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Puerto Rico Gets 21 Days to Respond to Investors’ Lawsuit

A federal court gave Puerto Rico 21 days to respond to a suit by investors seeking to have a new law that allows certain public corporations to restructure debt declared unconstitutional.

The summons was issued in a challenge brought by investment funds of Franklin Templeton Investments and Oppenheimer Funds Inc., which hold more than $1.7 billion in power authority bonds. They filed the suit on June 28, the same day Puerto Rico Governor Alejandro Garcia Padilla signed the measure.

The law, passed under threat of a “fiscal emergency,” would allow public utilities such as Puerto Rico Electric Power Authority to negotiate with bondholders to reduce their debt loads, potentially forcing investors to accept unfavorable terms, according to the complaint.

Prepa, struggling with $10 billion of debt, may “file for relief under the act imminently,” investors alleged.

Investors argue the law creates a process similar to federal bankruptcy protection, and that Puerto Rico “has no power to enact” its own bankruptcy law.

U.S. District Judge Jay A. Garcia-Gregory in San Juan was assigned today to handle the case.

The funds’ case is Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 14-cv-01518, U.S. District Court, District of Puerto Rico (San Juan).

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