High court seems sympathetic to Puerto Rico in debt case

WASHINGTON (AP) – Four liberal justices on a short-handed Supreme Court seemed sympathetic Tuesday to arguments that Puerto Rico officials should be allowed to restructure the debt of the island’s financially struggling public utilities.

Some of those justices expressed early doubts about Puerto Rico’s position as arguments in the case began. But by the end of the one-hour session, they appeared open to the idea that federal bankruptcy law does not prevent the island from passing its own measure offering debt relief to local municipalities.

The issue has roiled the island, which is going through the most severe economic crisis in its history. It is mired in a decade-long recession and its governor announced last year that it cannot pay $72 billion in public debt.

The case was argued before only seven justices, and the court’s four liberals could control the outcome. Justice Antonin Scalia died in February and Justice Samuel Alito recused himself. Alito owns shares in a tax-free fund that invests in Puerto Rican bonds and is involved in the case.

At issue is how the court should interpret a 1984 amendment to the nation’s federal bankruptcy laws. While states are allowed to let their cities and utilities seek bankruptcy relief, federal law specifically excludes Puerto Rico, a territory, from doing so.

So Puerto Rico lawmakers passed their own law in 2014 to help cash-strapped utilities meet obligations to bondholders and creditors. But a federal district court agreed with creditors in ruling that the local measure is not allowed under federal bankruptcy law. The 1st U.S. Circuit Court of Appeals agreed.

At the start of the argument, Justice Stephen Breyer seemed convinced that bankruptcy law does not give Puerto Rico the same power as states.

“I can’t say that an airplane means a horse,” Breyer told Puerto Rico’s lawyer Christopher Landau.

And Justice Elena Kagan said if Congress really meant to give Puerto Rico free rein to restructure debt by passing its own law, the 1984 amendment was a “cryptic, odd way to make such a major change.”

Landau said it was “nonsensical” to think that Congress would put Puerto Rico in a position where it’s barred from restructuring its debts under federal law, yet unable to reorganize under local law.

“It is facing a crisis in providing essential services to its citizens,” Landau said.

But by the time Matthew McGill, lawyer for the creditors, took the podium, Kagan said she now wondered whether Puerto Rico’s interpretation of the law wasn’t just as persuasive.

“I didn’t come here thinking that,” she said.

Justice Sonia Sotomayor, the daughter of Puerto Rico-born parents, seemed to be the island’s biggest supporter on the bench. She repeatedly interrupted McGill to challenge his view of the law. She asked McGill why Congress would intend to prevent Puerto Rico “from passing emergency legislation that said, ‘Don’t shut off the lights tonight.'”

Justice Ruth Bader Ginsburg asked McGill why Congress “would put Puerto Rico in this never-never land.”

McGill said Congress “has micromanaged Puerto Rico’s debt” for a long time and has a history of intervening to help the island.

Among the three conservatives, only Chief Justice John Roberts asked questions. He suggested it was not irrational for Congress to have one system for states, but require Puerto Rico to seek legislative relief.

A Supreme Court ruling that favors Puerto Rico would allow officials to put agencies including the Puerto Rico Electric Power Authority and Puerto Rico Highways & Transportation Authority into bankruptcy. That would help the island restructure about $20 billion in debt. It could also give the island more negotiating power as it deals with creditors.

Puerto Rican officials and the Obama administration have spent months trying to persuade Congress to enact legislation that would let Puerto Rico seek bankruptcy protection under a framework reserved for U.S. territories.

House Speaker Paul Ryan said last year that the House would work to come with “a responsible solution” by the end of March, and Tuesday he said lawmakers are on track to meet that deadline. The House Natural Resources Committee, which has oversight of the territory, is expected to introduce legislation laying out some ways to alleviate the crisis by next week.

So far, Republicans in Congress have objected to allowing the territory to restructure its debt, saying they first want to address the root causes of the crisis and see more data on the island’s finances. Democrats say giving the island bankruptcy protection won’t cost U.S. taxpayers and is the right thing to do.