On April 2016, Governor Alejandro García Padilla Act Num. 21 of 2016 known as the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (Moratorium law). This law establishes a moratorium on law suits against PR for collecting money owed, inter alia, on bonds debt. In addition, it allows the Governor not to pay certain debts and to prioritize providing essential services, which are not defined in the Act. Today, Jacana Holdings, I LLC et als filed a lawsuit in the United States District Court of the Southern District of New York challenging the constitutionality of this law. It joined two other suits in the United States District Court for the District of Puerto Rico where Brigade Leveraged Capital Structures Fund, Ltd., et als and National Public Finance Guarantee Corporation are challenging the law.


Brigade, the first to file challenging the law, did so in its amended complaint of May 16, 2016, claiming it conflicted with 11 U.S.C. § 903 and was therefore preempted as decided by the First Circuit in Franklin California v. Commonwealth, 805 F. 3d 322 (2015) and later affirmed by the SCOTUS on June 13, 2016 in that a state, including PR, cannot make its owns bankruptcy or one that changes payment terms. This power belongs only to Congress. In addition, Brigade claims the Moratorium law) impairs contractual obligations, constitutes a taking without just compensation, discriminates against non-residents in violation of the dormant commerce clause of the Constitution and denies access to Courts.


National filed two days after the SCOTUS decided the Franklin California case and claimed the Moratorium law is preempted by 11 U.S.C. § 903 and other sections of the Bankruptcy Code, impairs contractual obligations, constitutes a taking without just compensation, and denies access to Courts.


Jacana Holdings claims need a little more explaining. In March 2014, PR issued $3.5 billons in General Obligation bonds and waived its sovereign immunity, concented to be sued in NY courts and agreed to have NY law rule the obligations. Hence, Jacana Holdings filed in the Sourthern District of NY claimin that the Moratorium law could not alter NY contract law, that the law violated Article VI of the PR Constitution, the PR and US Constitution prohibition on impairment of contractual obligations, that it is unreasonable and not an adequate emergency measure, the takings and due procees clauses of both Constitutions and denies access to Courts. Jacana Holdings does not claim the Moratorium law is preempted by the Bankruptcy laws of the US.


Any of these claims would render the Moratorium law inoperative and in my view, all claims are correct, especially the one’s pertaining to section 903 since it was recently affirmed by the SCOTUS. Given that Judge Besosa, who was the District Judge who decided the PR Recovery Act was unconstitutional in Franklin, has the Brigade and National cases, I expect a prompt decision on the issues before the Souther District even considers the issue. And I am sure Judge Besosa will strike down the Moratorium law.



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