WASHINGTON – Several of the Supreme Court Justices seemed sympathetic with Puerto Rico's complaints that a federal appeals court ruling striking down its debt recovery law for utilities leaves it "in a no man's land" where it "is not entitled to the benefits," but " is subject to the burdens" of Chapter 9.
Puerto Rico appears to have some support from Justices Ruth Bader Ginsburg, Sonia Sotomayor, Elena Kagan, and Stephen Breyer. Even Chief Justice John Roberts complimented Christopher Landau, the lawyer representing Puerto Rico, on his response to a question. Justices Anthony Kennedy and Clarence Thomas were silent. Justice Samuel Alito recused himself from the case because of a financial conflict and no one has yet replaced the late Justice Antonio Scalia.
The seven-member high court is expected to rule on the case by June.
But even if four of the seven Justices rule in favor of Puerto Rico and reinstate DERA, several of them worried on Tuesday that DERA might violate the contract clause of the U. S. Constitution, which prohibits states from impairing private contracts. Landau told judges the contract clause issue could be argued if the case is remanded back to the appeals court, but it is not an issue before the high court.
In addition, Congress could pass legislation that either gives, or refuses to give, Puerto Rico or its authorities bankruptcy protection under Chapter 9 and that measure would supersede any ruling by the Supreme Court.
Puerto Rico, its Government Development Bank, and their officials are urging the Supreme Court to overturn a ruling last year by the U.S. Court of Appeals for the First Circuit in Boston, that concluded the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (DERA) is illegal. The appeals court sided with funds that hold over $2 billion of bonds by the Puerto Rico Electric Power Authority and concluded that DERA violates a section of the U.S. Bankruptcy Code that prohibits states from passing laws allowing their authorities to restructure debt without the approval of those entities' creditors.
During oral arguments before the Supreme Court, Ginsburg asked Matthew McGill, the lawyer representing hedge fund BlueMountain Capital Management as well as Franklin and Oppenheimer funds, "Why would Congress put Puerto Rico in this never-never land, that is, it can't use Chapter 9 and it can't use a Puerto Rico substitute for Chapter 9?"
Puerto Rico "is locked out … It has to take the bitter but it doesn't get any benefit at all," she said.
Justice Sonia Sotomayer, who asked the most questions of all the Justices, also seemed sympathetic when she said, "It is inherent in state sovereignty that states have to have some method, their own method, of controlling their municipalities."
Landau argued that two sections of Chapter 1 of the bankruptcy code serve as a "gateway" that keeps Puerto Rico out of Chapter 9 altogether, including Section 903(1) which says state law cannot prescribe "a composition of indebtedness" that bind creditors without their consent.
Section 101(52) of the code says in part that the definition of state "includes the District of Columbia and Puerto Rico" except for the purposes of defining who may be a debtor under Chapter 9."
Section 109(c)(2) of the code says an entity is only a debtor under Chapter 9 if it "is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter." Landau said that section means Puerto Rico is categorically precluded from authorizing its municipalities to enter Chapter 9 and that it is simply not part of Chapter 9.
Kagan said to McGill, "Why isn't Justice Breyer's and Mr. Landau's view of the text just as good if not better than yours?" She added, "I didn't come in here thinking that, but now I kind of am thinking that."
The justices noted that the bankruptcy code does not mention Guam or the Virgin Islands and wondered if Congress intended to treat the territories differently.
Roberts asked Landau why it doesn't make sense to think Congress wanted to keep Chapter 9 for the states and make the territory come to it for help.
Landau said frankly, it would be very anomalous [for] Puerto Rico [to be] in a worse position, let's say, than Guam and the Virgin Islands."
Roberts said Landau "came up with a very good answer." But Roberts asked why did Congress lump Puerto Rico with the District of Columbia in saying in the bankruptcy code that there were not states except for the purpose of defining who would be a debtor under Chapter 9.
Ginsburg also asked McGill, "What explains Congress wanting to put Puerto Rico in this anomalous position of not being able to restructure its debts?"
McGill gave three reasons. First he said, Congress has always micro-managed Puerto Rico's debt, citing a change to the Jones Act aid that limited the amount of debt it could take on. Second, he said, Puerto Rico debt is triple tax-free and therefore is held by bondholders all over the U.S. Finally, he noted, when Congress amended the bankruptcy code in 1984 to say Puerto Rico is a state except for defining who a debtor is under Chapter 9, it was concerned about the amount of indebtedness of both Puerto Rico, which had about $9 billion of debt, and D.C., which had about $1.6 billion of debt.
