March 22, 2016 / 4:29 PM / 3 years ago

Liberal justices lean toward Puerto Rico in debt case

The power station Central San Juan of Puerto Rico Electric Power Authority (PREPA) is seen in San Juan, Puerto Rico, June 30, 2015. Reuters/Alvin Baez-Hernandez

WASHINGTON (Reuters) - Liberal justices on Tuesday signaled support for Puerto Rico’s bid to convince the Supreme Court to revive a law that could let the U.S. territory cut billions of dollars in debt at public utilities in a key test in its quest to weather a fiscal crisis.

The issue before the court was whether the Caribbean island’s 2014 law known as the Recovery Act, which was invalidated by U.S. courts last year, conflicts with U.S. federal bankruptcy law. With only seven justices hearing the case, the Supreme Court’s four liberals, including one whose parents were from Puerto Rico, could determine the outcome.

Puerto Rico faces what its governor has called an unpayable $70 billion in debt. In 1984, Congress passed legislation that barred Puerto Rico, as a U.S. territory and not a state, from using statutes that let states put struggling municipalities into bankruptcy. The Supreme Court must decide whether other aspects of federal bankruptcy law apply to Puerto Rico, specifically a provision barring states from passing their own restructuring laws. Applying that provision to Puerto Rico would mean the island could neither pass its own law nor use federal bankruptcy law.

“Why would Congress put Puerto Rico in this never-never land?” liberal Justice Ruth Bader Ginsburg asked. The Recovery Act would not apply to all of Puerto Rico’s debt, but would let it put into bankruptcy public utilities including power authority PREPA. Two U.S. court decisions deemed the Recovery Act invalid after PREPA creditors sued, with the Supreme Court agreeing in December to hear Puerto Rico’s appeal. Puerto Rico needs four votes among the seven justices to overturn the rulings that invalidated the Recovery Act. Conservative Justice Samuel Alito recused himself from the case. Conservative Justice Antonin Scalia, who died in February, has not yet been replaced.


Liberal Justice Sonia Sotomayor, whose parents were from Puerto Rico, was the most supportive of the territory. She expressed skepticism that Congress would have kept Puerto Rico from federal bankruptcy without allowing it to pass “emergency legislation that said, ‘Don’t shut off the lights tonight.’” Comments from fellow liberals Elena Kagan and Stephen Breyer were more measured, but indicated they could back Puerto Rico.

Kagan said Puerto Rico’s reading of the bankruptcy statute could be stronger than that of the creditors.

“I didn’t come in here thinking that, but now I kind of am thinking that,” Kagan said. Breyer, though, said the language of the statute does not favor Puerto Rico. “I can’t say that an airplane means a horse,” Breyer said. The only justice who expressed hostility to Puerto Rico’s position was conservative Chief Justice John Roberts, who said he was not sure the territory’s argument “carries much weight.” “Why would it be irrational for Congress to say ... ‘When it comes to Puerto Rico, if they want changes (to debt), we want them to come to us?’” Roberts asked Puerto Rico’s lawyer. Conservative justices Anthony Kennedy and Clarence Thomas did not speak during the oral argument. Reinstating the Recovery Act could threaten a hard-fought, consensual restructuring at PREPA, where creditors holding most of the utility’s $8.3 billion in debt agreed to take 15 percent reductions in payouts. The Recovery Act could allow Puerto Rico to scrap that deal and instead put PREPA into bankruptcy, where it could impose deeper cuts and bind holdout creditors. The Supreme Court is expected to rule by the end of June.

Puerto Rico’s debt traded in very tight ranges on Tuesday, drawing little conclusions from the Supreme Court arguments. The benchmark 2035 General Obligation bond, bearing an 8 percent coupon, traded up just 2 basis points to bid 71.90, with the yield at 11.69 percent, according to data from the Municipal Securities Rulemaking Board.

Reporting by Lawrence Hurley and Nick Brown; Editing by Will Dunham

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