Court Battles

Supreme Court rules Puerto Rico can’t restructure debt

The Supreme Court ruled Monday that Puerto Rico can’t restructure the debts of its public utilities to avoid a financial crisis, closing off one of the island’s last remaining options for avoiding default without help from Congress.

In a 5-2 ruling, the justices said that although the government and people of Puerto Rico should not have to wait for possible congressional action to avert a financial crisis, the Constitution does not allow them to rewrite a statute that Congress enacted in 1984.

While states can allow municipalities to seek such debt relief, the lower court said, Congress had not given Puerto Rico that right.

{mosads}“The plain text of the Bankruptcy Code begin and ends our analysis,” Justice Clarence Thomas wrote in the majority opinion. “Resolving whether Puerto Rico is a ‘state’ for purposes of the pre-emption provisions begins ‘with the language of the statute itself,’ and that ‘is also where the inquiry should end’ for ‘the statute’s language is plain.’ ”

Puerto Rico had long been included as a state under the bankruptcy code, but Congress amended that definition in 1984 to exclude the territory.

The island has more than $72 billion in outstanding debt, with public utilities accounting for $20 billion of the total. Seeking to alleviate that burden, Puerto Rico enacted legislation in 2014 that would have provided the island’s electric and water utilities an alternative way to restructure their debts.

Investors filed a legal challenge to that measure, citing the 1984 law. The Supreme Court on Monday affirmed a lower court ruling that found the utilities cannot restructure the debt under federal bankruptcy rules.

Financial reform advocates said they hope the court’s decision will motivate Congress to finish a bill addressing Puerto Rico’s debt before the island territory defaults on a $2 billion payment on July 1

“I think what the decision makes clear is the only real option on the table right now is congressional action,” said Eric LeCompte, executive director of Jubilee USA. “Now that the House has passed legislation, it’s incumbent on the Senate to pass its version of the legislation.”

The House bill, which passed on Friday, would allow Puerto Rico to restructure its debt, including the amount held by the utilities. The government would not provide Puerto Rico with any money under the measure, and the territory’s finances would be placed under the supervision of a new oversight board.

The House bill has support from both parties, as well as the White House. Speaker Paul Ryan (R-Wis.) and House Minority Leader Nancy Pelosi (D-Calif.) both gave floor speeches in favor of the measure on Friday.

“The Puerto Rican people are our fellow Americans. They pay our taxes. They fight in our wars,” Ryan said. “We cannot allow this to happen.”

Ryan’s office said on Monday that the court’s decision “underscores the importance of getting the House-passed bill to the president’s desk to prevent a taxpayer bailout and help the people of Puerto Rico.”

The Senate appears to have doubts about the House bill, but considering the July 1 deadline, members have suggested it could still move directly to the floor for a vote.

“There is no plan B for Puerto Rico right now,” LeCompte said. “There’s only two viable options: the legislation pending and the other is direct negotiations between the creditors and the government of Puerto Rico.”

LeCompte, however, doubts the territory would be able to reach an agreement with its creditors in time.  

“We’re not going to see a negotiated solution by July 1,” he said. “That’s just not in the cards.”

Frank Shafroth, director of the Center for State and Local Leadership at George Mason University, argued that Puerto Rico’s Recovery Act would have given the island greater leverage in handling the $72 billion it owes.

“The [Supreme Court] decision, however, leaves Puerto Rico more dependent than ever on Congress to authorize means for the U.S. territory to avoid insolvency,” he said in an email to The Hill. “Puerto Rico and its public agencies face a $2 billion payment due July 1st, after defaulting May 1st on $370 million of Government Development Bank debt.”

Justice Sonia Sotomayor, who issued a dissenting opinion, insisted that Puerto Rico’s law created the only nonfederal bankruptcy solution to restructure debts that could cripple its citizens.

“Congress could step in to resolve Puerto Rico’s crisis,” she wrote. “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 — consequences that members of the Executive and Legislature have described as a looming ‘humanitarian crisis.’ ”

Justice Ruth Bader Ginsburg joined in the dissent.

Justice Samuel Alito took no part in considering or deciding the case. Reports said Alito recused himself from the case due to some of his financial investments, but the court did not disclose a reason for his decision.

Updated at 2:30 p.m.

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