Puerto Rico lost its bid to revive a restructuring law that investors argued conflicts with U.S. bankruptcy code, a blow to the commonwealth as it falls deeper into a fiscal crisis.
Lawyers for Puerto Rico officials had asked the U.S. Court of Appeals in Boston to reinstate the local law to help it deal with $72 billion in debt. The court resisted, agreeing instead with a San Juan judge who threw out the statute in February.
The dispute centers on whether the island, which is excluded from federal bankruptcy code regarding municipal entities, can make its own rules for allowing public agencies to seek protection from creditors.
The commonwealth may seek a rehearing before the three- judge panel or a larger group of judges at the Boston-based court. It can also seek to be heard by the U.S. Supreme Court. Puerto Rico can also turn to Congress and request permission to put its agencies in bankruptcy, the appeals court said.
“In denying Puerto Rico the power to choose federal Chapter 9 relief, Congress has retained for itself the authority to decide which solution best navigates the gauntlet in Puerto Rico’s case,” the appeals court said in a majority decision on Monday. “We must respect Congress’s decision to retain this authority.”
Barring help from federal lawmakers, the decision means the debt-burdened Puerto Rico agencies will have no other choice except to continue piecemeal negotiations with creditors, a process which could lead to chaos if discussions break down and investors end up suing the agencies and each other to reclaim some of what they’re owed.
Puerto Rico securities have dropped in prices after Governor Alejandro Garcia Padilla last month said he would move toward restructuring the island’s debt. Commonwealth general obligations maturing July 2035 traded Monday at an average price of 70.6 cents on the dollar, after falling to 66.6 cents on the dollar June 30, a record low, according to data compiled by Bloomberg.
The case is Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 15-1218, U.S. Court of Appeals for the First Circuit (Boston).
Written by Christie Smythe of Bloomberg