Response to Ms. Cate Long Regarding Mr. Felix Salmon’s Article

Mr. Felix Salmon from Reuters has come up with a very interesting and thought provoking piece on PR defaulting on its bonds. The gist of his piece is “The point here is that the concept of seniority doesn’t really make a lot of sense when you’re not operating in the context of a formal bankruptcy regime.” Obviously, he is referring to the seniority of the new $3.5 billion issue but more information is required to really understand the situation.

PR’s debts are owed by the Commonwealth of Puerto Rico (Estado Libre Asociado in Spanish), the different public corporations, some of which can invoke 11th Amendment protection and some that cannot and the Municipalities. As such, none of these debts has any seniority, EXCEPT the following: General Obligation bonds issued pursuant to Article VI, sec. 2 of the Commonwealth’s Constitution  These bonds, however, are only around $16.233 billion of the $70 billion owed by the island. See slide 56 of the GBD’s presentation to bondholders of October 15, 2013  They are senior debt because the Constitution states that they must be paid BEFORE any other debt, which includes other bonds, guarantees and even salaries. The Constitution also provides a cause of action to bondholders to sue in the PR Treasury Secretary for payment. Hence, it is clearly a first lien. Hence, there is some seniority in GO bonds if PR law applies. Doubt there will be one in New York. The type of waiver of sovereignty contemplated by the PR Legislature is not exclusive jurisdiction in New York Courts but rather a concurrent jurisdiction with any other court with jurisdiction, i.e., PR Commonwealth Courts or the United States District Court for the District of Puerto Rico. Why is this important? Simple, if PR believes it is close to default it can file in the Commonwealth Courts a suit for declaratory judgment in order to determine if the waiver is valid, if PR law or New York law is applicable to the emission, etc. Knowing PR courts, it will be years before bondholders get their money back. Moreover, don’t count on the Puerto Rico Federal District Court for help. Given the issues I have mentioned, abstention via Railroad Commission v. Pullman Co., 312 U.S. 496 (1941); Burford v. Sun Oil Co., 319 U.S. 315 (1943) or Louisiana Power & Light Co. v. City of Thibodaux, 360 U.S. 25 (1959), sending any removal back to Commonwealth Courts. Of course, that would require footwork Governor García Padilla, himself a lawyer, has never shown.

I concur with Mr. Salmon that any debt adjustment will be cumbersome without bankruptcy law, but since the Bankruptcy Code cannot protect PR or its public corporations or municipalities, the local legislature could write its own version of Chapter 9 and liquidation procedures. Bondholders will cry foul but modernly, states are given leeway to alter contractual obligations. See, United Auto., Aerospace, Agr. Implement Workers of America Intern. Union v. Fortuño, 633 F.3d 37 (1st Cir. 2011); Trinidad v. ELA, 2013 TSPR 73 and Domínguez Castro et al. v. E.L.A. I, 178 D.P.R. 1 (2010), cert denied, Domínguez Castro v. Puerto Rico, 131 S. Ct. 152  (2010).

I believe it would be best if PR would not take this loan, admit it cannot pay what it owes and negotiate some type of amnesty or debt reduction but since this government wants to be reelected, it will not happen this year. A final note, as I am writing, the press reports there is great reluctance from the PR House of Representatives on approving the limited waiver of immunity the Senate approved, even when it had done so before. Will keep you posted.



Reporta Noticel que el Senado eliminó del proyecto para permitir el tomar prestado $3.5 billones el renunciar a la inmunidad del ELA a ser demandado en cortes que no sean las de PR. Aunque ahora el proyecto pasará a Conferencia a menos que la Cámara lo acepte así, a pregunta ahora es si el Ejecutivo lo puede hacer a pesar de que el Senado eliminó eso del proyecto. Aunque no hay precedentes legales en PR sobre ello, existen precedentes federales sobre ello. En Lapides v. Bd. of Regents of the Univ. Sys., 535 U.S. 613, 624 (2002) el SCOTUS decidió que un estado puede renunciar a su inmunidad al solicitar remover un caso a la Corte Federal. Ya que estas acciones son determinadas durante el litigio por el Ejecutivo, se puede entender que a pesar de lo que hizo el Senado, el Gobernador puede reunciar a esa inmunidad.  Ver también, Porto Rico v. Ramos, 232 U.S. 627 (1914)   donde el SCOTUS indica que al intervenir en un caso PR había renunciado a su inmunidad soberana a ser demandado.  Nuevamente, esto no quiere decir que el TSPR decida así pero apunta a ello.

Noticel reports  that the PR Senate eliminated from the law that authorizes the $3.5 billion bond emission, the waiver of sovereign immunity to be sued in other courts. Although the proposed law will now go to a Conference Committee unless the House approves the Senate’s version, the question now is whether the Executive may waive immunity notwithstanding this action. Although there are no legal precedents in PR about this, there are federal precedents about it. In Lapides v. Bd. of Regents of the Univ. Sys., 535 U.S. 613, 624 (2002)  el SCOTUS determined that “the State’s action joining the removing of this case to federal court waived its Eleventh Amendment immunity . . . .”.  Since these actions are taken during litigation by the Executive, one could conclude that  in spite of what the Senate did, the Governor may waive said immunity. See also, Porto Rico v. Ramos, 232 U.S. 627 (1914)  where the SCOTUS said that by intervening in a case, PR had waived its sovereign immunity to be sued. Again, this does not mean that the PR Supreme Court will decide this way but it certainly points that way.