The Puerto Rico Bond Crisis Goes To The Core Of The Status Issue

National Law Review
July 14, 2014
Puerto Rico Bonds: Legislation and Litigation
Article By: A.W. Chip Phinney III, PhD, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
For municipal bond investors and insurers, recent events in Puerto Rico have become a major concern. Puerto Rico has tried to address its mounting debt crisis by enacting legislation that would create, in effect, a quasi-bankruptcy court to provide restructuring relief for certain public corporations that have issued revenue bonds, including the Puerto Rico Electric Power Authority, the Puerto Rico Aqueduct and Sewer Authority and the Puerto Rico Highways and Transportation Authority.

National Law Review
Not surprisingly, the legislation has sparked a suit by certain bondholders challenging its legality and constitutionality. They have filed a complaint in federal district court in Puerto Rico, asking the court to hold that the legislation violates 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 creditors without their consent. The plaintiff bondholders also argue that the legislation violates the Contract Clause in Article I, Section 10 of the U.S. Constitution and the Takings Clause under the Fifth and Fourteenth Amendments.

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