Skip to main content

Be PREPAred: PREPA 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.



Subscribe To Viewpoints


William W. Kannel is a bankruptcy attorney at Mintz. Bill has experience in corporate reorganizations and municipal Chapter 9 and debt restructurings. He represents both creditors and debtors in all phases of distressed debt negotiations, bankruptcy litigation, and distressed asset acquisitions.