We are delighted and proud to share the news that our colleague Meghan Burke has been selected to receive the Freda Johnson Award for Trailblazing Women in Public Finance at the Bond Buyer’s Deal of the Year ceremony in New York on December 3rd. The Freda Johnson award is given annually and recognizes one woman in the private sector and one in the public sector who exemplify the qualities that Freda Johnson, who served as public finance division head at Moody’s Investors Service, brought to the industry as a “trail blazer” and as a “leader, innovator and mentor.” This will be the award’s fifth year and Meghan, who heads Mintz Levin’s public finance practice, is the first recipient chosen for her contributions as an attorneyIn addition to her wealth of public finance experience, Meghan’s professional contributions to the field, volunteer work and mentorship were highlighted in her selection for the award.

Congratulations Meghan!


On Saturday, June 28, Puerto Rico’s Governor Padilla signed into effect Puerto Rico’s new bankruptcy law for certain revenue bond issuers.  Within 24 hours of the statute’s enactment, two mutual fund complexes owning approximately $1.7 billion in bonds of the Puerto Rico Electric Power Authority (PREPA) filed a complaint in the federal district court for Puerto Rico, seeking a declaratory judgment invalidating the fledgling legislation.

The complaint is efficient and straightforward.  It asserts that the legislation is preempted by Section 903 of the United States Bankruptcy Code, which precludes “States” from enacting laws for the composition of debt of “municipalities” that purport to bind non-consenting creditors.  The complaint additionally alleges that, even if not preempted, certain provisions of the legislation effect unconstitutional impairments of contract and/or takings of property of secured creditors.

Puerto Rico has yet to file a response to the complaint, but the Section 903 argument is compelling and, subject to likely objections by Puerto Rico to adjudication of the statute’s validity before a specific issuer seeks its protection, has the potential to make short shrift of Puerto Rico’s attempt to create a bankruptcy process applicable to its financially challenged revenue bond issuers.




We previously discussed the Puerto Rico Supreme Court’s decision in the Hernandez case, in which by a 5-4 vote the court upheld the constitutionality under federal and Puerto Rico law of pension reform legislation affecting public sector employees, holding that though such legislation substantially impairs contract rights, the measures are reasonable and necessary to salvage the actuarial soundness of the pension system and that less onerous measures are unavailable.  Holders of bonds issued by Puerto Rico and its instrumentalities have now shifted their attention to the Puerto Rico Supreme Court’s handling of a constitutional challenge to recently enacted legislation reforming the teacher pension system.  The legislation currently under court review requires additional teacher contributions while deferring retirement age for current teachers with at least 30 years’ service from 50 to 55.


On January 14, 2014, the Puerto Rico Supreme Court issued an order taking over jurisdiction of the case from the trial court, and staying the effectiveness of the legislation pending further court action.  The court also appointed a special master to conduct an evidentiary hearing and present findings of fact to the court no later than today, February 7.  The court’s action, particularly the stay, is being evaluated by bond market participants as a potential sign that the constitutional challenge to this legislation may have more traction in the court than the Hernandez challenge mustered.


Bondholders have a mixed rooting interest in the outcome of the current pension reform litigation.  On the one hand, the cutbacks on future pension benefits effected by such legislation are viewed as a positive step by Puerto Rico’s legislative and executive branches to manage the liability side of Puerto Rico’s balance sheet, and therefore as a positive credit development.  On the other hand, such legislation impairs the contractual expectations of Puerto Rico’s teachers, much like the statute upheld in Hernandez impaired the pension rights of other public employees.  To the extent such impairments continue to survive constitutional challenges in Puerto Rico’s courts, questions are raised about how Puerto Rico’s courts would react should Puerto Rico feel compelled to adopt future measures that defer or reduce debt service payments or that otherwise impair its contracts with bondholders.


