Could Bondholders Bring Claims Against Puerto Rico Bond Issuers In Courts Outside Puerto Rico?

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.

Questions of court jurisdiction over a sovereign entity or sovereign instrumentality are complex and nuanced, and require individualized analysis regarding the applicable entity, the applicable court and the applicable dispute. But a few basic general observations may be of interest to those involved with Puerto Rico's ongoing bond saga:

A Puerto Rico bond issuer and its bondholders may contractually agree (in a bond resolution or indenture or, in the case of general obligation bonds issued without a resolution or indenture, in the bonds themselves) on exclusive or non-exclusive jurisdiction in the courts of Puerto Rico or in the courts of another state. Courts will generally enforce such contractual choice-of-forum clauses. Absent any contractual agreement, Puerto Rico or a Puerto Rico instrumentality may be sued in the courts of Puerto Rico unless such issuer has sovereign immunity and has not waived it. Puerto Rico itself, and many but not all of its agency issuers, likely qualify for sovereign immunity in Puerto Rico's courts. The extent to which such immunity has been waived for particular claims would likely be at issue in any litigation in Puerto Rico's courts. Under the Eleventh Amendment to the U.S. Constitution, which applies to the states and has also been held applicable to Puerto Rico, Puerto Rico and its instrumentalities generally cannot be sued for money damages in the U.S. federal court system, absent a waiver of such Eleventh Amendment protection by the applicable issuer. It may be possible to obtain injunctive relief against a Puerto Rico issuer in federal...