July 25, 2014 – Major U.S. Investment Firms Sue Puerto Rico; Constitutional Challenges to the Puerto Rico Public Corporation Debt Enforcement and Recovery Act
July 28, 2014
On July 22, 2014, BlueMountain Capital Management, LLC, a major New York investment firm, filed a lawsuit against the government of Puerto Rico, challenging the constitutionality of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. The Act, which was enacted in June 2014, creates a bankruptcy system that adjusts debts owed by Puerto Rican public entities and instrumentalities and binds non-consenting creditors. BlueMountain manages funds that hold over $400 million in power revenue bonds issued by the Puerto Rico Electric Power Authority (“PREPA”). The bonds were issued pursuant to the Puerto Rico Electric Power Authority Act, under which Puerto Rico promised not to alter or limit the rights and remedies of any entity that acquires bonds until those bonds are fully met and discharged.
In its complaint, BlueMountain argues that the Act will allow entities such as PREPA to seek relief from their contractual obligations to bondholders. BlueMoutain asserts that the value of PREPA bonds has decreased and negotiating a settlement with PREPA has become increasingly difficult as a result of the imminent likelihood that PREPA will file for relief under the Act. In addition to its preemptive concerns, BlueMountain argues that it has already been harmed by the Act because it effectively voids the right guaranteed by the Puerto Rico Electric Power Authority Act for bondholders to seek appointment of a receiver. BlueMountain alleges that the U.S. Constitution precludes Puerto Rico from adjusting debts and enacting bankruptcy regimes because those powers have been explicitly reserved for Congress. The Act also impairs contractual obligations, thus violating express provisions in both the U.S. and Puerto Rico Constitutions that prohibit the enactment of such laws that are not reasonable and necessary to promote public welfare.
Two other U.S. investment funds, Franklin Templeton Investments and OppenheimerFunds, filed similar constitutional challenges to the Act on June 28, 2014. Puerto Rico’s Justice Secretary Cesar Miranda requested that the June 28th lawsuit be dismissed, arguing that the Act does not conflict with federal bankruptcy laws because public entities of U.S. territories are ineligible for filing bankruptcy under U.S. law. Miranda also contends that the lawsuit is moot because the Act has not yet been put into action. Both cases are currently pending in the U.S. District Court for the District of Puerto Rico.
Crosby & Higgins LLP is currently investigating the collapse of the Puerto Rican bond market earlier this year and evaluating potential investor claims arising from the losses that have followed.