The tea-leaf reading in the teacher pension case includes review of brief statements delivered by some of the Puerto Rico Supreme Court justices in connection with the court’s stay order.  The Chief Justice indicated that he would have postponed the decision on the stay request until after the evidentiary hearing and findings of fact.  He indicated that such postponement would be consistent with court precedent to the effect that injunctive relief is not granted without a prior hearing.  One of the associate justices stated that she would not have granted direct Supreme Court review or the stay, but would have ordered the trial court to process the case on an expedited basis.  Three associate justices filed a concurring opinion citing precedent that the Puerto Rico Supreme Court can intervene in cases pending in lower courts that raise new questions of law or questions of high public interest that include any substantial constitutional question.  The concurring opinion states that the court order is appropriate given the high public interest for review of the changes to the teachers’ pension system and the urgent need to address the constitutionality of the challenged statute.  The concurring opinion asserts the need for a speedy resolution not only for the State of Puerto Rico and the teachers, but for the peace of mind of thousands of parents and children that the applicable justices assert are being deprived of education.  It also notes that the uncertainty over the teachers retirement system could force over 40,-000 teachers to decide in the coming days whether to resign, causing irreparable harm to the education system.


It is clear from the Chief Justice’s statement that the stay prior to a hearing is a departure from precedent. Whether that indicates that there is a majority of the court that favors a finding of unconstitutionality, or simply reflects the enormous public and political pressure associated with this case and the desire to temporarily mitigate the unrest sparked by the legislation remains to be seen.  What seems notable is the emphasis on fact-finding, which may include fact-finding on the key question of the existence of less onerous means of addressing the system’s solvency.  As described in our analysis of the Hernandez decision, the dissenters in that case castigated the majority for rubber-stamping the legislature’s findings of crisis and lack of alternative.  The Puerto Rico Supreme Court has given the plaintiff teachers, as well as the government, the ability to make presentations in a Supreme Court sponsored fact-finding that was not present in the Hernandez case.  Given the emphasis placed by the court on a speedy resolution of the challenge, whether that fact-finding results in a different outcome should be known fairly soon.



By Len Weiser-Varon and Bill Kannel

As Puerto Rico prepares to access the public markets with a new bond issue, the Wall Street Journal reports that the list of demands from some potential investors include, in addition to a high interest rate and as much security as the issuer can provide, the issuer’s consent to the adjudication in the New York courts of any future disputes involving the applicable bonds.

Hoping for the best but preparing for the worst, holders of existing bonds issued by Puerto Rico and its bond-issuing instrumentalities (such as COFINA) are likewise engaged in prospective forum-scouting.   The desired option to litigate any potential dispute outside Puerto Rico may be driven by the assumption that in times of financial crisis Puerto Rico’s courts are less likely to side with off-island investors than with Puerto Rico’s bond issuers, however meritorious the bondholders’ claims may be. Continue Reading Could Bondholders Bring Claims Against Puerto Rico Bond Issuers in Courts Outside Puerto Rico?


The MSRB has put out for comment a proposed interpretive notice http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2012/2012-04.aspx designed to eliminate or reduce instances in which underwriters of new bonds issued under a parity indenture or bond resolution consent to amendments to such instrument on the issuance date of the new bonds during the brief period in which the underwriter owns the bonds prior to their resale to the underwriter’s customers.  According to the MSRB’s request for comment: “While underwriters may technically be bondholders during the period between the time they purchase an issuer’s bonds and the time they distribute the bonds to investors, they are still underwriters while they hold bonds with a view to distribution.  As such, they will not be negatively affected by the amendments to which they consent.  In fact, they may have a monetary incentive to consent to the amendments and, accordingly, a conflict of interest.”

The proposed interpretive release would characterize such underwriter consents to amendments  as a potential violation of MSRB Rule G-17, which requires broker-dealers to “deal fairly with all persons in the conduct of their municipal securities activities.”   The notice does not impose a blanket prohibition on such consents, and declines to establish any standard (such as amendments that are materially adverse to existing bondholders) for what might constitute an unfair consent by an underwriter.  The notice does provide, as an example of an underwriter consent that could be deemed a violation of MSRB Rule G-17, a consent to amendments that would reduce the security for existing bondholders (e.g., eliminating or reducing a debt service reserve requirement, releasing collateral or loosening additional indebtedness tests.) 

