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In an article for Law360, Jonathan Randles looks at the US Supreme Court’s recent decision dealing a heavy blow to Puerto Rico’s restructuring laws. Puerto Rico, which is facing $70bn in public debt, passed a law in 2014 that would have restructured the debt of its financially struggling public utilities.
Law360, New York (June 13, 2016, 10:28 AM ET)—The U.S. Supreme Court refused Monday to revive a dormant law that would have allowed Puerto Rico to restructure a portion of its $70 billion debt, as the territory now looks to a proposal working its way through Congress for assistance as more defaults loom on the horizon.
The court ruled 5-2 that federal bankruptcy code preempts Puerto Rico's own restructuring law enacted by the commonwealth in 2014. Writing for the majority, Justice Clarence Thomas said a provision in Chapter 9 of the code, which is intended to keep bankruptcy laws uniform throughout the U.S., blocks Puerto Rico from enacting its Recovery Act law. "That provision bars Puerto Rico from enacting its own municipal bankruptcy scheme to restructure the debt of its insolvent public utilities companies," Justice Thomas wrote.
The ruling leaves Puerto Rico’s only viable option for restructuring its public debts with Congress. Federal lawmakers are backing legislation that would create an oversight board to control the U.S. territory's finances and debt restructuring. Dubbed the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, the bill is a compromise between congressional Republicans and the Obama administration. Under PROMESA, Puerto Rico could pursue a court-monitored restructuring of its public debts, but only if the oversight board determines the local government has engaged in good-faith negotiations with creditors. Members of the board, which will be appointed by Congress, will develop fiscal plans and also have power over Puerto Rico's budget. The House passed the bill last week on a 297-127 vote. PROMESA does not give Puerto Rico access to Chapter 9. Republicans had opposed previous proposals that would have given Puerto Rico access to traditional bankruptcy, arguing that it would unfairly impair bondholders’ rights.
Puerto Rico's Resident Commissioner Pedro Pierluisi on Monday urged the Senate to pass the bill. Pierluisi, who had supported a Chapter 9 option for Puerto Rico and expressed opposition to a control board, described PROMESA as “imperfect but indispensable bill.” The Supreme Court’s decision puts an end to Puerto Rico’s law, dubbed the Recovery Act. The proposed law would have allowed Puerto Rico’s public utilities to restructure about $20 billion in debt. After it was approved by Puerto Rico’s legislature, the law was quickly challenged in court by creditors Blue Mountain Capital Management and Franklin Templeton Investments.
The case has illuminated the unique bind Puerto Rico is in. Congress, without explanation, passed an amendment in 1984 that bars Puerto Rico from accessing Chapter 9 of the Bankruptcy Code, the part of the code that struggling cities like Detroit have used to restructure municipal debt. On Monday, Justice Thomas said for the purposes of assessing the restructuring law, Puerto Rico is classified as a state under Chapter 9. The classification prevents Puerto Rico from fashioning its own restructuring law, even when the territory is prevented from accessing Chapter 9, Justice Thomas said.
In dissent, Justice Sonia Sotomayor suggested that the practical implications of preventing Puerto Rico from addressing its debt trump preemption as it relates to Chapter 9 in this case. Justice Ruth Bader Ginsburg joined in the dissent. Justice Samuel Alito recused himself. “Finding preemption here means that a government is left powerless and with no legal process to help its 3.5 million citizens,” Justice Sotomayor wrote.
Puerto Rico is represented by Christopher Landau of Kirkland & Ellis LLP. The Government Development Bank is represented by John Roberts, Andrea Miller, Laura Stafford, Martin Bienenstock, Mark Harris, Sigal Mandelker, Philip Abelson and Ehud Barak.of Proskauer Rose LLP. BlueMountain is represented by Matthew D. McGill of Gibson Dunn. Franklin Templeton is represented by Thomas Moers Mayer of Kramer Levin Naftalis & Frankel LLP.
The cases are The Commonwealth of Puerto Rico et al. v. Franklin California Tax-Free Trust et al., case number 15-233, and Melba Acosta-Febo et al. v. Franklin California Tax-Free Trust et al., case number 15-255, in the U.S. Supreme Court.
Editing by Sarah Golin.
This article first appeared on Law360 on 13 June 2016.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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