December 8, 2021

Volume XI, Number 342

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December 07, 2021

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December 06, 2021

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Be PREPAred: PREPA (Puerto Rico Electric Power Authority) Bondholders Greet Puerto Rico’s Bankruptcy Legislation With Federal Lawsuit

On Saturday, June 28, Puerto Rico’s Governor Padilla signed into effect Puerto Rico’s new bankruptcy law for certain revenue bond issuers.  Within 24 hours of the statute’s enactment, two mutual fund complexes owning approximately $1.7 billion in bonds of the Puerto Rico Electric Power Authority (PREPA) filed a complaint in the federal district court for Puerto Rico, seeking a declaratory judgment invalidating the fledgling legislation.

The complaint is efficient and straightforward.  It asserts that the legislation is preempted by Section 903 of the United States Bankruptcy Code, which precludes “States” from enacting laws for the composition of debt of “municipalities” that purport to bind non-consenting creditors.  The complaint additionally alleges that, even if not preempted, certain provisions of the legislation effect unconstitutional impairments of contract and/or takings of property of secured creditors.

Puerto Rico has yet to file a response to the complaint, but the Section 903 argument is compelling and, subject to likely objections by Puerto Rico to adjudication of the statute’s validity before a specific issuer seeks its protection, has the potential to make short shrift of Puerto Rico’s attempt to create a bankruptcy process applicable to its financially challenged revenue bond issuers.

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume IV, Number 187
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About this Author

Leonard Weiser-Varon Coporate and Finance Law Attorney Mintz Law Firm
Member

Len specializes in municipal and corporate debt transactions,  represents state sponsors and private program managers of Section 529 college savings programs and Section 529A (ABLE) disability savings programs, and is often invited to speak on securities and constitutional law issues impacting finance. He also regularly writes on public finance matters and has been recognized as one of the top public finance lawyers in Massachusetts in a peer survey by Massachusetts Super Lawyers.

Len is active in both...

617-348-1758
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