On June 25, 2014, the island enacted the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (“Recovery Act”), a state bankruptcy law for public corporations. It is a mixture of Chapter 9 and Chapter 11 of the Federal Bankruptcy law. The Act was intended mainly to protect the Puerto Rico Electric Power Authority (PREPA), a public corporation that has a monopoly of electrical generation and distribution in the island and owes almost $10 billion to bondholders. It successfully used the threat of this law to secure a Forbearing Agreement to postpone payment of some debts until March of 2015.
On the same day that the Recovery Act was enacted, Franklin California Tax Free Trust and several others filed a complaint in Federal Court to declare the law unconstitutional on several grounds. BlueMountain Capital Management and others soon joined them. All plaintiffs hold PREPA bonds.
On February 6, 2015, Federal Judge Francisco Besosa declared the Recovery Act unconstitutional because it is in conflict with 11 U.S.C. § 903, which requires, inter alia:
(1) a State law prescribing a method of composition of indebtedness of such municipality may not bind any creditor that does not consent to such composition; and
(2) a judgment entered under such a law may not bind a creditor that does not consent to such composition.
From the start of Puerto Rico’s effort to enact a local Bankruptcy law, I pointed out that there would be a need for unanimity in any composition of bond obligations. After reviewing the parties’ motions and opposition, I saw no way that defendants could get around the 903-argument. I was right. (links a los blog posts sobre esto)
In addition, Judge Besosa characterized plaintiffs’ claim that the Recovery Act was a violation of the constitutional prohibition against impairment of contractual obligations as plausible and refused to dismiss it. The Court came to the same conclusion with plaintiffs’ claim that they were deprived without just compensation plaintiffs’ contractual right to seek the appointment of a receiver as per the 1974 bondholders agreement with PREPA. The Court also dismissed several of plaintiffs’ claims without prejudice for being unripe, i.e., it was not the moment to file them.
At page 75 of his opinion, Judge Besosa held that “[t[he Commonwealth defendants, and their successors in office, are permanently enjoined from enforcing the Recovery Act.”
It remains to be seen the long-term impact of this decision. Pursuant to Rule 58 of the Federal Rules of Civil Procedure requires that there be a separate document entitled judgment. It is from the date this document is entered into the docket that the defendants’ time to request a remedy starts. The judgment will probably be issued by February 9. From that time on, defendants will have 28 days to file a motion to Alter or Amend Judgment (Rule 59) and 30 days to file a notice of appeal, which is a two page motion informing the Court that they have the intention of appealing. After all is said and done, it can take a year for the First Circuit Court of Appeals to rule on the appeal and even then, I doubt it will reverse Judge Besosa.
For the past year, starting with his refusal to honor its contract with Doral, Governor García Padilla and the PPD have worked against bondholders with disastrous consequences for Puerto Rico’s credit ratings and the economy in general. It is high time Governor García Padilla and the Government work with bondholders instead of against them to find solutions to Puerto Rico’s mountain of debt. The clock is ticking and it is near midnight.
Relevant previous blog entries:
Puerto Rico’s Local Chapter 9, a Good Start http://wp.me/p4hdBJ-4J
LEY DE QUIEBRAS LOCAL, LAS SECCIONES MAS RELEVANTES http://wp.me/p4hdBJ-8U
LAS FUNCIONES DEL RESTRUCTURING OFFICER http://wp.me/p4hdBJ-9Q
¿PUEDE PR PEDIR CONDONACION DE TODA O PARTE DE SU DEUDA? http://wp.me/p4hdBJ-aX