The already complicated quest for a resolution to Puerto Rico’s debt crisis became more complex with the sudden death on Saturday of Supreme Court Justice Antonin Scalia, whose passing could influence a pending Supreme Court case on the island’s debt.
On March 22, the court will hear oral arguments in Puerto Rico v. Franklin California Tax-Free Trust, which will determine if Puerto Rico’s legal system can restructure debts and arbitrate debt disputes through its own bankruptcy process. Currently, it doesn’t have the authority under Chapter 9 of the U.S. bankruptcy code to do so. The case has been merged with a companion case, Acosta-Febo v. Franklin California Tax-Free Trust.
The case deals with about $20 billion of Puerto Rico’s $72 billion in debt, all of which was incurred by its three major public utilities. In Puerto Rico’s petition asking the high court to take up the case, the petitioners said there is “no basis to conclude that the exclusion of Puerto Rico from Chapter 9 represents a limitation on the Commonwealth’s power to create its own mechanism for restructuring the debts of its public utilities.”
The petition said that “anyone who has even glanced at the headlines in recent months knows that the Commonwealth is in the midst of a financial meltdown that threatens the island’s future.”
It also said the high court should prioritize reviewing the case because of the alternative of Puerto Rican citizens being left “at the mercy of their creditors.”
Justice Samuel Alito, a key conservative on the court, recused himself from hearing the case for undisclosed reasons. With Scalia’s death, the seven remaining justices deciding with the case could come to a decision more favorable to Puerto Rico, according to Eric LeCompte of the anti-poverty group Jubilee USA.
LeCompte told Morning Consult the balance of the court now tilts toward the left since four of the justices — Ruth Bader Ginsburg, Elena Kagan, Sonia Sotomayor and Stephen Breyer — are considered to be judicial liberals. The remaining justices hearing the case are Chief Justice John Roberts, Clarence Thomas, and Anthony Kennedy, all of whom are considered moderates or conservatives.
There is a “good chance that we could see an outcome that would be in favor of Puerto Rico now, with this new 4-to-3 number that would be facing the Supreme Court.”
“Scalia and Alito very heavily would fall on the side of bondholders or the major creditors” in matters related to bankruptcy law, LeCompte said.
Stephen Wermiel, a Supreme Court expert and law professor at American University, said the court’s opinion in the Puerto Rico case will lack Scalia’s consistent refusal to consult legislative history or congressional intent in crafting a statute.
Justices often back up their decisions by citing congressional committee reports or speeches to determine how Congress intended a law (the U.S. bankruptcy code, in this case) to function. But Scalia avoided this approach, since he believed the evidence was “too easily manipulated by political interests in Congress to be very reliable,” according to Wermiel.
Scalia’s absence on the bench could also affect, at least in political terms, how Congress acts on a legislative solution to the debt crisis.
Some of the most important lawmakers in the search for a solution include Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa) and Finance Committee Chairman Orrin Hatch (R-Utah), who also serves on the Judiciary Committee. The Judiciary Committee will be the first body within the Senate to act on Obama’s pick to replace Scalia. Grassley says he hasn’t ruled out hearings on a nominee.
With the Senate mired in a Supreme Court nomination fight, LeCompte predicted that it will more or less defer to whatever solution emerges in the House. Speaker Paul Ryan (R-Wis.) has said he wants a legislative solution by the end of March. Republicans are opposed to the bankruptcy proceedings being sought in the lawsuit, and the prospect of a Supreme Court decision in favor of Puerto Rico may spur them to act.
“If the House is successful with coming up with a [compromise], I think there’s a good chance we could see the Senate adopt it,” LeCompte said.