Bills Halting Litigation Over Puerto Rico Debt Raise Legal Issues

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WASHINGTON – Bills introduced by Senate and House Democrats on Monday to temporarily halt litigation over Puerto Rico debt raise legal issues and could divide rather than unite lawmakers over a solution to the territory's debt crisis, sources said on Wednesday.

"I think it has some challenges," said bankruptcy expert James Spiotto, managing director of Chapman Strategic Advisors. "It's similar to the moratorium New York State had in 1975 on lawsuits and demands for payment of debt that was reversed by the state's highest court two years later."

The state's high court ruled that the state constitution required debt payments to be made, said Spiotto.

"I think there's a good question about whether it would be constitutional, said another source who did not want to be identified. Under the U.S. Constitution if the government takes your property it must pay you fair market value, he said. Bondholders would regard their bonds as property.

The U.S. Constitution also requires due process, Spiotto pointed out.

"But the real question is whether [the bill] would be an impediment that people will be fighting over rather than reaching some resolution," said Spiotto.

"I don't think anybody's against the sentiment" of avoiding a legal quagmire over Puerto Rico debt, he said. "But would this be a distraction and prevent the good faith negotiations you want?" he asked.

Identical bills were introduced by Senate and House Democrats to halt litigation by bondholders and creditors over Puerto Rico's debt between Dec. 18 and March 31, while Congress takes action to allow the territory to restructure the debt.

"Puerto Rico desperately needs this short term financial tourniquet to stop its fatal bleeding," Sen. Richard Blumenthal from Connecticut, said in offering the bill on Monday in the Senate with Minority Leader Harry Reid form Nevada and Sens. Chuck Schumer from New York and Elizabeth Warren from Massachusetts.

House Minority Leader Nancy Pelosi pushed for the measure to be included in the omnibus spending bill at the 11th hour, but she was rebuffed by Republicans, sources said.

"It is profoundly disappointing that debt restructuring authority for Puerto Rico was not included in the omnibus" spending bill recently enacted, said Peloisi in offering the bill in the House. Reid and Pelosi both pushed to get bankruptcy protection provisions for Puerto Rico added to the $1.1 trillion omnibus spending bill that was just enacted. But Republicans, particularly Sen. Chuck Grassley, R-Iowa, held firm against any such provisions.

"A temporary stay on litigation is essential to facilitate an orderly process for stabilizing, evaluating, and comprehensively resolving the commonwealth's fiscal crisis," the Senate Democrats said in the "Puerto Rico Emergency Financial Stability Act of 2015. "Avoiding a disorderly race to the courthouse will benefit creditors as well as other stakeholders."

The bill was filed on Monday just before lawmakers adjourned the first session of the 114th Congress. The lawmakers will not be back until Jan. 5 after a pro forma session to introduce bills on Jan. 4.

The Senators stated in their bill that its purpose is two-fold. First, it would "provide a limited period of time to permit Congress to enact comprehensive relief for the commonwealth, providing it the necessary tools to address its economic and fiscal crisis."

Also it would "provide the commonwealth government with a tool it needs to address an immediate and imminent crisis that is unprecedented in the history of the United States."

The bill notes that the commonwealth's debt is unusually complex with 18 different but inter-related issuers. This "will substantially complicate any potential consensual restructuring in the absence of federal legislation to facilitate the negotiations," the Senators stated in the measure.

The bill was offered just after House Speaker Paul Ryan, R-Wis., instructed committees in that chamber that have jurisdiction over Puerto Rico to work with commonwealth officials to come up with a "responsible solution" to the debt crisis by the end of March.

Also recently, the Supreme Court agreed to review a lower court ruling that held Puerto Rico's local restructuring law was not allowable under federal bankruptcy law.

In addition, several bills are pending in the House and Senate that would help Puerto Rico. One, by Republican senators in charge of committees with jurisdiction over Puerto Rico and bankruptcy, would establish an authority that could issue bonds and provide up to $3 billion in resources to help the territory stabilize its budget and debt. The money would come from changes in the Affordable Care Act, known as Obamacare. The sponsors of that bill are Senate Finance Committee chair. Orrin Hatch from Utah, Senate Energy and Natural Resources Committee chair Lisa Murkowski from Alaska and Grassley, who is Senate Judiciary Committee chair.

Rep. Sean Duffy, R-Wis., a member of the House Financial Services Committee, has offered a bill that would provide public authorities in Puerto Rico with bankruptcy protection in exchange for the commonwealth's acceptance of oversight from a presidentially-appointed, five-member Financial Stability Council.

Companion bills, one pending in the House by Puerto Rico's representative in Congress, Pedro Pierluisi, and one in the Senate, by Blumenthal and Schumer, would provide bankruptcy protection for the territory's authorities.

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