Puerto Rico asks Supreme Court for debt relief

After years of fiscal mismanagement, Puerto Rico has appealed to the U.S. Supreme Court to help it smooth the road out of debt. During oral arguments in late March, Puerto Rico complained that a decades-old law prohibiting it from declaring bankruptcy was unfair.

All 50 states have authority to declare Chapter 9 bankruptcy to restructure public utility debt. But Congress specifically forbade Puerto Rico from doing so in a 1984 law that also said the island’s legislature cannot come up with an alternate plan.

But Puerto Rico can’t pay its bills. And so its legislature passed a law to let its public utilities restructure about $20 billion in debt, in defiance of the federal regulation. Puerto Rican lawmakers called it the Recovery Act.

Creditors holding the debt sued, pointing to U.S. bankruptcy laws.

The dilemma didn’t sit well with Justice Ruth Bader Ginsburg.

“What explains Congress wanting to put Puerto Rico in this anomalous position of not being able to restructure its debt?” she asked the lawyer for the creditors.

Attorney Matthew McGill said it isn’t fair to creditors to let debtors legislate out of poor money-management decisions, but his argument didn’t get much traction with Ginsburg or Justices Elena Kagan and Sonia Sotomayor.

This is another case with only seven justices deciding it; Justice Samuel Alito recused due to some investments he owns. So the liberal justices might carry the day and rule in favor of Puerto Rico’s ability to restructure its utilities debt. U.S. lawmakers are looking at the issue again. Maybe the high court is signaling they had better hurry up, or else the court will do it for them.

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