High Court to Hear Arguments on P. R. Restructuring Law March 22

WASHINGTON – The Supreme Court has set March 22 as the date it will hear oral arguments over an appeals court ruling that a Puerto Rico authority restructuring law is illegal under federal bankruptcy law.

The Puerto Rico Public Corporation Debt Enforcement and Recovery Act was enacted last year to allow the territory's cash-strapped public authorities to restructure because the authorities, unlike most U.S. localities, don't have access to bankruptcy protection under Chapter 9.

The recovery law was challenged by Franklin California Tax-Free Trust and hedge fund BlueMountain Capital Management, which together hold $2 billion of Puerto Rico Electric Power Authority bonds.

A three-judge panel of the U.S. Court of Appeals for the First Circuit in Boston sided with a lower court in July, ruling the recovery act violates a section of federal bankruptcy law that prohibits states from passing laws that would allow their public entities to restructure without the approval of those entities' creditors.

"Congress preserved to itself that power to authorize Puerto Rican municipalities to seek Chapter 9 relief," appeals court Judge Sandra Lynch wrote in the majority decision. One of the three judges, Juan Torruella argued in a concurring opinion that there is no legislative basis for prohibiting Puerto Rico public entities from seeking Chapter 9 relief.

The Supreme Court is consolidating cases in which the funds are challenging Puerto Rico, its principal bond issuer the Government Development Bank, and their officials.

Puerto Rico is arguing that federal law currently leaves it in a legal "no man's land" while it is struggling with nearly $70 billion in debt. "Nothing in the federal bankruptcy code purports to leave a jurisdiction like Puerto Rico that is outside the scope of Chapter 9 in a 'no man's land' where its public utilities cannot restructure their debts under either federal law or its own law," the commonwealth's lawyers said in their brief to the Supreme Court.

The funds are arguing, as the courts have ruled, that U.S. bankruptcy law preempts Puerto Rico's restructuring law.

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