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Puerto Rico Senate Not in a New York State of Mind

As reported by the Wall Street Journal today and by other sources, the authorizing legislation for Puerto Rico’s much anticipated $3.5 billion non investment grade general obligation issue has become hung up in Puerto Rico’s Senate over language included in the bill passed by the territory’s House of Representatives that would authorize Puerto Rico’s Treasury secretary to agree that disputes over such bonds would be governed by the laws of, and could be brought in, a jurisdiction other than Puerto Rico. New York is the jurisdiction and law bondholders are presumed to prefer.

There are three possible outcomes.  If the legislation is enacted in the House form and the Treasury secretary so agrees, Puerto Rico could eliminate any doubt over the ability of bondholders to litigate disputes over the new general obligation bonds in New York federal or state court.  If the legislation as enacted is stripped of the House language, there may be no choice of law or forum provision in the documentation governing the general obligation bonds, in which case, as we have previously discussed, it would remain open to bondholders to bring suit in New York state court (or for injunctive relief in New York federal court), although Puerto Rico could seek to contest New York’s jurisdiction.  If the legislature or the Treasury secretary insist on affirmative language in the general obligation bond documentation requiring suit on the bonds to be brought in Puerto Rico, bondholders, if they accepted such terms, would be bound to litigate in Puerto Rico.

Today’s Wall Street Journal article asserts that “the vast majority of Puerto Rico’s existing bonds are subject to the island’s local law and jurisdiction.”  We believe that may overstate the case as to the jurisdiction element.  A sample of offering documents for Puerto Rico’s outstanding general obligation bonds contains no mention of a Puerto Rico jurisdiction requirement, and the bond resolution for COFINA bonds, while specifying that Puerto Rico law governs, does not reference Puerto Rico jurisdiction.  Although express agreement on New York jurisdiction would be preferable from the perspective of bondholders, it is not a given that silence on the topic in the documentation for the upcoming general obligation bonds would concede exclusive Puerto Rico jurisdiction.

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About this Author

Leonard Weiser-Varon, Mintz Levin Law Firm, Corporate and Finance Law Attorney
Member

Len is active in both municipal finance and corporate finance, with an emphasis on financings for 501(c)(3) institutions, project finance, secured lending, structured finance transactions, workouts and restructurings, corporate debt, and Section 529 college savings programs.

His practice includes service as bond counsel, issuer’s counsel, underwriters’ counsel, and counsel to institutional purchasers and borrowers in connection with public offerings and private placements of, and defaults and bankruptcies involving, tax-exempt and taxable debt for public, nonprofit, and corporate...

617-348-1758
William W. Kannel, Bankruptcy Attorney, Mintz Levin Law Firm
Member

Bill’s practice focuses primarily on commercial law, workouts, and corporate reorganization. He has represented various institutional lenders, indenture trustees, bondholders, and other creditors, debtors, and trustees in all manner of insolvency proceedings in courts throughout the United States.

His industry experience encompasses municipalities, airlines, hospitals and other health care facilities, retail, telecom, energy and clean tech, waste disposal, military housing, hotels, and educational institutions.

He has substantial experience in all phases of bankruptcy litigation, practice, and case management from both the debtor’s and creditor’s perspective, including relief from stay, adequate protection, valuation, preference, fraudulent transfer, subordination, competing plan, and appellate litigation. One of his specialty areas is in negotiating sales of troubled companies and assets, both in and out of bankruptcy. His practice also includes addressing bankruptcy and documentation issues in securitizations, receivable sales, bond transactions, and structured financings generally.

Bill is also experienced in the growing area of municipal bankruptcies, and recently was quoted in stories in the Wall Street JournalThe Deal, BloombergLaw360, and Dow Jones Daily Bankruptcy Review.

617-348-1665