Federal court strikes down the Criolla Bankruptcy Law

On February 7, 2015, Primera Hora reported that the U.S. District Court for the District of Puerto Rico sided with Franklin California Tax Free Trust and BlueMountain Capital Management, LLC, and essentially invalidated the so-called Criolla Bankruptcy Law (Ley para el Cumplimiento con las Deudas y para la Recuperación de las Corporaciones Públicas), approved July 28, 2014 to declare a fiscal emergency and seek to restructure Puerto Rico Electric Power Authority (PREPA) debt.

In a 75-page opinion, Judge Francisco Besosa held that the territorial statute conflicts with the U.S. Bankruptcy Code, denied the government’s motion to dismiss, and largely recognized plaintiffs’ claims, while dismissing some motions in favor of the Commonwealth. Plaintiffs alleged nullity under the federal Bankruptcy Code and the constitutional supremacy clause.

Together, plaintiffs held about $2,000 million in PREPA bonds and argued the law violated contractual clauses. Preliminary figures cited when the suit was filed: Franklin Funds ~$907.2 million and Oppenheimer Rochester Funds ~$821.4 million in PREPA debt.

Justice Secretary César Miranda said they would examine the decision “to determine whether to appeal,” with review by the Solicitor General and counsel who defended the Commonwealth. Rep. Jenniffer González (PNP) recalled that the rushed approval had already cost a second credit downgrade within months. A civil constitutionality ruling ≠ a criminal judgment or “theft” of funds.