The notice provides that such underwriter consents would not constitute a duty of fair dealing violation if (i) the indenture or resolution expressly provide that an underwriter can provide bondholder consent and (ii) the offering documents for the outstanding previously issued bonds disclosed that bondholder consents could be provided by underwriters of other securities issued under the indenture or resolution.  The voting of bonds acquired by a broker-dealer without an intent to distribute also would be exempted, as would underwriter consents to amendments to the terms of variable rate demand obligations at the time of their mandatory tender.   .

The notice is interesting in that it interprets a broker-dealer’s fair dealing duty as applying literally to “all persons”, including prior bondholders with which it has no relationship.  The notice does not address other techniques used by issuers to facilitate indenture amendments, such as disclosure in offering documents that purchasers of newly offered bonds will be “deemed” to have consented to specified amendments.  Such other techniques may not raise the same concerns, as they typically involve new bondholders that will actually have long-term exposure to the amended security provisions.  In any event, to the extent such other techniques do not involve action by the underwriter, the MSRB has no jurisdiction to regulate such techniques.     

The MSRB’s release indicates that the interpretive notice, when finalized, will have prospective application only.  Comments are due to the MSRB by March 6, 2012.     



In a decision that may have implications for holders of community development district bonds and other similar “dirt bonds,” a Florida bankruptcy court has ruled that holders of community development district bonds do not always have plan voting rights when the underlying developer — as opposed to the development district itself — is the bankruptcy debtor. The decision, In re Fiddler’s Creek, LLC, determined that holders of bonds issued by two community development districts to finance roadway and other infrastructure at a Florida residential development lacked standing to vote for or against the plans of reorganization proposed in the bankruptcies of the project developer and its affiliates. The bankruptcy court came to this conclusion over the bond trustee’s objections and even though the bankruptcy plans sought to modify the debtors’ obligations to pay the special assessments that were the primary means for the payment of debt service on the associated bonds.

Fiddler’s Creek is a residential development project on Florida’s gulf coast with more than 1,700 existing homes and plans for up to 6,000 residences over 4,000 acres, including golfing, spa, tennis, and related amenities. To finance infrastructure associated with the project, the developers formed two community development districts (“CDDs”) that collectively issued more than $100 million of bonds. Each CDD is governed by a board of trustees, initially appointed by the developer, and later, by landowners within the CDD. Payment on the bonds is secured by special assessments levied on the real property situated within the CDDs but not by the real property itself or any assets of the developers. The landowners within the CDDs (including the developer) have no direct obligations to the bond trustee or bondholders.

The developer and a number of its affiliates sought bankruptcy protection in February 2010, and in due course filed plans of reorganization and a joint disclosure statement that proposed to restructure the developer/debtors’ obligations to pay the assessments needed to timely service the CDD bonds. The plan specifically proposed to capitalize unpaid interest on the assessments and to defer certain payments on the special assessments. Under the debtors’ projections, these changes would provide for payment of the assessments in full and with interest, though perhaps not in the amounts necessary to ensure timely payment of debt service on the bonds. Despite the direct impact of these plans on bondholders’ interests, the debtors argued that bondholders did not have direct claims or liens in the bankruptcy proceedings and therefore could not vote. The debtors instead asserted that their obligations ran to the CDDs, and that the two CDDs were the appropriate parties to vote on the plans. Under this framework, bondholders and the bond trustee would need to rely on their rights with respect to the CDDs as set forth in the trust indentures and related bond documents. The CDDs, which according to the bond trustee remained heavily influenced by the developers, voted to accept the plans. By its ruling in the Fiddler’s Creek case, the bankruptcy court adopted the developer/debtors’ position that the bond trustee was “a creditor of a creditor” and therefore the bondholders could not vote on the plan.

The bond trustee has appealed the decision in Fiddler’s Creek to the United States District Court for the Middle District of Florida. Pending disposition of that appeal, it remains to be seen whether parties with similarly structured bond obligations will attempt to use this decision to exclude bondholders from voting on bankruptcy plans that effectively restructure bond obligations. The decision reinforces the importance of understanding the legal structures associated with municipal bond transactions and understanding the extent to which bond trustees have been assigned sufficient rights to establish privity with the conduit obligor.


