Seven justices heard arguments Tuesday weighing whether the island can escape crippling debts that the governor has warned are bringing it to the brink of ruin

This article is more than 4 years old

This article is more than 4 years old

The US supreme court on Tuesday began weighing whether Puerto Rico can escape billions of dollars owed in crippling debts that the island’s governor has warned are bringing the island territory to the brink of ruin.

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The four liberal justices on the supreme court signalled support for the move and House speaker Paul Ryan told reporters Tuesday that Congress will take up a Puerto Rico relief bill in April.

But it remains unclear how the court will rule on whether the Caribbean island’s 2014 law, known as the Recovery Act, can be changed to allow the territory to escape some of its $70bn plus debts.

The economic crisis has left Puerto Rico facing a mass exodus of residents – 84,000 people left Puerto Rico for the US mainland in 2014, a 38% increase from 2010. Some 45% of people live in poverty and the unemployment rate is the highest in the US.

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 US territory, could not use bankruptcy laws that govern US 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.

Some creditors have argued that Puerto Rico has massively overspent on services such as education and should close schools and lay off teachers. They blame mismanagement for the territory’s woes and say the law protects their investment.

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 US lawmakers seek a debt solution in 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 US cities such as Detroit and Stockton, California.

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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 US 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 $8.3bn in debt agreed to take 15% 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.

Reuters contributed to this article