By Julie Triedman, From The Litigation Daily
In what is likely the leading edge of a rash of multibillion-dollar disputes involving the Commonwealth of Puerto Rico, the first round has gone to a group of bondholders.
The U.S. Court of Appeals for the First Circuit on Monday struck down a law that would have allowed the commonwealth’s public utilities to seek bankruptcy protection. The decision, which affirms a district court ruling in February, is a blow to Puerto Rico’s debt restructuring efforts, and a victory for debt holders that opposed the law.
The ruling comes as Puerto Rico is increasingly desperate to restructure some $72 billion in public debt, nearly half involving its utilities and the rest related to other government-guaranteed bonds. As a commonwealth, Puerto Rico can’t use an essential tool in the restructuring toolkit available to states and municipalities: Chapter 9 bankruptcy protection. Last June, in a ploy to create a little breathing room with its bondholders, the Puerto Rican legislature enacted the Public Corporations Debt Enforcement and Recovery Act as an alternative path. The act would have given the debtor greater leverage to impose a restructuring on holdout creditors.
Bondholders in Prepa, the Puerto Rican power company struggling under $9 billion in bond debt, challenged the law. Kramer Levin Naftalis & Frankel’s Thomas Moers Mayer argued for Franklin Templeton Investment and Oppenheimer Funds, which hold $1.6 billion in Prepa bonds. A Gibson, Dunn & Crutcher team led by Matthew McGill represents hedge fund BlueMountain Capital Management LLC, which holds $400 million in Prepa bonds. Marc Kasowitz of Kasowitz, Benson, Torres & Friedman argued for bond insurers, who supported the bondholders.
Kirkland & Ellis’ Christopher Landau represents the commonwealth and Proskauer Rose’s restructuring expert Martin Bienenstock argued for the Government Development Bank. Cleary Gottlieb Steen & Hamilton’s Lewis Liman argued for Prepa.
The Puerto Rico entities argued that the commonwealth should have the right to restructure its municipalities’ debt. Cleary Gottlieb’s Liman told the judges during the May oral arguments that the absence of restructuring alternatives was “a euphemism for a stick up, a euphemism for pay me or else.” Proskauer’s Bienenstock told the panel that Puerto Rico’s constitution gave it special police powers during a crisis.
But Gibson Dunn’s McGill countered that Congress never indended to allow Puerto Rico to replicate a Chapter 9-type law. “Congress’ intention was not to give them carte blanche,” he told the panel.
Siding with the bondholders, the First Circuit found that the federal bankruptcy code preempted Puerto Rico from enacting its own version of Chapter 9. “In denying Puerto Rico the power to choose federal Chapter 9 relief, Congress has retained for itself the authority to decide which solution best navigates the gauntlet in Puerto Rico’s case,” wrote Chief Judge Robert Howard for the panel. “We must respect Congress’s decision to retain this authority.”
McGill, reached by phone, said his client was pleased with the court’s decision. “This was a straightforward application of the federal bankruptcy law,” he says, adding that the court “took note of the fact that the Puerto Rican law was different from, and in significant ways, less favorable to creditors than Chapter 9 bankruptcy itself.”
In a concurring opinion, Judge Juan Torruella, a Puerto Rican, wrote that Puerto Rico’s municipalities shouldn’t be denied bankruptcy protection under Chapter 9 and that its exclusion is discriminatory.
Monday’s ruling leaves Prepa and the government with fewer options as they try to work toward a consensual deal by a September deadline. Many tenacious and deep-pocketed hedge funds have scooped up Puerto Rican public debt on the cheap in the past few years and they have previously proved willing to fight hard in court.
Other law firms are likely gearing up for battles between groups of bondholders that invested in at least 14 government and government-related bonds–potentially leading to years of chaos. Investors holding $1 billion in Puerto Rican sales tax bonds have tapped Quinn Emanuel Urquhart & Sullivan’s Susheel Kirpalani to look after its interests, according to Bloomberg News. Davis Polk & Wardwell has been hired by a group of bondholders who hold securities issued by the Government Development Bank, according to Bloomberg.
Still more firms are being deployed in Congress. Puerto Rico has stepped up efforts to press legislators on Capitol Hill to enact a bill that would allow the commonwealth to use Chapter 9. On Puerto Rico’s side are a group of 32 financial institutions collectively holding $4.2 billion in Puerto Rican debt, which has tapped Morrison & Foerster. On the opposing side are six hedge funds holding Prepa bonds, which have hired Venable; BlueMountain has tapped Gibson Dunn to lead its legislative fight, according to The Washington Post.
IMAGE:
Gibson Dunn’s Matthew McGill argued for Puerto Rico bondholders at the First Circuit along with Thomas Moers Mayer of Kramer Levin.
Photo: Diego M. Radzinschi/NLJ
For more on this story go to: http://www.litigationdaily.com/id=1202731552462/Kramer-Levin-Gibson-Dunn-Prevail-in-Puerto-Rico-Bond-Battle#ixzz3fJOa3xJE