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Fiscal board must convince judge that debt deal covers all bases


U.S. District Court Judge Laura Taylor Swain

By The Star Staff


When U.S. District Court Judge Laura Taylor Swain oversees closing arguments today, she wants the Financial Oversight and Management Board to back up its claims that the debt deal that would restructure some $33 billion in commonwealth debt would still be feasible in the event she determines that eminent domain and inverse condemnation, and most Takings Clause-related claims, are non-dischargeable.


The closing arguments come as the Puerto Rico government objected to the oversight board’s request to preempt certain laws that ensure the continuation of retirement benefits.


Swain said she wants the oversight board to argue about the legal and factual basis backing its finding that the debt deal satisfies the requirement of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The board must provide evidence that the debt adjustment plan represents a significant next step on the path toward Puerto Rico’s financial recovery, economic stability and prosperity, and a consensual resolution of complex litigation involving many of the debtors’ key stakeholders. The cost of the bankruptcy has already surpassed the $1 billion mark.


The judge also wants the oversight board to discuss whether inverse condemnation claims are included in Class 54, and if so, what document provides for the classification and treatment of inverse condemnation claims within Class 54, which provides for the treatment of eminent domains. According to the debt adjustment plan, from and after the effective date, the automatic stay will be modified to allow holders of any eminent domain claims to liquidate their claim.


Among the evidence presented last week, Swain heard arguments on whether the plan complies with the Takings Clause of the U.S. Constitution with respect to the compensation owed to property owners subject to eminent domain actions from the government. For instance, Suiza Dairy and others are claiming they are not getting fair compensation under the plan. Suiza successfully challenged the constitutionality, as implemented, of the laws and regulations that govern the milk industry in Puerto Rico. Part of the remedy granted in favor of Suiza is what is called “regulatory accrual,” which consists of an amount to be added to the regulatory rate to be recovered prospectively to compensate a previous regulatory taking. The debt adjustment plan classifies Suiza as part of Class 53 and proposes to pay only 50% of the debt owed to Suiza.


Final arguments on the debt deal are slated to start as the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) is objecting to the oversight board’s attempts to preempt Act 80, the Law to Establish an Incentivized Retirement Program; Act 81, the Law to Provide for a Dignified Retirement; and Act 82, the Law to Credit Teachers’ Unused Leave. The three laws, signed in August 2020, would, respectively, create an incentivized early retirement program, create a “dignified” retirement plan for police officers, firemen, emergency service personnel and prison guards, and allow teachers to have their excess vacation time and sick leave be considered time worked for the purposes of determining their retirement package.


The laws were added at the “last minute,” the oversight board said.


“This is wholly inappropriate — especially given that the August 2020 acts include provisions that are essential to retaining police officers critical to maintaining public safety,” the AAFAF said. “Moreover, the Board should not be able to use Title III to take away rights reserved to the Government under PROMESA Title I and Title II, especially where there are specific guardrails under such Titles that preserve PROMESA’s unique balance of power between the Board and the Government.”

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