Supreme Court Rules Against Puerto Rico in Debt Case

Puerto Rico can't use a local law to restructure the debt of its financially ailing public utilities as it tries to overcome a decade-long economic crisis, the Supreme Court ruled Monday.

The 5-2 ruling said that federal bankruptcy law bars Puerto Rico from enacting its own law to restructure about $20 billion in debt. The decision means the U.S. territory must wait for Congress to pass debt-relief legislation that would address its fiscal woes.

Puerto Rico lawmakers passed the law in 2014 to help cash-strapped utilities meet obligations to bondholders and creditors. Puerto Rico argued that it could enact its own measures since the island is precluded from using bankruptcy law. But lower courts struck down the law.

The commonwealth is mired in recession and cannot pay $72 billion in public debt.

Writing for the court, Justice Clarence Thomas said the plain text of the law bars Puerto Rico from enacting its own municipal bankruptcy schemes. He said Congress "would have said so" if it didn't want the exclusion to apply to the island.

"Congress does not, one might say, hide elephants in mouseholes," Thomas said.

The case has diminished in importance since Congress began considering legislation that would create a new control board to manage the territory's finances and allow the board to supervise some court-ordered debt restructuring. Help for the debt-stricken territory may be just weeks after the strong House voted Friday to approve the measure.

Lawmakers had hoped to pass the measure before May 1, when Puerto Rico defaulted on $370 million in bond payments. GOP leaders are now focusing on a July 1 deadline, when around $2 billion in principle and interest payments come due.

A high court ruling in Puerto Rico's favor would have given the island more leverage to negotiate with creditors, even as Congress moves closer to passing debt-relief legislation.

Justice Sonia Sotomayor, whose parents were born in Puerto Rico, filed a dissent that was joined by Justice Ruth Bader Ginsburg. She said preventing the island from passing its own debt restructuring laws "means that a government is left powerless and with no legal process to help its 3.5 million citizens."

"Congress could step in to resolve Puerto Rico's crisis," Sotomayor said. "But, in the interim, the government should not have to wait for possible congressional action to avert the consequences of unreliable electricity, transportation and safe water."

The issue before the high court was how to interpret a 1984 amendment to the nation's federal bankruptcy laws. The law allows states to let their cities and utilities seek bankruptcy relief, but it specifically excludes Puerto Rico — a territory — from doing so.

Puerto Rico lawmakers passed their own version of bankruptcy laws in 2014 to help the island's utilities meet obligations to bondholders and creditors. But a federal district court agreed with creditors — including OppenheimerFunds Inc. and Franklin Advisers Inc. — in ruling that the local measure is not allowed under federal bankruptcy law. The 1st U.S. Circuit Court of Appeals agreed.

The pending bill in Congress contains language that would prevent Puerto Rico from using its own laws to restructure public debt.

Earlier versions of a House bill came under fire from conservatives worried it would set a precedent for financially ailing states. Democrats worried the control board would be too powerful.

The island has been under a state of emergency and many businesses have closed, schools have lacked sufficient resources like electricity and some hospitals are limiting treatment. Puerto Rico's governor says the island can't pay the bonds without cutting essential services.

Only seven justices heard the case. 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.