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High Court Rules Against Puerto Rico in Debt Case

by Associated Press /
This file photo taken on February 8, 2015 shows the Puerto Rican and US flags in the Old Town district of San Juan, Puerto Rico.PAUL J. RICHARDS / AFP - Getty Images

The Supreme Court ruled Puerto Rico cannot restructure more than $20 billion in public debt as it tries to overcome a decade-long economic crisis on Monday.

The 5-2 ruling said that federal bankruptcy law bars Puerto Rico from enacting its own law to restructure the debt of its financially ailing public utilities. The decision means the U.S. territory must wait for Congress to pass debt-relief legislation that would address its fiscal woes.

Puerto Rico lawmakers passed the law in 2014 to help cash-strapped utilities meet obligations to bondholders and creditors. Puerto Rico argued that it could enact its own measures since the island is precluded from using bankruptcy law. But the Supreme Court upheld lower court rulings that struck down the law.

The commonwealth is mired in recession and cannot pay $72 billion in public debt.

Writing for the court, Justice Clarence Thomas said the plain text of the law bars Puerto Rico from enacting its own municipal bankruptcy schemes. He said Congress "would have said so" if it didn't want the exclusion to apply to the island.

"Congress does not, one might say, hide elephants in mouseholes," Thomas said.

The case has diminished in importance since Congress began considering legislation that would create a new control board to manage the territory's finances and allow the board to supervise some court-ordered debt restructuring. Help for the debt-stricken territory may be just weeks after the House voted Friday to approve the bill.

Lawmakers had hoped to pass the measure before May 1, when Puerto Rico defaulted on $370 million in bond payments. GOP leaders are now focusing on a July 1 deadline, when around $2 billion in principle and interest payments come due.

A high court ruling in Puerto Rico's favor would have given the island more leverage to negotiate with creditors, even as Congress moves closer to passing debt-relief legislation.

Justice Sonia Sotomayor, whose parents were born in Puerto Rico, filed a dissent that was joined by Justice Ruth Bader Ginsburg. She said preventing the island from passing its own debt restructuring laws "means that a government is left powerless and with no legal process to help its 3.5 million citizens."

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

The issue before the high court was how to interpret a 1984 amendment to the nation's federal bankruptcy laws. The law allows states to let their cities and utilities seek bankruptcy relief, but it specifically excludes Puerto Rico — a territory — from doing so.

Puerto Rico lawmakers passed their own version of bankruptcy laws in 2014 to help the island's utilities meet obligations to bondholders and creditors. But a federal district court agreed with creditors - including BlueMountain Capital Management, OppenheimerFunds Inc. and Franklin Advisers Inc. - in ruling that the local measure is not allowed under federal bankruptcy law. The 1st U.S. Circuit Court of Appeals agreed.

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