Justices divided over Puerto Rico debt

The Supreme Court appeared divided Tuesday over whether Puerto Rico should be allowed to let its public utilities restructure their debts.

The island territory has more than $72 billion in outstanding debt, with public utilities accounting for $20 billion of that total.

The court hearing comes as lawmakers are closing in on legislation to address Puerto Rico’s fiscal woes; some justices questioned whether Congress would eventually resolve the issue.

“Isn’t there also legislation to put Puerto Rico back in Chapter 9?” asked Justice Ruth Bader Ginsburg.

{mosads}The territory is currently barred from allowing its municipalities to access federal bankruptcy courts under Chapter 9.

Puerto Rico in 2014 enacted legislation providing island electric and water utilities an alternative way to restructure their debt. A lower court, though, ruled that the law is not allowed under federal bankruptcy statutes. While states can allow municipalities to seek such debt relief, the lower court said, Congress had not given Puerto Rico those rights.

The Supreme Court’s liberal faction appeared sympathetic during Tuesday’s oral arguments to Puerto Rico’s claim that it needed some way to keep the lights on and water running.

But Chief Justice John Roberts said it was understandable that Congress would not want to allow a territory to act without input.

“Why would it be irrational for Congress to say, ‘All right, this is the system we’re going to apply to all the states, but when it comes to Puerto Rico, if they want changes, we want them to come to us,’ partly because Congress has a different sort of relationship with Puerto Rico than it has to all the other states?” he asked the territory’s attorney, Christopher Landau.

Justice Sonia Sotomayor, however, agreed with the island that there was no sign Congress intended to prevent Puerto Rico from taking necessary action to keep its utilities solvent.

“It is inherent in state sovereignty that states have to have some method, their own method, of controlling their municipalities,” she told lawyer Matthew McGill, who argued on behalf of creditors to Puerto Rico’s electric authority, which challenged the Recovery Act and won the lower court ruling.

McGill countered that states are barred from creating their own bankruptcy laws, an argument Sotomayor questioned.

“So why have so many major commentators, bankruptcy writers, district and circuit courts, the Sixth Circuit included, said that that’s impossible, that you can’t rob a state of the power to regulate its municipalities if you’re offering it nothing in return?” she asked.

Ginsburg also pressed McGill on why Congress would put Puerto Rico in a position where it’s unable to restructure its debts.

“Mr. McGill, why would Congress put Puerto Rico in this never-never land?” she asked. “That is, it can’t use Chapter 9, and it can’t use a Puerto Rican substitute for Chapter 9. It’s locked out by the provision on which you are relying, so it has to take the bitter, but it doesn’t get any benefit at all.”

McGill argued Congress has micromanaged Puerto Rico’s debts for a long time, even going as far as to specifically limit the amount of debt it could take on at one point.

“And it was only in 1961 that Congress ended its own restriction of Puerto Rico’s debt on the condition that Puerto Rico include that restriction in its own Constitution,” he said. “So there’s long history of Congress intervening on Puerto Rico debt issues.”

The court case comes as Democrats and Republicans are looking for a path forward on legislation.

Democrats want to give Puerto Rico the ability to declare bankruptcy and restructure its debt. Senate Democrats have offered legislation that would do just that, along with emergency aid.

But Republicans are hesitant to give bankruptcy powers and instead want more oversight. The island’s investors also oppose broad bankruptcy powers.

Speaker Paul Ryan (R-Wis.) has said the House will take up a Puerto Rico relief bill at the beginning of April, after the August recess. Lawmakers met Tuesday, with Ryan saying they were “on track” to complete legislation.

Only seven justices heard the arguments on Tuesday, with Justice Samuel Alito recusing himself. Justice Antonin Scalia passed away in February.

Justice Anthony Kennedy, who typically represents the court’s swing vote, did not ask any questions Tuesday. A decision is due out by the end of June.

This story was updated at 6:50 p.m.