The U.S. Court of Appeals for the First Circuit affirmed a lower court decision to strike down the Puerto Rico Recovery Act aimed at granting local municipalities the right to enter bankruptcy, saying that the law is preempted by the Bankruptcy Code and thus void, Reuters reported yesterday. Puerto Rico passed the Recovery Act in June 2014 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 yesterday. The Recovery Act was struck down by a federal court in Puerto Rico in February after bondholders in the island's power authority, including Franklin Advisers, OppenheimerFunds and Blue Mountain Capital, argued in a law suit that the legislation contravened the U.S. Bankruptcy Code, which expressly excludes Puerto Rico. Read more.
Click here to read yesterday’s ruling.
In related news, U.S. Democratic presidential candidate Hillary Clinton said today that Puerto Rico's public entities should be able to use U.S. bankruptcy laws to restructure some $72 billion in debt, Reuters reported today. "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. "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 the U.S. Congress should "take a look at" whether Puerto Rico's government-owned corporations should be able to access chapter 9 bankruptcy protection. Read more.
