Court Denies Puerto Rico Bankruptcy Law, But Says Should Have Access To Chapter 9

Court Denies Puerto Rico Bankruptcy Law, But Says Should Have Access To Chapter 9

A U.S. appeals court affirmed a decision to strike down Puerto Rico’s new law giving local municipalities the right to enter bankruptcy on Monday, but in a major blow to creditors, also commented that excluding the islands public corporations from federal bankruptcy laws was unconstitutional.

In background, Puerto Rico’s legislature passed the Recovery Act last year to give its heavily indebted public corporations the legal power to restructure financially in a bankruptcy-like process. Of note, the island commonwealth and U.S. territory is facing an unmanageable debt load of close to $73 billion, which its top exec has recently said it is unable to pay.

However, the Recovery Act was rejected by a federal court in Puerto Rico back in February after public utility PREPA bondholders, including Franklin Advisers, Oppenheimer Funds and Blue Mountain Capital, brought a lawsuit pointing out that Puerto Rico was explicitly excepted from the U.S. bankruptcy code. The ruling released late Monday on the surface vindicates the bondholders’ position, however it also argues that Puerto Rico should be able to use Chapter 9 of the U.S. bankruptcy code (municipal bankruptcies). Of note, bondholders have consistently argued that Puerto Rico should not have access to Chapter 9 bankruptcy (where they stand to take a haircut).

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Puerto Rico

Excerpt from ruling

“Besides being irrational and arbitrary, the exclusion of Puerto Rico’s power to authorize its municipalities to request federal bankruptcy relief should be re-examined in light of more recent rational-basis review case law,” the U.S. Court of Appeals for the First Circuit noted in its ruling. Legal experts highlight the unusually strong language in the ruling.

Hilary Clinton calls for Puerto Rico to have access to Chapter 9 bankruptcy

Former Secretary of State and leading Democratic presidential candidate Hillary Clinton commented on Tuesday she believes Puerto Rico’s public corporations should have access U.S. bankruptcy laws.

Just like state governments, Puerto Rico as a commonwealth cannot file for bankruptcy, but unlike states, the island’s public entities are not covered by U.S. Chapter 9 bankruptcy laws.

Both Puerto Rico’s Governor Alejandro Garcia Padilla and the island’s non-voting delegate in Congress have called for legislation to permit Puerto Rico to access the same bankruptcy laws available to other municipalities.

“Congress and the Obama administration need to partner with Puerto Rico by providing real support and tools so that Puerto Rico can do the hard work it will take to get on a path toward stability and prosperity,” Clinton argued in a statement published earlier today.

“As a first step, Congress should provide Puerto Rico the same authority that states already have to enable severely distressed government entities, including municipalities and public corporations, to restructure their debts under Chapter 9 of the Bankruptcy Code,” Clinton continued.

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