As we reported last year, on August 10, 2017, Judge Swain entered an order establishing procedures to govern resolution of the Commonwealth-COFINA dispute (the “Resolution Stipulation”).
Having practiced in Puerto Rico for nearly a decade, including being involved heavily in the ongoing Title III PROMESA proceedings, the recent ruling handed down by the First Circuit could prove to be the most impactful for the Island’s long term restructuring prospects and its access to the Bond markets. The controversial ruling, which pertains to the treatment of municipal revenue debt, has left investors with questions about the value and significance of a revenue pledge in a municipal bankruptcy. This blog provides some background and potential ramifications.
Introduction
On July 13 2016, the US Supreme Court issued its ruling in Puerto Rico v Franklin California Tax-Free Trust. Affirming the decision of the court of appeals, the Supreme Court ruled by a vote of five to two that the US Bankruptcy Code pre-empts the Recovery Act, which Puerto Rico enacted in 2014 to address its mounting debt crisis.
Puerto Rico’s financial woes have recently been front and center in financial news. Although a recent decision by the U.S. Supreme Court curtailed Puerto Rico’s ability to enact its own legislation to address its debt situation, late last month President Obama signed into law legislation designed to allow Puerto Rico to restructure its vast public debt, giving new hope to the Commonwealth’s financially strapped public utilities.
On June 13, 2016, the U.S. Supreme Court upheld lower court rulings declaring unconstitutional a 2014 Puerto Rico law, portions of which mirrored chapter 9 of the Bankruptcy Code, that would have allowed the commonwealth’s public instrumentalities to restructure a significant portion of Puerto Rico’s bond debt (widely reported to be as much as $72 billion). In Commonwealth v. Franklin Cal. Tax-Free Tr., 2016 BL 187308 (U.S.
On June 30, 2016, the United States Senate passed the “Puerto Rico Oversight, Management and Economic Stability Act” (“PROMESA”) and it was quickly signed into law by President Obama.[1] PROMESA enables the Commonwealth of Puerto Rico and its public corporations and other instrumentalities in financial distress to restructure their debt.
When we last discussed the Commonwealth of Puerto Rico’s efforts to restructure some $72 billion in municipal debt, a Federal District Court Judge had found the Commonwealth’s 2014 municipal debt-restructuring law, the “Recovery Act,” to be pre-empted by the federal Bankruptcy Code, unconstitutional and therefore void.
On May 3, 2017, the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), acting on behalf of the cash-strapped Commonwealth of Puerto Rico (the “Commonwealth”), filed for bankruptcy protection in the District Court for the District of Puerto Rico. The Commonwealth’s Title III Petition for Covered Territory or Covered Instrumentality (the “Petition”) was filed in accordance with Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), codified at 48 U.S.C. § 2161, et seq.
On May 3, 2017, the Financial Oversight and Management Board for Puerto Rico filed a voluntary petition for relief on behalf of Puerto Rico in federal court there. The filing required the Chief Justice of the United States to designate a district court judge to conduct the case. On May 5, Chief Justice Roberts appointed District Judge Laura Taylor Swain of the Southern District of New York. Judge Swain was a bankruptcy judge in the Eastern District of New York before joining the district court in 2000.