The United States District Court for the District of Puerto Rico (the “Court”) issued an Opinion and Order on Friday February 6, 2015 declaring that the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) is unconstitutional. The Court concluded that the constitutional challenges to the Recovery Act presented by the plaintiff investment funds were ripe for judicial review because, among other things, the Recovery Act constitutes “hardship” on the plaintiff investment funds. The Hon. Francisco A. Besosa determined that the Recovery Act is a “direct and immediate” injury to the bondholders and that a declaration that the Recovery Act is unconstitutional “would be of great utility” to the bondholders as their guaranteed rights would be completely restored.

After concluding that the matter is proper for judicial review, the Court concludes that the Recovery Act is expressly preempted by Section 903(1) of the Bankruptcy Code and therefore, unconstitutional. The Court interprets Section 903(1) of the Bankruptcy Code to mean that States, including Puerto Rico, are prohibited from enacting laws that “prescribe a method of composition of municipal indebtedness that binds nonconsenting creditors.” The Court understood that the Recovery Act is precisely the type of law that creates “procedures for indebted public corporations to adjust or discharge their obligations to creditors.” The foregoing, the Court reasons, is exactly what Section 903(1) of the Bankruptcy Code prohibits. Therefore, the Recovery Act is deemed void by the Court and the Commonwealth of Puerto Rico is permanently enjoined from enforcing the Recovery Act.

A copy of the opinion is attached. The Commonwealth of Puerto Rico announced that it intends to file an appeal before the Court of Appeals for the First Circuit. If you have any questions, please contact us.