Ethical Dilemmas: The Puerto Rican debt-crisis and Bankruptcy Law
On June 28, 2015, Alejandro García Padilla, Governor of Puerto Rico, declared the island’s approximate $72 billion worth of debt to be ‘not payable’. The governor’s assessment came to fruition when Puerto Rico missed a payment of $58 million payment on Public Finance Corporation (PFC) bonds due August 1st. For those who were already watching Puerto Rico closely, the pronouncement, and subsequent default, came as a shock, but not necessarily as a surprise. An October 2013 article published by The New York Times labeled Puerto Rico’s financing strategies as “unsustainable in the long run”. Furthermore, starting in 2000, Puerto Rico experienced 15 consecutive government deficits, and in February 2014, was downgraded by all three of the major credit rating agencies (Standard & Poor’s, Moody’s and Fitch) to non-investment grade, or ‘junk status’, signaling an increase in probability that the commonwealth would default on its debt obligations.
Puerto Rico has seeked debt relief and negotiation with its creditors, the problem however is that since the island is not a normative municipality, it doesn’t have the right to file chapter 9 bankruptcy, a right that municipalities like Detroit utilized to gain the necessary protection and leverage when negotiating with creditors to alleviate their financial woes. Affording Puerto Rico bankruptcy protection has been the subject of intense debate throughout the financial and political worlds. In July, Senator Chuck Schumer sought to help the commonwealth by proposing the Puerto Rico Chapter 9 Uniformity Act; since then, presidential hopefuls such as Hillary Clinton, Jeb Bush and Marco Rubio have all weighed in on the matter. The Puerto Rican bankruptcy controversy raises the question of whether or not declaring bankruptcy and defaulting on payments is ethical in the first place. In this article we’ll take a look at what the Jewish tradition has to say about defaulting on loan payments, declaring bankruptcy and overall debtor-creditor relations.
The first aspect of bankruptcy protection to consider is the fact that, by filing for bankruptcy, the debtor is essentially withholding the money of another party and is partially or completely (depending on the type of bankruptcy) ignoring his or her financial responsibility towards the creditor. The Talmud records that there is a positive commandment to repay debt obligations (Ketubot 86a), Maimonides (12th Century A.D.) suggests that failure to do so would constitute a violation of “Lo Taashok”, or ‘do not commit fraud’ (Sefer HaMissvot, Lo Ta’aseh 247). However, there is a concept in Jewish Law known as creditor’s despair (“Yeush”). This concept means that if the creditor believes, within reason, that the debtor does not--neither at this point in time, nor at any time in the future--have the ability to pay, than it is considered as if they have given up on receiving the money and the borrower would be absolved of his obligation.
The extent to which this concept is applied is argued amongst Jewish legal scholars. Rabbi Yosef Caro (16th century A.D.) states in his magnum opus, The Shulchan Aruch, that creditor’s despair does not override a debt obligation as a simple result of the debtors messy financial situation (Choshen Mishpat 262:5). Rabbi Moshe Isserles (“The Rema”), a contemporary of Rabbi Caro, agrees with this general sentiment. Rabbi Aryeh Leib HaKohen Heller (18th Century A.D.) (“The Ketzot HaChoshen”) points out that in the view of The Rema and other notable Jewish legal authorities of his time, if the circumstances are such that would lead any reasonable creditor to have Yeush--for example, a case “where the debtor's fields are ruined by floods”--the debt would be considered discharged. There is a third opinion, of Rabbi Meir Auerbach (19th Century A.D.) (“The Imrei Binah”) which states that the concept of creditor’s despair overrides a debtor’s obligation under all circumstances aside from financial negligence of the part of the borrower. Assessing whether or not negligence played a role in the debtor’s financial situation can prove to be somewhat difficult, and would most likely need to be carefully determined on a case by case basis.
Now that we’ve assessed the varying opinions as to a borrower’s right to default on their loan payments, we’ll take a look at the extent to which American ‘bankruptcy protection’ plays a role in Jewish Law. According to contemporary American bankruptcy law, there are three primary types of bankruptcy. A debtor could either liquidate all of their assets and use the money to pay creditors (Chapter 7), it could extend debt payments and create some form of a payment plan (Chapter 13) or the debtor could reorganize their debt (Chapter 9,11).With regards to civil law, the Jewish tradition makes room for incorporating the common practice (“Minhag Hasocharim”) into its own law. For example, the Talmud states that “One who hires laborers and tells them to come early or stay late: in a place where the custom is not to come early or stay late, the employer is not allowed to force them [to do so]. . . All [such terms] are governed by local custom." (Bava Metzia 83a). Rabbi Moshe Feinstein (21st Century A.D.) deduces from this passage and others like it in the Talmud, that when it comes to monetary laws, the prevalent custom can sometimes supercede Jewish Law (Iggeros Moshe, Choshen Mishpat, part 1, no. 72.).(This statement is not unqualified, and the extent to which this is true is not the subject of this article).
In terms of Minhag Hasocharim’s application in bankruptcy law, Rabbi Moshe HaKohen (16th Century A.D.) (“The Maharshach”) was once asked to adjudicate a case where a debtor was having a hard time meeting his obligations, and a majority of the creditors agreed to give him additional time to pay. One of the creditors was not happy about the agreement, and brought the debtor to Jewish court in an effort to force the debtor to meet his obligations. Citing passages in the Talmud with a similar sentiment to the previously mentioned passage, The Maharshach ruled that since it was customary for creditors to forgive their obligors in this type of situation the creditor did not have a valid claim (Responsa, volume 2, no. 113). This ruling was quoted favorably by other notable Jewish Legal Scholars such as Rabbi Samuel of Medina (16th Century) (Choshen Mishpat: 108).
Needless to say, this article purposely does not express a conclusion, but rather, presents a fraction of a larger more detailed discussion and analysis of the Jewish perspective on the intricacies involved in debtor-creditor relations.
NOTE: Most of the primary sources used for this article as well as translations were derived from ‘Bankruptcy - A Viable Halachic Option’ written in 1992 by Steven H. Resnicoff, Professor, DePaul University College of Law