Puerto Rico Court Win Strengthens Hand as $94 Billion Aid Sought

(Bloomberg) -- Puerto Rico’s governor won a decisive court victory that could boost his role in shaping the island’s financial recovery as he seeks $94 billion in federal aid to pay for the devastating damage dealt by the September hurricane.

A federal judge struck down a request by the U.S. board that oversees the island’s finances to appoint its own manager to turnaround Puerto Rico’s bankrupt electric utility. Governor Ricardo Rossello had opposed the move, saying it encroached upon the authority of elected officials and was beyond the scope of the power given to the panel in an emergency rescue law enacted last year.

U.S. District Court Judge Laura Taylor Swain said Monday that the federally appointed overseers must share control with local officials. While the law allowed it to put Puerto Rico’s various public agencies into bankruptcy, it doesn’t allow it to manage those institutions, she ruled.

“These are not managerial powers,” Swain said in federal court in Manhattan.

The ruling marks a victory for Rossello’s effort to keep control of the island’s government as it works through a record-setting bankruptcy and rebuilds from the storm. It came just as he asked President Donald Trump for $94 billion in aid to recover from the unprecedented disaster, which has worsened the government’s financial strains.

The court fight between the federal board and Rossello centered on who had authority to oversee the reconstruction of the government-owned electric company, known as Prepa, that was already bankrupt and in need of major investments before the storm. Creditors argued that an outside receiver was necessary to mitigate what they said was a history of mismanagement.

Last month, the board said it was appointing it’s own manager after it was revealed that Prepa had entered into a $300 million contract with a little-known Montana company with only two full-time employees before it started work. The contract raised questions about the ability of Puerto Rico’s government to administer the billions in federal funds it will receive, with Rossello requesting $18 billion for the electricity system.

The court ruling or aid request had little immediate impact on the price of Puerto Rico bonds or those issued by its electric company, which have tumbled since September. Some of the island’s most frequently traded bonds, which are due in 2035, traded for about 26 cents on the dollar Monday, similar to where they traded Friday.

The court’s ruling will likely be popular in Puerto Rico, where many residents have resented the board’s authority, said John Mudd, a San Juan bankruptcy and constitutional lawyer. Mudd, who has been involved in the case, said he told the governor’s lead lawyer, Peter Friedman with the law firm O’Melveny & Myers, that Rossello got a complete victory.

“I told him, ‘You got everything you wanted. You got everything the government asked for,”’ Mudd said. “The government and the board are now equal.”

Swain said the rescue law enacted by Congress leaves the board and the local government with shared responsibilities. While the board has authority to approve Rossello’s fiscal-recovery plans, Rossello also has the power to reject the board’s recommendations, Swain said.

“Congress may have made the board’s job easier” by giving it direct control over Puerto Rico’s government, as lawmakers did in bailing out Washington D.C., she said.

Instead, Congress created a “power-sharing structure that allows for mutual sabotage,” Swain said. She urged the two sides to work together rather than fight a “death match in which the winner takes all.”

The case is In re Puerto Rico Electric Power Authority, 17-4780, U.S. District Court, District of Puerto Rico (San Juan)

--With assistance from Michelle Kaske

To contact the reporters on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net, Rebecca Spalding in New York at rspalding@bloomberg.net.

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, William Selway, Rick Green

©2017 Bloomberg L.P.