Debt Ruling Leaves Puerto Rico's Future in Congress' Hands

by | June 14, 2016

By Greg Stohr

The U.S. Supreme Court struck down a Puerto Rico law that would have let its public utilities restructure their debt over the objection of creditors, leaving it to Congress to help the island resolve its fiscal crisis.

Siding with bondholders challenging the law, the court ruled 5-2 that the measure was barred under federal bankruptcy law.

The Recovery Act, as the local law was known, would have directly affected more than $20 billion in utility debt and given the commonwealth more leverage in handling the rest of the $70 billion it owes.

The decision leaves Puerto Rico dependent on Congress to extricate the island from its difficulties. Lawmakers are working on legislation that would create a federal oversight board to help manage the island's budgets and supervise a debt restructuring. A ruling backing the Recovery Act might have given Puerto Rico and its allies more leverage in that process.

The island and its agencies face a $2 billion payment due July 1. Puerto Rico defaulted May 1 on $370 million of Government Development Bank debt.

Federal law lets states authorize bankruptcy filings by public utilities and other municipalities but bars Puerto Rico and the District of Columbia from doing the same thing. Puerto Rico sought to get around that provision in 2014 by passing a local law that offers an option similar to bankruptcy.

Writing for the Supreme Court majority, Justice Clarence Thomas said Congress didn't authorize Puerto Rico to take that step.

"Our constitutional structure does not permit this court to rewrite the statute that Congress has enacted," Thomas wrote.

Justices Sonia Sotomayor and Ruth Bader Ginsburg dissented. They said Puerto Rico was right that Congress didn't mean to leave the island without access to either federal or local restructuring law.

"Congress could step in to resolve Puerto Rico's crisis," said Sotomayor, whose parents were born in Puerto Rico. "But, in the interim, the government and people of Puerto Rico should not have to wait for possible congressional action to avert the consequences of unreliable electricity, transportation, and safe water."

The dispute focused on a 1984 amendment to the federal bankruptcy code. The amendment said Puerto Rico and the District of Columbia were to be considered states under the code, except that neither could authorize utilities to file for bankruptcy.

Puerto Rico said that amendment implicitly freed the island to pass its own restructuring law. The bondholders argued that the Recovery Act was barred under an older, separate provision that prohibits states and Puerto Rico from enacting local bankruptcy laws.

The Supreme Court considered the case two justices short of its usual complement of nine. Justice Antonin Scalia died in February, and Justice Samuel Alito didn't take part because he had a financial conflict.

(Michelle Kaske contributed to this report.)

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