The San Juan Daily Star
Appeals court appears inclined to end bankruptcy proceedings despite claims by credit unions & other

By The Star Staff
The First Circuit of the U.S. Court of Appeals heard arguments Thursday from police officers, Suiza Dairy and credit unions to the effect that the commonwealth debt restructuring stripped them of their rights.
But the First Circuit appeared inclined to put an end to the bankruptcy proceedings. The move comes as one member of the Financial Oversight and Management Board, Justin Peterson, posted a video calling for deals to pay Puerto Rico Electric Power Authority bondholders.
The plaintiffs in the case argued that federal bankruptcy law bans some types of fraud claims to be discharged even though such a disposition does not appear in PROMESA, the law passed by Congress in 2016 to allow Puerto Rico to restructure its debt.
The credit unions claim that the Puerto Rico government used its regulatory power during the debt crisis to coerce them into buying its bonds, which the government knew it couldn’t pay off, and that their property was illegally taken.
U.S. Circuit Judge William Kayatta said the fraud does not appear in PROMESA.
“You’re kind of stuck on that, aren’t you?” he asked.
The credit unions’ lawyer, Guillermo Ramos Luina of San Juan, argued that discharge is a privilege that is reserved for the honest debtor and that the government should not get away with fraud.
U.S. Circuit Judge O. Rogeriee Thompson asked, “Do you think Congress doesn’t have the authority” to allow fraud to be discharged?
The debt adjustment plan went into effect March 15. The appeals court recently dismissed a challenge filed by teachers’ groups, authorizing modifications to their pensions.
The credit unions, or “cooperativas,” represent some 70,000 mostly lower-class depositors and small businesses. A lower court ruled that their fraud claims could be discharged.
Oversight board counsel Martin Bienenstock of Proskauer Rose in New York City argued Thursday that “there’s no rhyme or reason” to saying that a takings claim can’t be discharged when claims for other types of constitutional violations can be.
Suiza Dairy alleged a taking based on the island government’s milk price regulations as the government went back on a stipulation allowing for a hike in prices.
The judges said that when such settlements take place, they treat it as a contract claim that can be discharged.
The argument by police officers and other public employees was that the plan deprived them of pension benefits, but the judges faulted their lawyer, Víctor Rivera Ríos, earlier when the deal came together.
U.S. Circuit Judge Jeffrey Howard asked: “Do you have an argument that you weren’t on notice that things might happen quickly? Why wasn’t seven days enough?”
Bienenstock told the judges that the bankruptcy was a zero-sum game and that allowing the objectors to win would mean less money for other deserving creditors. “Every dollar we pay a takings claimant is going to reduce the cash available for others,” he said.