The debate continues over whether Rhode Island is “a bondholder’s dream,” as The Wall Street Journal argued last week, or just a haven for slap-dash lawmaking.

“A new Rhode Island law that guarantees municipal bondholders will be paid back even if the cities and towns in which they invest go bankrupt could spur a nationwide trend – if courts allow it to stand,” Reuters’ Nick Brown writes in a new analysis piece.

The argument over whether the new law will pass muster in the courts is an interesting one since it could have national implications. But it may take a long time before the question is settled, Brown writes:

Central Falls’ leaders will look to apply the new law as it tries to restructure the city’s debt.

Legal experts said nothing in federal bankruptcy law appears to stop them from doing so. …

But the law is the first to apply retroactively to agreements with vendors owed money under pre-existing contracts with the city, said Karen Grande, Rhode Island’s municipal finance counsel.

[David Skeel, a bankruptcy and corporate law professor at the University of Pennsylvania Law School,] said retroactively protecting bondholders at the expense of other creditors could violate the Contracts Clause of the U.S. Constitution. He said the matter could wind up being appealed, possibly to the U.S. Supreme Court.

If the law gets challenged in federal court, it’s going to be up to the state to send lawyers to defend it. That possibility is already on the mind of Attorney General Peter Kilmartin, who mentioned it Thursday while discussing Central Falls during a taping of WPRI 12′s “Newsmakers.”

That also raises another question – will investors take comfort in the new law if its constitutionality is in doubt? Officials have said the point of passing the legislation was to reassure the bond market so that other local cities and towns, as well as the state, could continue borrowing money. But it may be a long time before doubts about the law are put to rest.

This issue of making laws retroactive has been a recurring one during the Central Falls crisis. The act that was hurriedly passed after the city’s leaders filed for judicial receivership last year was also written so it would apply to the days before they went to court. State leaders have been largely reactive, not proactive, in Central Falls.

The full Reuters article is here. Thanks to a savvy reader for sending it my way.

(photo: CoinCircuit.com)