BY NICK BROWN
Puerto Rico will ask the U.S. Supreme Court on Tuesday to validate a law
that could let it cut billions of dollars from what it owes in debt at some
public agencies, a key test in the island’s efforts to weather a massive fiscal
crisis.
The U.S. territory, facing what its governor has called an unpayable $70
billion debt and a 45 percent poverty rate, will argue its case against
financial creditors, including Franklin Advisers and OppenheimerFunds, who want
to keep contentious restructuring talks out of court.
As Puerto Rico leaders, creditors and U.S. lawmakers seek a debt solution
in the U.S. Congress, the question before the Supreme Court is whether the
island should be allowed to restructure debts under a court-supervised regime
similar to Chapter 9 bankruptcy laws used by U.S. cities such as Detroit and
Stockton, California.
"It is very significant that the Supreme Court took this case — we're
seeing efforts to try to determine with some more clarity the status of Puerto
Rico," said bankruptcy expert Melissa Jacoby, a professor at the
University of North Carolina School of Law.
Puerto Rico, which as a U.S. commonwealth is excluded from Chapter 9,
passed the Recovery Act in 2014, a local restructuring law that lets it put
public entities, such as power authority PREPA, into bankruptcy.
Two U.S. court decisions deemed the Recovery Act invalid after PREPA
creditors sued, with the Supreme Court agreeing in December to hear an appeal.
Creditors say the act contradicts federal bankruptcy law, which prohibits
states from making their own debt restructuring laws.
Puerto Rico argues that if it is exempt from Chapter 9, it must also be
exempt from the limitation on states passing their own laws.
"It makes no sense to read a limitation on Chapter 9 to apply to a
jurisdiction … that is categorically excluded from that chapter," it said
in January.
The outcome could threaten a hard-fought, consensual restructuring at
PREPA, where creditors holding most of the utility's $8.3 billion in debt
agreed to take 15 percent reductions in payouts.
Reinstating the Recovery Act could allow Puerto Rico to scrap that deal and
instead put PREPA into bankruptcy, where it could impose deeper cuts and bind
holdout creditors to the deal.
Jacoby said the decision might come down to the court focusing on how
Congress previously interpreted bankruptcy law.
"It's all about legislative history," said Jacoby.
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