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Puerto Rico’s Restructuring: A Brief Update

When we last checked in on the Puerto Rico restructuring case, we reported on the February 15 decision of the First Circuit Court of Appeals that the members of the Financial Oversight and Management Board were appointed in contravention of the Appointments Clause of the U.S. Constitution because they were never confirmed by the U.S. Senate.  But, in recognition of the implications of its decision, the Court delayed the effectiveness of its ruling for 90 days.  That 90-day deadline was set to expire on May 16, causing several commentators to express skepticism that a legislative solution could be achieved in the time allotted. 

In the last ten days, however, there have been two developments that presage a possible solution to this particular sub-drama of the Puerto Rico case.  First, on Monday, April 29, the White House announced that President Trump would “nominate the current seven members of the Financial Oversight and Management Board for Puerto Rico to fill out the remainder of the three-year terms to which they were initially appointed in 2016.”[1]  The following week, on Monday, May 6, the First Circuit extended the stay of the effectiveness of its ruling for another 60 days, until July 15, 2019 (but denied the Oversight Board’s request to stay the mandate indefinitely pending review of its decision by the United States Supreme Court).[2]

Meanwhile, the Oversight Board and the Creditors’ Committee marked the two-year anniversary of the Commonwealth’s bankruptcy case with a slew of litigation commenced in the days and weeks leading up to May 3, 2019.[3]  Many of the complaints were garden-variety preference and fraudulent transfer claims that seek to recoup payments made by the Commonwealth prior to the filing of its case pursuant to applicable provisions of the Bankruptcy Code.  But certain of the lawsuits filed last week are unique to the special circumstances that led to Puerto Rico’s bankruptcy filing and seek significant relief with respect to the general obligation bonds issued by the Commonwealth in the years prior to Puerto Rico’s financial collapse. 

These actions arise from the Commonwealth’s issuance of approximately $9 billion dollars in general obligation bonds allegedly in violation of the Constitution and statutes of Puerto Rico. The Plaintiffs, on behalf of the Commonwealth, have asked the Court to declare that the laws of Puerto Rico do not authorize such debts and that the Commonwealth is entitled to recover principal and interest payments that were made to bondholders, so that such property may inure to the benefit of Puerto Rico’s citizens, taxpayers, and other creditors.  The Commonwealth has also sought a declaration that the general obligation bondholders do not have liens on its tax revenues or any other assets, as they have claimed, and has filed complaints against underwriters and other financial participants that took part in and allegedly profited from the issuance of general obligations bonds at a time when, it is alleged, the Defendants were aware that the Commonwealth was insolvent and could not repay the bonds. 

[3] The two-year anniversary of a bankruptcy filing is a significant date.  It is the deadline for a debtor in possession or bankruptcy trustee to commence an action to avoid fraudulent transfers and preferential payments (11 U.S.C. 546(a)) and marks the end of the two-year extension of time for a debtor to commence any other action that would otherwise have become untimely due to the passage of time during the pendency of the bankruptcy case (11 U.S.C. 108(a)(2)).