Defining Matters
Aug. 24, 2018

Kramer Levin Wins Landmark Appeal for Puerto Rico Bondholders

On August 8, 2018, the U.S. Court of Appeals upheld the right of Kramer Levin’s bondholder clients to seek a receiver for the Puerto Rico Electric Power Authority — the first appellate court in the history of municipal bankruptcy to do so.

The First Circuit reversed U.S. District Judge Swain, who presides over all proceedings under Title III of the Puerto Rico Oversight Management and Economic Security Act ("PROMESA"). PREPA bondholders alleged that PREPA's mismanagement had depreciated revenues pledged to them as collateral.  

PROMESA Section 305 barred the Title III Court from appointing a receiver. Therefore PREPA bondholders sought relief from the stay to appoint a receiver in another court. However, Judge Swain read Section 305 to preclude bondholders from seeking a receiver in any court and denied relief from the stay.

The First Circuit reversed and remanded, holding that bondholders could obtain relief from the stay. In a unanimous decision, Judge Kayatta directed Judge Swain to consider harms suffered by bondholders in determining whether to grant relief from the stay.

PROMESA Title III is an almost exact copy of Chapter 9 of the Bankruptcy Code, which governs municipal  bankruptcies nationwide, and Section 305 is an almost exact copy of Bankruptcy Code Section 904. The First Circuit's decision thus struck a blow for bondholders nationwide by recognizing bondholders' right to protect their collateral during a municipal bankruptcy case – the first appellate court to do so since municipal bankruptcy laws were first enacted in in 1930s.

The Kramer Levin team representing the ad hoc bondholder group in the First Circuit Appeal was led by Bankruptcy and Restructuring partner Amy Caton and included Bankruptcy and Restructuring partner Thomas Moers Mayer (who argued the case in the First Circuit) and associates Alice J. Byowitz, Douglas Buckley, Andrew Pollack and Kelly E. Porcelli, Litigation partners Gregory Aaron Horowitz and Jeffrey S. Trachtman, and Corporate associate Steven Segal.

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