Vacant buildings dot the coast in the upscale Condado neighborhood in San Juan, Puerto Rico.
Vacant buildings dot the coast in the upscale Condado neighborhood in San Juan, Puerto Rico. - 
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On Wednesday, one of Puerto Rico’s government agencies failed to transfer a debt payment of $93.7 million to a trustee. Failure to make an additional payment on August 1 could constitute a default. If this same scenario were happening in a state, that agency would probably restructure what it owes — just look at the city of Detroit in 2013. But Puerto Rican agencies can’t do that.

"What's really weird about Puerto Rico is that the commonwealth has been excluded from the Chapter 9 provisions of the bankruptcy code," says John Pottow, a professor at the University of Michigan Law School. "Now what's weird about Puerto Rico's omission from the bankruptcy code is that no one can really defend it. It appears to be a technical error. In fact, if you go back through the legislative history it looks like Congress tried to fix it and was unsuccessful. So, the clear text of the Federal Bankruptcy Code for mysterious reasons precludes Puerto Rico from letting its entities file for Chapter 9."

There's a bill in Congress that would allow Puerto Rican agencies to file for Chapter 9, but it has stalled. And Federal Reserve Chair Janet Yellen said Wednesday that she thinks the Fed "can't and shouldn't" get involved in the commonwealth's debt crisis. The commonwealth itself even drafted legislation to try to restructure its debt. 

"It passed and then got struck down as unconstitutional for, ironically, violating Chapter 9 of the Federal Bankruptcy Code, which they say preempts it," Pottow says. 

Steven Walt, a bankruptcy law specialist at the University of Virginia School of Law, says even if Puerto Rican agencies continue to miss payments, bond holders aren't in a very powerful position because everyone will just have to wait and see what happens in Congress before creditors can go about collecting.

"Realistically speaking, OK, so there's a default," Walt says. "What are the collectors going to do? Yes, they're entitled to payment and even to accelerate their debt, but they're going to have a very hard time realizing on any assets in Puerto Rico."

Walt says the complicated, multifaceted debt restructuring scenario for Puerto Rico puts it between a rock and a hard place. "They can't restructure, without unanimous agreement, and that's not forthcoming. At the same time, they don't have entry into the bankruptcy code. They can't enter it directly as a municipality, obviously. And secondly, Chapter 9 somehow preempts them from enacting legislation that would allow for restructuring. So, it leaves them out in the cold, doesn't it?"

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Follow Andy Uhler at @AU_Marketplace