OPY Oppenheimer Holdings Inc

WASHINGTON—The Supreme Court on Monday struck down Puerto Rico's effort to restructure its public utility debts, ruling Congress had precluded the territory from enacting its own bankruptcy legislation.

The 5-to-2 vote increases pressure on Congress to act to resolve the island territory's fiscal crisis, since Puerto Rico as a U.S. territory has no authority to provide for municipal bankruptcies.

Last week, the U.S. House passed bipartisan legislation to create a debt-restructuring process for the territory, which would be overseen by a seven-member federal board. No federal funds would be spent to bailout the island. It awaits action in the Senate.

The Supreme Court's decision means the pending legislation in Congress is really the only way to create a mechanism to avoid a disorderly restructuring of Puerto Rico's debt.

Monday's case involved an effort by Puerto Rico to ease one element of its pervasive fiscal crisis by restructuring the debt of its public utilities. But the case highlighted the unusual status the island holds within the U.S. federal structure, as an "unincorporated territory" subject to federal control with neither voting representation in Congress nor the quasi-sovereign powers of the 50 states.

Congress excluded the territory from authorization it provided U.S. municipalities to restructure their debts under section 9 of the federal bankruptcy code. Puerto Rico interpreted its omission as implicitly providing it with the authority to address the issue on its own, and the territorial legislature enacted a law allowing several public agencies and utilities to discharge most of their debts despite creditors' objections.

Bondholders read the federal law in precisely the opposite way, seeing it as providing Puerto Rico no authority to restructure debt either through section 9 or its own statutes. Lower courts agreed.

Bondholders in the case—Franklin Resources Inc. and Oppenheimer Holdings Inc.—hold approximately $1.56 billion in bonds issued by the Puerto Rico Electric Power Authority, a utility covered by the challenged statute.

"The holders of Prepa bonds have the right to a receiver to collect the pledged revenues, and the right to compel an increase in electricity rates so that revenues will be sufficient to repay the bonds," the Franklin Funds said in a court brief. Rather than discharge the debt, it called for appointment of a receiver who "can and will keep the lights on, and who also can increase revenues, cut costs and collect debts."

Because Puerto Rico bonds are exempts from all state and federal taxes, Franklin and other funds focused on a particular state's municipal bonds have filled out their portfolios with Puerto Rico bonds. The island is about $70 billion in debt and has missed bond payments.

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

Justice Sonia Sotomayor dissented, joined by Justice Ruth Bader Ginsburg.

Justice Samuel Alito recused himself from the case. He gave no explanation for sitting out the case, as is customary. But his financial disclosures list numerous mutual funds managed by Franklin and other companies, including funds focused on tax-free income.

Last week, the Supreme Court underscored Puerto Rico's dependent status in ruling that, for criminal prosecution purposes, the territory is a division of the federal government and lacks an independent source of sovereignty akin to that claimed by states and Indian tribes.

The distinction is important for the Constitution's double-jeopardy clause, which prevents the same "sovereign" from repeatedly trying a defendant for the same offense, but allows separate prosecutions by federal, state and tribal authorities.

Write to Jess Bravin at jess.bravin@wsj.com

(END) Dow Jones Newswires

June 13, 2016 12:45 ET (16:45 GMT)

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