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Jon Greenberg
By Jon Greenberg April 27, 2016

Mystery: Strom Thurmond, Puerto Rico and bankruptcy protection

Did he or didn’t he? Only the ghost of Strom Thurmond knows for sure.

Mystery surrounds whether, back in 1984, the former senator from South Carolina knowingly deprived Puerto Rico of bankruptcy protections that every U.S. state enjoys.

It’s crunch time for Puerto Rico. The island territory needs to pay bondholders $422 million on May 1. It doesn’t have the cash, it can’t use bankruptcy to reschedule its payments, and Congress seems unlikely to craft a solution in time to avoid a massive default.

During his April 24, 2016, HBO show Last Week Tonight, comedian and social critic John Oliver described the devil’s brew of legal oddities and fiscal recklessness by Puerto Rican officials that brought the island territory of the United States to the financial brink.

"If you are massively in debt and you can’t declare bankruptcy, you are stuck," Oliver said. "And this happened because of a tiny amendment to a law in 1984, and the crazy thing is, no one can say why it was written."

The tiny amendment Oliver mentioned was stuck in the most boring location one could ever imagine — in the definitions section of HR 5174, a bill geared mainly to fixing the bankruptcy court system. Buried in a long list of changes was the meaning of "state."

" 'State' includes the District of Columbia and Puerto Rico, except for the purpose of defining who may be a debtor under chapter 9 of this title;"

That was it. With those two dozen words, the bankruptcy protections that applied to every state, and until 1984, to Puerto Rico, too, were wiped away.

"We tried to find out for ourselves why that amendment got attached," Oliver said. "We knew Strom Thurmond had proposed it. So we asked an archivist at the library where his papers are kept to go through the relevant papers, and they came up with nothing."

Oliver quipped about that lack of a paper trail, saying it might be the best scenario for Thurmond given his reputation for "fervent racism."

Oliver enlivened his diatribe over Puerto Rico's dilemma with a rap performed by Lin-Manuel Miranda, the son of Puerto Rican parents and the creator and star of the Broadway hit Hamilton. Miranda mentioned Thurmond, too:

Somewhere down the line

Strom Thurmond's ghost busted a cap

at a chance at Chapter 9.

Which brings us to the focus of this fact-check: Did Thurmond propose the cunning words that ultimately caught Puerto Rico in a debtor’s vice?

Thurmond’s role

In a 2015 ruling, the judges of the 1st Circuit Court of Appeals provided some very helpful background.

In March 1984, the House passed its version of a bankruptcy bill. That version did not have the Puerto Rico exemption.

Then on May 21, 1984, the judges wrote that Thurmond introduced the package of changes that included the text at the center of this controversy.

"On the day that he introduced the amendment, Senator Thurmond addressed the Senate to explain several of its numerous stipulations, yet said little about the newly added Puerto Rico exemption," the judges wrote.

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In fact, we went through the Congressional Record for that day (thank you, Internet Archive). Thurmond said less than little. He said nothing.

The record shows that after Thurmond’s amendment, the exemption became part of the final legislation.

While this seems to point the finger at Thurmond, there’s more to this story.  Aside from introducing the overall amendment, Thurmond might not have had much to do with the text. It had been introduced four years before, and not in the Senate, but in the House.

Congress’ earlier run at changing the law

Experts question whether Thurmond actually understood the significance of the amendment. To see why, we have to go back to 1978.

That year, Congress gave the bankruptcy law a complete overhaul. As often happens with major legislation, various gaps and ambiguities emerged and, in 1979, the Senate passed a bill to tidy up the loose ends. Among the dross, the Senate defined states to include Puerto Rico, the District of Columbia and any territory or possession of the United States.  

That legislation moved over to the House, and here the trail becomes murky. Bankruptcy law professor Stephen Lubben at Seton Hall University traced the twists and turns in a 2014 article.

"In July 1980, the House Judiciary Committee returned with an ‘amendment’ to the Senate bill that struck the entire Senate text and replaced it with the Judiciary Committee’s desired text, including a new definition of ‘state,’ " Lubben wrote.

The House version, under Democratic control, had the Chapter 9 bankruptcy exclusion for Puerto Rico and the District of Columbia.

That bill never passed, but in April 1981, Lubben found that the exclusion language "resurfaced" in the Senate.

"This exclusion was never discussed by Congress, at least publicly, and the language apparently simply materialized as a result of the House Judiciary Committee’s extensive revision of the 1979 Senate ‘technical corrections’ bill," Lubben wrote.

Lubben told us that the text in Thurmond’s 1984 amendment "was essentially the same language that was kicking around since 1980."

"It’s not even clear that the parties even understood what was going on," Lubben said. "The only thing we can say for certain is the change happened without a whole lot of thought behind it."

Another factor makes it hard to find Thurmond’s fingerprints on the text that beleaguers Puerto Rico today.

The change was never offered as a stand-alone item. It was always bundled with a number of other small changes. Law professor John Pottow at the University of Michigan told us, "Strom Thurmond might have introduced that, but it’s an overstatement to say he played a big role."

A final mystery — if you’ve followed the trail this far, you will notice that in 1984, the House version of the bill didn’t have the Puerto Rico exclusion. The logical question is, why was it dropped when the House was the first to add it in 1980?

We wish we knew.

Our ruling

Oliver said "we know that Thurmond proposed" the text that stripped Puerto Rico of the right to let municipalities and public utilities declare bankruptcy. There is no question that Thurmond introduced the amendment with that change.

So technically, he did propose it. But there’s no evidence that he came up with the idea, and experts question that he understood the significance of the change that would follow.

The statement is accurate but requires some additional information. We rate this claim Mostly True.

https://www.sharethefacts.co/share/260b6aad-f921-45fc-9937-1d82d35f7874

This fact-check previously contained erroneous references about the timing of Strom Thurmond's Senate career and Lin-Manuel Miranda's birthplace.

Our Sources

HBO, The John Oliver Show, April 24, 2016

Associated Press, House Republicans working to help Puerto Rico avoid economic collapse have faced setbacks, as nationwide ads erroneously charge that their bill supports a financial bailout for the territory, April 25, 2016

Genius, Puerto Rico (A Hundred Miles Across), April 24, 2016

U.S. Court of Appeals, Franklin California Tax Free Trust v. Puerto Rico PREPA, July 6, 2015

GovTrack, Text of the Bankruptcy Amendments and Federal Judgeship Act of 1983, July 10, 1984

Congressional Record, Page 13058, May 21, 1984, via Internet Archive

American Bankruptcy Law Journal, Puerto Rico and the bankruptcy clause, Fall 2014

Noticel, Who put the brake on that PR could not qualify for federal bankruptcy, July 8, 2015

Bloomberg, Congress Goofed. Puerto Rico Pays., Dec. 3, 2015

George Mason University, Origins of the Puerto Rico Fiscal Crisis, April 12, 2016

John Pottow, Testimony before the Committee on House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law, Feb. 26, 2015

Kenneth Klay, Testimony before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law, House Committee on the Judiciary, Feb. 26, 2015

Interview, Stephen Lubben, professor of law, Seton Hall University School of Law, April 26, 2016

Interview, John Pottow, professor of law, University of Michigan Law School, April 26, 2016

 

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