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High Court to Dive Into Puerto Rico’s Debt Woes

(CN) - The U.S. Supreme Court said it will resolve whether bankruptcy law - which does not apply to Puerto Rico - nonetheless preempts the struggling commonwealth's legal efforts to restructure its debt.

Earlier this year, the First Circuit ruled that Puerto Rican municipalities cannot declare Chapter 9 bankruptcy after Congress amended bankruptcy code in 1984 and prohibited the commonwealth from defining a municipal debtor.

Puerto Rico has approximately $72 billion in debt on a $103 billion gross domestic product, and is struggling to pay its creditors.

And as the island's public utilities risked becoming insolvent, lawmakers there sought to take matters into their own hands and passed a law in 2014 that would have allowed utilities to restructure their debt.

Bondholders in the power plant challenged the law in court, claiming that the definition of "state" in federal bankruptcy law does not apply to Puerto Rico, an unincorporated U.S. territory. A federal judge in San Juan agreed with the bondholders, as did a 3-judge panel of the First Circuit this past July.

Puerto Rico appealed to the U.S. Supreme Court, which on Friday agreed to decide whether Chapter 9 preempts the Puerto Rican law even though the bankruptcy code as a whole does not apply to the commonwealth.

Bondholders in the case include Franklin California Tax-Free Trust and BlueMountain Capital Management.

As is its custom, the high court did not explain why it will take up the case but noted that Justice Samuel Alito "took no part in the consideration or decision of these petitions."

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