SCOTUS Denies Chapter 9 |Lifeline to Puerto Rico

(CN) — With Puerto Rican pride parades and celebrations barely complete, the Supreme Court upheld a reading of a bankruptcy statute that will leave the island powerless to respond to a crippling debt crisis.

Puerto Rico's daunting $72 billion in debt represents nearly 70 percent of its $103 billion gross domestic product.

More than a quarter of that amount, $20 billion, is held by the Puerto Rico's three main utility companies, which predict that — without quick relief — the commonwealth will have to contend with rolling blackouts, unsafe drinking water and treacherous transportation issues.

To stave off a crisis, Puerto Rico lawmakers invoked the commonwealth's police power two years ago in passing the Recovery Act.

Mutual fund Franklin California Tax-Free Trust and hedge fund BlueMountain Capital Management sued Puerto Rico to overturn Puerto Rico's legislature.

They convinced a San Juan judge and the First Circuit Court of Appeals that a 1984 amendment to the U.S. bankruptcy code specifically stripped Puerto Rico of the right to restructure its debt.

On Monday, the day after Puerto Rican Pride Day, Justice Clarence Thomas denied the commonwealth a Chapter 9 lifeline.

"We hold that Puerto Rico is still a 'state' for purposes of the preemption provision," Thomas wrote in a 15-page opinion. "The 1984 amendment precludes Puerto Rico from authorizing its municipalities to seek relief under Chapter 9, but it does not remove Puerto Rico from the reach of Chapter 9's pre-emption provision."

The decision fell less than a week after the Supreme Court ruled that Puerto Rico is not sovereign.

Chief Justice John Roberts and Justices Anthony Kennedy, Stephen Breyer and Elena Kagan joined the majority opinion.

During oral arguments in March, Justice Ruth Bader Ginsburg wondered why Congress would place Puerto Rico in a legal "Never-Never Land" by subjecting the commonwealth to Chapter 9's exemption but not its protections.

Ginsburg joined a passionate dissent penned by Justice Sonia Sotomayor, who emphasized the human toll of the commonwealth's economic woes.

"Soon, Puerto Rico and the utilities contend, they will be unable to pay for things like fuel to generate electricity, which will lead to rolling blackouts," Sotomayor wrote in a 10-page dissent. "Other vital public services will be imperiled, including the utilities' ability to provide safe drinking water, maintain roads, and operate public transportation."

Sotomayor urged her colleagues to look beyond theoretical federalism arguments.

"Pre-emption cases may seem like abstract discussions of the appropriate balance between state and federal power. But they have real-world consequences," the dissent states. "Finding preemption here means that a government is left powerless and with no legal process to help its 3.5 million citizens."

Meanwhile, congressional action appears to be taking the form of a bill installing an oversight board regulating Puerto Rico's debt crisis.

Critics of the bill denounce the board for its colonial overtones, but the dissenting justices contend that Puerto Rico's legislature should not have to wait for Washington to take action.

"Congress could step in to resolve Puerto Rico's crisis," the dissent states. "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.'"

The first Latina Supreme Court justice ended on the blistering conclusion: "Statutes should not easily be read as removing the power of a government to protect its citizens."

Addressing this critique, Justice Thomas replied that "our constitutional structure does not permit this court to 'rewrite the statute that Congress has enacted.'"

Justice Samuel Alito took no part in the decision.

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