Ricardo Arduengo / AP

US court upholds ruling against Puerto Rico bankruptcy law

Puerto Rican municipalities remain barred from declaring bankruptcy, but ruling makes case for new Chapter 9 legislation

A U.S. appeals court affirmed a lower court decision to strike down Puerto Rican legislation aimed at granting local municipalities the right to enter bankruptcy, but said excluding the U.S. territory's public entities from federal bankruptcy law was unconstitutional.

Puerto Rico passed the so-called Recovery Act last year to give certain public corporations, with around $20 billion in debt, the ability to restructure financially in an orderly process. Puerto Rico is currently struggling with a total debt load of around $72 billion, which it says it is unable to pay.

"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 said in the ruling late Monday.

On Tuesday, the head of the island's Government Development Bank Melba Acosta said Puerto Rico will meet with its creditors next week for the first time since announcing it wants to restructure its $72 billion debt but the island does not intend to cut principal payments.

Governor Alejandro Garcia Padilla told holders of its $72 billion debt last week that he wants to restructure debt and postpone bond payments.

The Recovery Act was struck down by a federal court in Puerto Rico in February after bondholders in the island's power authority argued in a law suit that the legislation contravened the U.S. bankruptcy code, which expressly excludes Puerto Rico.

While the 75-page ruling ostensibly vindicates the bondholders' position, it also makes a forceful case that Puerto Rico should be given access to Chapter 9 of the U.S. bankruptcy code, which deals with municipal bankruptcies. Bondholders have consistently opposed this view.

The in-depth ruling, steeped in legislative history, will strengthen the case for Congress to act on a bill, currently before a House committee, that seeks to change Chapter 9 to treat Puerto Rico like any other state for the purposes of bankruptcy.

U.S. Democratic presidential candidate Hillary Clinton said Tuesday that Puerto Rico's public entities should be able to use U.S. bankruptcy laws to restructure some $72 billion in debt.

“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 said in a statement provided to Reuters.

“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 added.

The White House said last week that there is “no one in the administration” that is “contemplating a federal bailout of Puerto Rico” but that Congress should “take a look at” whether Puerto Rico's government-owned corporations should be able to access Chapter 9 bankruptcy protection.

“We're not talking about a bailout, we're talking about a fair shot at success,” Clinton said.

Congressional Republicans largely oppose such a step, though Republican presidential candidate Jeb Bush said in April that he thinks Puerto Rico's public agencies should have the ability to use U.S. bankruptcy laws.


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