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U.S. top court wrestles with Puerto Rico restructuring case

Liberal justices on Tuesday signaled support for Puerto Rico as the U.S. Supreme Court considered whether to revive a law that could let the U.S. territory cut billions of dollars owed in debt at some public agencies, a key test in the island’s efforts to weather a huge fiscal crisis.

It was unclear how the court will rule on whether the Caribbean island’s 2014 law known as the Recovery Act, which was invalidated by U.S. courts, conflicts with U.S. federal bankruptcy law. Puerto Rico faces what its governor has called an unpayable $70 billion in debt.

Only seven justices heard the arguments in the case. Justice Antonin Scalia died in February and has not yet been replaced. Justice Samuel Alito recused himself.

In 1984, Congress said Puerto Rico, as a U.S. territory, could not use bankruptcy laws that govern U.S. states. But federal bankruptcy law also dictates that no state can pass local debt-restructuring laws, and in one provision Puerto Rico is defined as a state.

“Why would Congress put Puerto Rico in this never-never land?” liberal Justice Ruth Bader Ginsburg asked.

Fellow liberal Elena Kagan said that before the oral argument she favored the creditors’ position, but after hearing from Puerto Rico’s lawyer she found the territory’s arguments to be equally compelling.

“Both of you have stories. … It’s just not clear which one is right,” Kagan said.

The only justice who expressed outright hostility to Puerto Rico’s position was conservative Chief Justice John Roberts, who said he was not sure the territory’s argument “carries much weight.”

As Puerto Rico’s leaders, creditors and U.S. lawmakers seek a debt solution in the U.S. Congress, the question before the Supreme Court is whether the island should be allowed to restructure certain debts under a court-supervised regime similar to Chapter 9 bankruptcy laws used by U.S. cities such as Detroit and Stockton, California.

The Recovery Act would not apply to all of Puerto Rico’s debt, but would let it put public entities, such as power authority PREPA, into bankruptcy.

Two U.S. court decisions deemed the Recovery Act invalid after PREPA creditors sued, with the Supreme Court agreeing in December to hear an appeal.

The Supreme Court case’s outcome could threaten a hard-fought, consensual restructuring at PREPA, where creditors holding most of the utility’s $8.3 billion in debt agreed to take 15 percent reductions in payouts.

Reinstating the Recovery Act could allow Puerto Rico to scrap that deal and instead put PREPA into bankruptcy, where it could impose deeper cuts and bind holdout creditors to the deal.

The Supreme Court is due to rule by the end of June.

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