming up very soon (Feb. 10, 2016).  If the client does not hire an attorney to file a response on time, a default will be entered against the client immediately for the full amount in the lawsuit. 

Also, if the client is an LLC, or a Corporation, they must hire an attorney to defend the case.  An LLC or a Corporation cannot represent itself under the law.

In discussing the case, Resnick summed up the position the city has forced many small vendors and contractors in by expressing his personal outrage at this lawsuit.

“It is horrific that the very contractors and vendors that helped keep Detroit afloat during its darkest days just before the bankruptcy are now being sued by the City,” he said, “for the payments they received only three months before the filing the largest municipal bankruptcy case in the history of the United States.

“Many of these companies and individuals who are now being sued after having supported the City for so long were the very same essential vendors identified by the emergency manager that were so vital to keep the lights on in the City of Detroit,” he added.

“Now their reward for their loyalty and patience is a lawsuit filed by a law firm in New York!,” Resnick said, feeling outraged. “It is no wonder that an out of state firm filed 185 lawsuits because there is no firm in the Detroit area that would be so brazen to go after the very same folks who helped the City stay afloat.”

If you or your company have been named as a defendant against the City of Detroit in its attempt to recover funds alleged to have been paid within the 90 days prior to the city’s Chapter 9 Bankruptcy filing, note that time is of the essence and your rights are in jeopardy.

The Bankruptcy practice group at Resnick Law has been diligently preparing the defense against the city’s allegations that improper payments to select contractors and vendors were made under the notion of preferential treatment, which was described in our last blog post.

According to a recent Bankruptcy Court Order, defendants have until February 10, 2016 to respond to preference complaints. While the response date may be extended subject to certain limitations, our attorneys highly recommend a response be filed on or before Feb. 10.

Resnick Law attorneys have made attempts to reach out to all known defendants in this case; however, if you are a party to this action and know of another vendor facing potential litigation, we recommend forwarding this information along.

Our Bankruptcy attorneys are at the ready to answer your questions and help you and your company prepare to defend keeping your hard earned money. As always, we will continuously update our clients and all interested parties through our blog, direct mailings, social media and other communications.

To speak with us regarding this or other concerns, please click here or call us directly at (248) 642-5400.