High court rules against Puerto Rico in debt case

Federal bankruptcy law bars Puerto Rico from restructuring the debt of its insolvent public utilities, the U.S. Supreme Court has ruled in a 5-2 decision.

Nevertheless, Puerto Rico passed its own law in 2014 to restructure some of its $72 billion of debt, including $20 billion with public utilities.

According to Justice Clarence Thomas’ majority opinion in Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, a quirk in the Bankruptcy Code locks Puerto Rico out of legal protections afforded to almost any other debtor.

“But in the interim, the government and people of Puerto Rico should not have to to wait for possible congressional action to avert the consequences of unreliable electricity, transportation and safe water”.

Puerto Rico Governor Alejandro García Padilla says that the island will have to cut the necessities from its residents, if it is to service the bonds.

Earlier this year there were a couple of paths Puerto Rico could take to restructure its massive $70 billion in debt.

Justices Sonia Sotomayor and Ruth Bader Ginsburg dissented. “Our goal must not only be to give Puerto Rico the flexibility it needs to restructure its debt, but to make sure that it can rebuild its economy, create good-paying jobs and expand its tax base”. However, it was also struck down by the lower courts.

Justice Clarence Thomas, writing for the Supreme Court, said Puerto Rico is not considered a U.S. state in one part of bankruptcy law, meaning it can not authorise its municipal agencies to restructure debt.

If public utility companies in one of the 50 states found themselves in a similar situation, they could seek relief through bankruptcy. The problem with this law, according to Justice Thomas, is that it runs afoul of another provision of the federal Bankruptcy Code that prevents states from enforcing their own bankruptcy provisions against unwilling creditors.

In its appeal to the Supreme Court, commonwealth officials argued that the appeals court’s decision left the island in a legal “no man’s land” without access “to any legal mechanism to restructure” its utilities’ debt.

The primary disagreement between Thomas and Sotomayor is whether Puerto Rico can count as a “State” for purposes of this later provision but not for purposes of its ability to greenlight municipal bankruptcies. Finding pre-emption here means that a government is left powerless and with no legal process to help its 3.5 million citizens.

Justice Samuel A. Alito Jr. did not participate in the case, Puerto Rico v. Franklin California Tax-Free Trust.

Puerto Rico, also hit by a 45 percent poverty rate and a shrinking population, faces economic calamity without measures that either change its laws or involve an agreement with creditors, which include USA hedge funds.