Puerto Rico may have better chance of Supreme Court win after Scalia death

NEW YORK (Reuters) - Financially troubled Puerto Rico’s push for a debt restructuring program could get a lift from the death of conservative Justice Antonin Scalia, who was viewed as likely to oppose granting such relief in an upcoming U.S. Supreme Court case.

The bench of late Supreme Court Justice Antonin Scalia is seen draped with black wool crepe in memoriam inside the Supreme Court in Washington February 16, 2016. REUTERS/Carlos Barria

The highest U.S. federal court in December agreed to hear Puerto Rico’s bid to reinstate a 2014 law called the Recovery Act after it was struck down by a lower court.

The government of the U.S. territory, which has around $70 billion in borrowings, hoped the act would help it to restructure its debt and pull it out of a fiscal crisis. It would give the Caribbean island more power to impose conditions on creditors in a debt restructuring, which could worsen creditor recoveries, bondholders had argued.

“Scalia has been a fairly aggressive defender of contractual rights over the years,” said Height Securities analyst Daniel Hanson, who estimated the chances of a Puerto Rico victory have risen to around 30 percent from five percent after Scalia’s death.

Scalia, who served on the Supreme Court for nearly 30 years, died at a ranch in Texas last Saturday, setting up a major political showdown between President Barack Obama and the Republican-controlled Senate over who will replace him on the nine-member court.

A Supreme Court victory could help strengthen the arguments of island officials and a number of Democrats in their campaign to give Puerto Rico bankruptcy protection rights, which U.S. states already receive. That effort has been stunted by lack of Republican support.

The Recovery Act was designed to apply to some of Puerto Rico’s public corporations, such as utility PREPA, but excluded debt issued by the island and its Government Development Bank.

PREPA bondholders Oppenheimer Funds and Franklin Templeton sued Puerto Rico, claiming the act would enable Puerto Rico to modify debt obligations. A U.S. federal court in Puerto Rico a year ago voided the Recovery Act saying it contravened federal bankruptcy law, and a U.S. appeals court affirmed that last July.

The Puerto Rican government and its lawyers, as well as a representative for the bondholder plaintiffs, did not respond to requests for comment or declined comment.


Scalia’s death means that only seven justices are likely to vote on the Puerto Rico case as Justice Samuel Alito, a conservative, who had investments in funds with Puerto Rico bonds, last year recused himself.

If there had been a tied 4-4 vote it would have automatically upheld the lower court’s decision. Alito could still participate if he divests investments before the oral argument.

Of the remainder of the justices, four are viewed as liberals and three as conservatives. The latter are seen by some restructuring experts as more likely to support creditors on the basis of contractual business rights.

“The four liberal justices are the justices most likely to be sympathetic to Puerto Rico’s arguments,” said David Skeel, Professor at the University of Pennsylvania law school, who said Scalia’s death creates the possibility that the liberal block will prevail by a 4-3 vote. Skeel wrote a brief supporting Puerto Rico’s position in the case.

Still, the restructuring experts said that it may be too simple to suggest that Scalia would have voted against Puerto Rico as the case involves complex legal questions.

Richard Levin, Co-head of Jenner & Block’s Restructuring and Bankruptcy Department, said the court tries very hard to apply the law, rather than allow political leanings to dominate its decisions.

Carlos Del Valle Cruz, counsel for Eduardo Bhatia, president of Puerto Rico’s Senate, also said that Scalia’s absence may favor Puerto Rico.

A complicating factor is a separate case which was just argued in front of the U.S. Supreme Court. That concerns the indictment of two men by Puerto Rico prosecutors on gun charges, and their subsequent indictment by a federal grand jury. Both pleaded guilty to the federal charges and were sentenced to prison but the case in Puerto Rico continued.

The U.S. Solicitor General Donald Verrilli has argued that the Puerto Rico prosecution violated double jeopardy laws that ban trying a defendant twice for the same crime in the same jurisdiction, while Puerto Rico’s government countered that its rights to self-governance were threatened.

Nicholos Venditti, a portfolio manager at Thornburg Investment Management, said rulings in both cases could “have significant implications for Puerto Rico and the U.S. that reach far beyond the $70 billion in debt.”

John Miller, co-head of fixed income for Nuveen Asset Management, which holds around $300 million in par value of insured Puerto Rican paper, said the concern with the Recovery Act being reinstated would be the potential for it to be expanded to other issuers beyond the public agencies it was originally designed for.

Oral arguments in the Supreme Court case are scheduled to be held March 22.

Additional reporting by Lawrence Hurley in Washington, D.C.; Editing by Martin Howell