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Three Strikes and Recovery Act is Out

By LEN WEISER-VARON and BILL KANNEL

Today's U.S. Supreme Court decision in Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust puts an end to one of Puerto Rico's multi-pronged efforts to deleverage itself.  Given the comprehensiveness of the First Circuit's intermediate appellate opinion upholding the district court's invalidation of Puerto Rico's Recovery Act, it was surprising that the highest court took the case, a decision apparently prompted by Justice Sotomayor's interest in obtaining a reversal.  Comments of some other Justices at oral arguments raised the possibility of Sotomayor attracting a majority for the proposition that the preemption provisions of Section 903 of the U.S. Bankruptcy Code were inapplicable to Puerto Rico, but in the end only Justice Ginsburg joined what turned out to be Sotomayor's dissenting opinion in a 5-2 ruling upholding the relegation of the Recovery Act to the dustbins of history.

As  we have written previously, the Recovery Act was damaged goods from the beginning: even if the fairly clear preemption argument had not prevailed, the Contracts Clause constraints on non-federal bankruptcy legislation would have severely constrained, if not eliminated, the effective use of  the Recovery Act to break bond contracts. In any event, the Recovery Act, and the Supreme Court's decision, were  a couple weeks away from being moot, as it appears evident that Congress will pass PROMESA, the federal oversight and debt restructuring legislation that has always constituted the logical legal mechanism for those favoring a less chaotic denouement to Puerto Rico's debt woes.

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Author

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.