Supreme Court Says No, Puerto Rico Can't Fix A Big Hole In Bankruptcy Law

But Congress could still throw the island a lifeline.
Justice Clarence Thomas wrote the opinion striking down a local Puerto Rican law on bankruptcy.
Justice Clarence Thomas wrote the opinion striking down a local Puerto Rican law on bankruptcy.
Susan Walsh/Pool/Getty Images

WASHINGTON -- The Supreme Court ruled Monday that Puerto Rico does not have the authority to enact its own bankruptcy laws, a decision that adds greater urgency to passing congressional legislation aimed at helping the island restructure its $70 billion debt.

In a 5-2 ruling, the court struck down a 2014 Puerto Rico law that would have allowed the island's public entities -- including utility companies -- to declare bankruptcy and seek court-supervised debt restructuring from their creditors.

Several of Puerto Rico’s creditors challenged the statute, known as the Recovery Act, arguing that federal law does not permit the commonwealth to create its own bankruptcy mechanism. The case, titled Puerto Rico v. Franklin California Tax-Free Trust, centered on whether the island is excluded from some aspects of federal bankruptcy law, but not others.

The U.S. Bankruptcy Code generally precludes Puerto Rico, unlike the states, from seeking bankruptcy protection for its municipalities and public corporations. A 1984 congressional amendment established that Puerto Rico is not considered a "state" for the purpose of such protections.

Elsewhere, federal law bars “states” from enacting their own municipal bankruptcy laws.

In court, Puerto Rico argued that by excluding the island from the definition of “state” for the purpose of extending federal bankruptcy protections to its municipalities, the law effectively excluded the island from all federal bankruptcy provisions that apply to states. That would mean Puerto Rico is free to pass its own bankruptcy law to fill the void.

Puerto Rico’s creditors contended, however, that federal law can simultaneously consider the island a "state” when it comes to prohibiting local bankruptcy measures and deny that Puerto Rico is a “state” when it comes to accessing federal bankruptcy protection.

The Supreme Court’s majority opinion, written by Justice Clarence Thomas, accepted the creditors' argument, even as it acknowledged the gravity of Puerto Rico’s debt crisis. Thomas wrote that the text of federal bankruptcy law declares that Puerto Rico is not a "state" specifically for the purpose of extending bankruptcy protection to municipalities -- and that's it.

“The plain text of the Bankruptcy Code begins and ends our analysis,” he wrote.

If Congress had wished to exempt Puerto Rico from the entire federal bankruptcy law, it would have said so explicitly, Thomas added.

“Congress ‘does not, one might say, hide elephants in mouseholes,’” he wrote, quoting a 2001 Supreme Court case holding that Congress would not change the fundamental meaning of a law through vague language.

Thomas' majority opinion was joined by two of his liberal colleagues, Justices Stephen Breyer and Elena Kagan, and two of his conservative bench mates, Chief Justice John Roberts and Justice Anthony Kennedy. (Justice Samuel Alito recused himself from the case.)

Justice Sonia Sotomayor noted that the court's decision about legal intricacies has "real-world consequences."
Justice Sonia Sotomayor noted that the court's decision about legal intricacies has "real-world consequences."
Allison Shelley/Getty Images

That breakdown comes as something of a surprise since all four liberal justices appeared sympathetic to Puerto Rico’s side during oral arguments in April.

Justice Sonia Sotomayor, whose parents were born in Puerto Rico, wrote a dissenting opinion, joined by Justice Ruth Bader Ginsburg.

Sotomayor was receptive to Puerto Rico’s argument that only entities considered a “state” for the purposes of extending bankruptcy protections to municipalities are subject to the rest of the law’s provisions. The statehood definition in that one clause determines how other aspects of the law apply to Puerto Rico, according to Sotomayor.

Since Congress denied Puerto Rico the same federal bankruptcy powers as the states have in 1984, it "excluded Puerto Rico from Chapter 9 for all purposes -- it shut the gate and barred it tight," Sotomayor wrote.

She emphasized that the majority’s ruling that federal bankruptcy law pre-empts Puerto Rico’s local bankruptcy legislation has “real-world consequences.”

"Congress could step in to resolve Puerto Rico’s crisis. But, in the interim, the government and people of Puerto Rico should not have to wait for possible congressional action to avert the consequences of unreliable electricity, transportation, and safe water—consequences that members of the Executive and Legislature have described as a looming 'humanitarian crisis,'" Sotomayor wrote. "Statutes should not easily be read as removing the power of a government to protect its citizens."

Puerto Rico's government had hoped the local bankruptcy measure would give it another tool in its struggle to emerge from a fiscal crisis that has forced it to dramatically reduce public spending and raise taxes. The island’s public utilities bear $20 billion of its $70 billion in debt.

The Supreme Court's decision will add pressure on the Senate to pass the Puerto Rico Oversight, Management, and Economic Stability Act -- or PROMESA, for short -- which passed the House with bipartisan support last week. The bill would create a financial oversight board empowered to help the island rebuild its economy and restructure its debts, including through a court-supervised process that could force resistant creditors to accept losses. Puerto Rico faces a $2 billion debt payment on July 1 that it likely can't afford to pay.

“This decision demonstrates how important it is that the Senate passes Puerto Rico debt legislation as soon as possible,” Eric LeCompte, executive director of Jubilee USA, a religious anti-poverty organization, said in a statement.

Monday's ruling is also the Supreme Court's second consecutive decision circumscribing Puerto Rico’s control over its own affairs. A 6-2 majority ruled on June 9 that Puerto Rico could not prosecute two criminals that the U.S. had already prosecuted in federal court, because the island’s authority to prosecute comes from Congress.

Taken together, the two decisions could inspire action by the political forces in Puerto Rico seeking greater independence from the United States, through statehood or other means.

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