Puerto Rico And PREPA Seek Dismissal Of Bondholder Challenge To Territory’s Bankruptcy Statute

The Commonwealth of Puerto Rico and the Puerto Rico Electric Power Authority (PREPA) yesterday filed separate motions to dismiss the federal court complaint filed last month by some PREPA bondholders seeking to invalidate the recently-enacted Puerto Rico Public Corporation Debt Enforcement and Recovery Act. As anticipated, the motions to dismiss assert that the plaintiffs lack standing and the claims lack ripeness because PREPA has not, to date, sought relief under the challenged legislation.

PREPA's motion is limited to standing and ripeness arguments; the Commonwealth's motion to dismiss also engages the bondholders' substantive claims, arguing that the bondholders have failed to state claims on which relief can be granted. In our prior analysis of the bondholders' complaint, our assessment was that the bondholders' strongest argument is the statutory argument that Section 903 of the federal Bankruptcy Code preempts Puerto Rico's bankruptcy legislation. The Commonwealth's motion to dismiss confirms that assessment, as its attempts to rebut the preemption argument consist principally of an argument that Congress cannot have intended to leave Puerto Rico's public corporations without recourse to a bankruptcy process, even though that is exactly what Section 903 appears to do as a literal matter.

Section 903 provides that "a State law prescribing a method of composition of indebtedness of [a] municipality may not bind any creditor that does not consent to such composition." The Commonwealth's motion argues that "because Puerto Rico's public corporations may not avail themselves of Chapter 9, Section 903—which, by its own terms, applies only when Chapter 9 is invoked—is wholly inapplicable to the Commonwealth." (emphasis added) The Commonwealth's motion to dismiss does not corroborate its assertion that Section 903 "by its own terms ... applies only when Chapter 9 is invoked" with any identification of the "terms" of Section 903 that allegedly limit its application to jurisdictions that are eligible to adopt Chapter 9.

Apparently recognizing that its textual analysis of what Section 903 literally says may be unpersuasive, the Commonwealth's motion next asserts that Section 903 cannot possibly mean what it apparently says. According to the motion: "That Congress would have denied Puerto Rico and its public corporations [the] ability to escape financial ruin in a brief statutory provision unrelated to Puerto Rico strains credulity." Finally...