Federal judge rules that Puerto Rico debt-restructuring law is unconstitutional

SAN JUAN, Puerto Rico – A federal judge ruled late Friday that a Puerto Rico debt-restructuring law that aims to protect the government from bankruptcy and make public corporations self-sufficient is unconstitutional.

The judge’s decision comes as the U.S. territory seeks to avoid a collapse of public services as it tries to dig itself out from $73 billion in public debt. The ruling was issued eight months after several U.S. investment funds filed a lawsuit against Puerto Rico’s government, saying the local law known as the Recovery Act interfered with federal bankruptcy laws.

Judge Francisco Besosa agreed in a 75-page ruling.

“The Recovery Act is pre-empted by the federal Bankruptcy Code and is therefore void,” he wrote.

He also permanently forbade current and future government officials from enforcing the act, which warned that the island’s public corporations, especially the power company, “face significant operational, fiscal, and financial challenges.”

The court consolidated two cases filed by plaintiffs who hold roughly $1.6 billion in bonds issued by Puerto Rico’s Electric Energy Authority.

Puerto Rico Justice Secretary Cesar Miranda said the government is analyzing the judge’s decision.

“We will decide later what action to take,” he said.

Gov. Alejandro Garcia Padilla approved the Recovery Act last June after submitting a last-minute bill to legislators, urging them to approve it amid concerns that certain public agencies might collapse financially.

Puerto Rico’s public corporations account for nearly 40 per cent of the island’s $73 billion debt. None of them have sought to restructure their debt under the act, which the government has described as an “option of last resort.”

The act in part allows certain public corporations to work first with creditors to reach an agreement before the case goes to court. The measure does not apply to the government’s general obligation debt and also excludes the island’s 78 municipalities, the Government Development Bank and other entities.


Danica Coto on Twitter: