Puerto Rico officials are appealing a judge’s ruling that struck down a new law allowing the commonwealth’s public corporations to restructure their debt.
The government argued the “Recovery Act,” enacted last year, was necessary because its public corporations aren’t permitted to seek restructuring under Chapters 9 or 11 of the Federal Bankruptcy Code.
The judge, though, said it violated federal law.
“The Recovery Act is pre-empted by the Federal Bankruptcy Code and is therefore void,” Judge Francisco A. Besosa wrote.
Law applied to Prepa, other corporations
The law would have applied to public corporations, such as the Puerto Rico Electric Power Authority, Puerto Rico Aqueduct and Sewer Authority and the Puerto Rico Highway and Transportation Authority, and would have allowed them to negotiate with bondholders to reduce their debt.
Investment funds, holding about $1.6 billion in debt issued by Prepa, sued. They argued there were other ways, aside from restructuring, to repair their finances, including reducing costs, increasing rates and collecting unpaid bills.
The commonwealth is trying to cope with a protracted economic slump and approximately $70 billion in public sector debt. The law was one of several measures designed by Puerto Rico Gov. Alejandro Garcia Padilla to ease its debt load.
After the ruling, César Miranda, Puerto Rico’s secretary of justice, said the decision is “incorrect in law.”
“We are left deprived of the only instrument available to manage our debt in an organized form.”
Analysts said the ruling could touch off prolonged litigation.
Next move
Meantime, Puerto Rico’s representative in Congress, Pedro Pierluisi, last week reintroduced a bill that would allow Puerto Rico to use Chapter 9 of the U.S. Bankruptcy Code, as was used by the city of Detroit to manage its fiscal problems. Pierluisi originally proposed the measure in July 2014.
“In the wake of the district court’s decision, it is more clear than ever that Congress should act swiftly to amend the U.S. Bankruptcy Code to empower the government of Puerto Rico to authorize its insolvent government-owned corporations to restructure their debts under Chapter 9,” he said. “If Congress does not act, government-owned corporations in Puerto Rico will be left without any legal framework—at either the federal or territory level—to adjust their debts.”
Recent reports said the U.S. House Judiciary Committee will hear the bill within weeks, though we don’t anticipate passage anytime soon.