The U.S. Supreme Court will consider reinstating a Puerto Rico law that would let its debt-ridden public utilities restructure their obligations, agreeing to hear an appeal by the commonwealth as it tries to navigate out of its fiscal crisis.
The disputed law would affect $22 billion of Puerto Rico’s $70 billion in debt. That includes $8.2 billion owed by the Puerto Rico Electric Power Authority, known as Prepa, which is negotiating with its creditors and would gain new leverage from a ruling upholding the law. The high court will decide by June.
The case centers on the power of the Puerto Rican government to fill what it says is a gap in federal bankruptcy law, which bars filings by the commonwealth’s utilities.
The decision to hear the case is a setback to funds that are battling Puerto Rico in court over $2 billion in Prepa bonds they hold. They said high court review was unnecessary given that they have already agreed to a restructuring plan with Prepa. The utility is still trying to reach an agreement with bond-insurance companies, an essential group in making the accord final.
“This pending restructuring diminishes, if not eliminates, the supposed emergency,” bondholders led by Franklin California Tax-Free Trust argued.
Justice Samuel Alito didn’t take part in Friday’s action, giving no reason. His most recent financial disclosure report indicates that either he or his wife owns shares in a Franklin fund that holds Puerto Rico municipal bonds.
If Alito doesn’t participate when the court rules, Puerto Rico will need to win the votes of five of the other eight justices. A 4-4 split would leave intact a lower court ruling throwing out the Puerto Rico law.
Under federal law, states can authorize bankruptcy filings by their municipalities, including public utilities, but Puerto Rico and the District of Columbia can’t. Puerto Rico sought to get around that provision in 2014 by passing a local law known as the Recovery Act, which was modeled after the federal bankruptcy code.
A U.S. appeals court ruled unanimously in July that federal bankruptcy law bars the Puerto Rico measure. The three-judge panel said Congress had reserved for itself the power to decide how Puerto Rican debt should be restructured.
Puerto Rico contends the lower court relied on a portion of the federal bankruptcy code that has nothing to do with the commonwealth. The appeals court left the commonwealth “in a ‘no man’s land’ where its public utilities cannot restructure their debts under either federal law or its own law,” the appeal argued.
The bondholders say Puerto Rico’s utilities aren’t alone. Only about half the states have authorized their municipalities to declare federal bankruptcy, according to BlueMountain Capital Management LLP, which has about $400 million in Prepa bonds.
The funds also say that since 1946, federal law has barred states and Puerto Rico from using their own laws to authorize non-consensual restructurings.
“For 68 years, the states, the District of Columbia, and Puerto Rico alike all observed this prohibition,” BlueMountain argued. “None attempted to enact their own municipal bankruptcy law until Puerto Rico enacted its Recovery Act in 2014.”
Supreme Court intervention comes amid congressional efforts to address the Puerto Rico debt crisis. The Obama administration and congressional Democrats say Puerto Rico should be granted broad bankruptcy powers, while Republicans are working on proposals that could include a federal financial control board.
“It’s clearly an issue of national importance,” said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics. “So it’s not unreasonable that the court would pick this up.”
The cases are Puerto Rico v. Franklin California Tax-Free Trust, 15-233, and Acosta-Febo v. Franklin California Tax-Free Trust, 15-255.