Distressed Download

Debt Enforcement and Recovery Act (the “Recovery Act”)

Update on Puerto Rico

Lorraine McGowenPosted on December 15, 2015

Supreme Court to Determine Constitutionality of DERA

By order dated December 4, 2015, the US Supreme Court has agreed to consider the appeal by the Commonwealth and the Government Development Bank regarding the constitutionality of the Commonwealth’s Debt Enforcement & Recovery Act (DERA). In requesting the Supreme Court to consider its appeal, the Commonwealth stated that this case “presents a question of extraordinary importance and urgency and that the lack of a bankruptcy framework is hindering negotiations to reach a restructuring agreement.

For additional Puerto Rico updates, including information on the proposed Supervisory Oversight Board, continue below.

Puerto Rico Debt Recovery Act Ruled Unconstitutional

Lorraine McGowen and Thomas MitchellPosted on February 10, 2015

On Friday February 6, the Puerto Rico Federal District Court ruled the Debt Enforcement and Recovery Act (the “Recovery Act”) unconstitutional. Franklin Calif. Tax-Free Trust, et al. v. Comm. Of Puerto Rico et al., (D.P.R., Feb. 6, 20150)(Case No. 3:14-cv-01518-FAB).

The opinion is extensive and addresses each of the constitutional challenges raised by both Blue Mountain and the Franklin/Oppenheimer plaintiffs, and the Commonwealth’s request that the bondholder complaints be dismissed as being “unripe”, among other defenses. The Court confirmed federal jurisdiction and ripeness of the bondholders’ claims of preemption, impairment of contracts and certain of the taking clause claims. The Court said that those claims became ripe immediately upon adoption of the Recovery Act. Most importantly, the Court has ruled that the entire act is preempted expressly by the federal Bankruptcy Code and is therefore void pursuant to the Supremacy Clause of the United States Constitution. The Court further ruled that the Commonwealth is permanently enjoined from enforcing the Recovery Act.

A summary of the key findings by the Court is provided below. The Court also dismissed the claims against PREPA. The Court held that the mere fact that PREPA may commence an action under the Recovery Act at some future time is not sufficient to assert claims against PREPA. The Court noted that “if PREPA’s filing for debt relief pursuant to the Recovery Act were imminent, this could be a sufficient injury traceable to PREPA.” (Decision at 26-27).