PREPA

First Circuit Rules Bankruptcy Code Preempts Puerto Rico’s Recovery Act

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On Monday, July 6, the Court of Appeals for the First Circuit affirmed the February 6, 2015 order and injunction of the Puerto Rico District Court and held that section 903(1) of the Bankruptcy Code preempts the Puerto Rico Debt Enforcement and Recovery Act (the “Recovery Act”).  Franklin Cal. Tax Free Trust, et al. v. Commonwealth of Puerto Rico, et al., (1st Cir. July 6, 2015) (Case No. 15-1218): On February 10, 2015, we reported on the district court’s decision holding that the Recovery Act was unconstitutional.

As a result of amendments to the Bankruptcy Code in 1984, Puerto Rico, unlike states, may not authorize its municipalities, including its public utilities like PREPA or PRASA, to seek federal bankruptcy relief under chapter 9 of the Bankruptcy Code. In considering the appeal of the district court’s order, the Court first confirmed that it had jurisdiction to consider the bondholders’ claims of preemption, that those claims were ripe and that they had become ripe immediately upon adoption of the Recovery Act. The Court then ruled that the Commonwealth’s effort to allow its public corporations to restructure their debt by enacting the Recovery Act is expressly preempted by the federal Bankruptcy Code. Rejecting the Commonwealth’s arguments that the 1984 amendments made the preemption provisions of section 903(1) of the Bankruptcy Code inapplicable, the Court stated that “§ 903(1) has applied to Puerto Rico since the predecessor of that section’s enactment in 1946. The statute does not currently read, nor does anything about the 1984 amendment suggest, that Puerto Rico is outside the reach of § 903(1)’s prohibition. Op. at 4. Because the Court affirmed the district court’s order and injunction, the Court declined to consider the Commonwealth’s appeal of the district court’s order denying motions to dismiss the bondholders’ Contracts Clause and Takings Claims. Op. at 21.

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Rep. Pierluisi Introduces Bankruptcy Code Amendment to Permit P.R. Municipalities to File Under Chapter 9

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Just days after the United States District Court for the District of Puerto Rico struck down the Commonwealth’s efforts to pass its own insolvency regime, Resident Commissioner Pedro Pierluisi introduced the “Puerto Rico Chapter 9 Uniformity Act of 2015” into the U.S. House of Representatives last week.  The bill, which is substantively similar to one introduced in 2014, would allow the Commonwealth of Puerto Rico to authorize its insolvent public corporations to file a chapter 9 petition; they currently are not able to do so.  The bill, H.R. 870, has been assigned to the House Judiciary Committee and is scheduled for a hearing before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law on February 26th.  H.R. 870, 114th Cong. (1st Sess. 2015)

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Puerto Rico Debt Recovery Act Ruled Unconstitutional

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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).

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