A case of interest to holders of bonds issued by Indian tribes to finance gaming facilities continues to wend its way through the courts.  On September 6, 2011, the United States Court of Appeals for the Seventh Circuit issued its opinion in Wells Fargo Bank, National Association v. Lake of the Torches Economic Development Corporation. The case centers on whether a trust indenture for bonds issued by an instrumentality of an Indian tribe to finance a gaming facility is a “management contract” that is void if not approved by the National Indian Gaming Commission (NIGC).  The appellate court upheld a federal district court judgment that the indenture had particular provisions that converted it into a “management contract.”  Although in connection with the sale of the bonds the tribal issuer and its counsel had represented and opined, respectively, that no such approval was required, the appellate court agreed with the issuer’s argument, in a lawsuit by the bond trustee alleging an indenture default, that the indenture was void due to the failure to obtain NIGC approval.  The district court had dismissed the litigation, ruling that because the indenture was void, a sovereign immunity waiver by the tribal issuer in the indenture also was void, and that the federal courts therefore lacked jurisdiction to consider any claims brought by the bond trustee against the tribal issuer on behalf of bondholders.  The appellate court remanded the case to the lower court with direction that the lower court reconsider whether sovereign immunity waivers in transaction documents other than the void indenture were effective, and if so whether there were claims not based on the indenture that the bond trustee or the bondholders could assert to recover amounts paid for the bonds. 

The appellate court ruled that although the federal statute requiring NIGC approval of Indian gaming facility management contracts does not clearly define what constitutes a “management contract”, Congress intended a broad application and that there was no exemption for financing instruments.  The court determined that the following provisions, taken as a whole, tipped the indenture into “management contract” status:

  • The required deposit of the casino’s gross revenues with the bond trustee and, upon an event of default, the bond trustee’s ability to approve withdrawals of such funds for operating expenses,
  • The required retention of a bondholder-approved independent third-party consultant  if debt service coverage is below a specified level, and the requirement that the tribal issuer exercise best efforts to implement the consultant’s recommendations as to improving operations and cash flow,
  • The required approval by majority bondholders of capital expenditures in excess of a specified percentage of prior year capital expenditures, such approval not to be unreasonably withheld
  • A prohibition on the removal or replacement of the casino’s general manager, controller or chairman or executive director of the gaming commission without the majority bondholders’ consent.
  • The ability of the bondholders to require the tribal issuer’s selection of new management after an event of default.  

In addition, the appellate court agreed with the lower court that the provisions it deemed problematic could not be severed from the indenture under the indenture’s severance clause.  Accordingly, the appellate court upheld the lower court’s determination that, because the indenture was void in its entirety, the waiver of the tribal issuer’s sovereign immunity contained in the indenture was void.  Without a valid waiver of sovereign immunity, the federal courts have no jurisdiction over any claims against a tribal issuer.

The appellate court partially reversed the lower court and remanded the case for consideration of whether waivers of sovereign immunity in documents other than the indenture (such as the bonds themselves and the issuer’s resolution approving the bonds) were valid.  The appellate court held that the fact that such other documents were part of the same transaction and referenced the indenture did not make them “management contracts.”  The court also characterized as “premature” the district court’s conclusion that the bonds and other bond-related instruments were “interdependent” with the indenture, and asked the district court to determine whether the tribal issuer intended the sovereign immunity waivers in those documents to be operative irrespective of the status of the indenture.  The appellate court indicated that the bond trustee and/or bondholders should be permitted to file amended complaints asserting legal or equitable claims not based on the indenture, and that the district court should consider again whether the tribal issuer has validly waived sovereign immunity as to such non-indenture claims.

The appellate ruling represents the view of one federal circuit on a controversial matter, and leaves this particular case in an unresolved status.  The court acknowledged that the tribe and its counsel had taken the position in connection with the bond offering that the indenture was not a management contract and required no NIGC approval, but, without discussion, treated that as inconsequential to the tribal issuer’s ability to argue in court that the indenture was void.  While the litigation seems likely to continue, the ruling suggests that purchasers of tribal bonds must proceed with extreme caution in evaluating, and relying upon other parties’ evaluations of, the legality and validity of bond documents with tribal entities.