Online predictors say SCOTUS will affirm on Puerto Rico v. Franklin CA Tax-Free Trust

by | Apr 20, 2016 | Courts | Comments

In response to the current financial crisis and Puerto Rico’s inability to restructure debts of municipalities and utilities to seek debt relief with Chapter 9 bankruptcy, Puerto Rico put into place the “Puerto Rico Public Corporation Debt Enforcement and Recovery Act” also referred to as the Recovery act in 2014.

Current investors hold around $2 billion worth of bonds in Puerto Rican companies who are eligible to file for bankruptcy under the Recovery Act. In response to the Recovery Act, these investors have sued Puerto Rico in a federal district court citing they are not eligible for Chapter 9 bankruptcy, which the Recovery act in practice allows the Puerto Rican companies to do.

The 9th district ruled in favor of the creditors, saying the restructuring of of state and municipal debt without the creditor’s consent is illegal in regards to Puerto Rico’s ineligibility to file Chapter 9 Bankruptcy.

Puerto Rico appealed the case, and last month the Supreme Court heard the case “Puerto Rico v. Franklin California Free Trust”. Puerto Rico argued that it has the authority to create a mechanism for restructuring debts of public utilities, while the creditors argued that the Recovery act violated federal law.

One month after oral arguments, Supreme Court prediction cite FantasySCOTUS, which has a correct prediction rate of Supreme Court case hearings in over two-thirds of cases, predicts that the Supreme Court will rule in favor of the creditors. The site predicts that the court will affirm the decision by the 1st District Court of Appeals in a unanimous 8-0 ruling. In addition to this prediction, the “Marshall Algorithm” has the court slated to also affirm the case but through a tie, with the right leaning Justices voting to reverse the decision (that said this outcome is now impossible, with Samuel Alito having recused from the case)..

If this is the case, this will not be good for the islands as the debt continues to grow and creditors will gain more and more power while the Puerto Rican government is not allowed to restructure debt. However, this is not final and other Supreme Court prediction algorithms have it pegged at a much closer decision.

Major economists cite Puerto Rico’s inability to restructure their debt as one of the main reasons why the territory has not been able to get their financial situation under control. Many US jurisdictions that have gone bankrupt have used chapter 9 restructuring to turn their economy around and clear their debts. If the courts to not rule in favor of Puerto Rico, Congress or the next president will be faced with a tough task in helping turn Puerto Rico’s struggling economy and fast climbing debt around.