Puerto Rico Bankruptcy Temptation – The Wall Street Journal (May 15, 2015)

Regarding Mary Anastasia O’Grady’s “Puerto Rico’s Debt Relief Gambit” (Americas, May 4): The fact that the proposed amendment to the U.S. bankruptcy code would operate retroactively to bondholders of Puerto Rico state-owned entities is neither unfair nor unusual. In fact, the retroactive application of U.S. bankruptcy laws to existing debts has been the historical practice since the U.S. was founded.

Separately, bondholders and other creditors of the Puerto Rico Electric Power Authority (Prepa) should be wary of the ancient and untested receivership provisions in Prepa’s Organic Act. The statutory regime adopted in 1941 requires the naming of a receiver under the supervision of a court in Puerto Rico. Given the large amounts at issue by nonresident bondholders, the island’s U.S. federal district court may have jurisdiction to appoint and supervise the receiver and hold the proceedings in English. But it is not entirely clear that this federal court would also have jurisdiction of other claims by resident bondholders and other creditors. The result could be multiple additional proceedings in local courts conducted in Spanish. The risk of confusion and inconsistent results between the different forums seems likely and evident. Finally, Prepa’s Organic Act expressly forbids the sale, mortgage and other disposition of Prepa’s assets to satisfy bondholder claims.

These issues could be largely avoided if creditors are forced to file their claims in a U.S. bankruptcy court that would consolidate all proceedings and conduct them in English.

So to those vying to block Puerto Rico from using the U.S. bankruptcy code to restructure its state-owned entities, I say: Be careful what you wish for.

David R. Martin


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