• The San Juan Daily Star

Judge: ‘Problematic’ POA not approvable without modification

By The Star Staff

Title III Bankruptcy Judge Laura Taylor Swain told the Financial Oversight and Management Board for Puerto Rico on Wednesday that the proposed plan of adjustment to restructure some $33 billion in central government debt is “problematic” and that she is asking for modifications to address her concerns.

Swain said that otherwise, the oversight board will need to show cause as to why she shouldn’t deny the proposed plan if changes aren’t made.

Financial Advisory Authority and Fiscal Agency (AAFAF by its Spanish initials) Executive Director Omar Marrero Díaz said in a statement Wednesday that the amendments ordered by Swain do not pose a risk to the confirmation of the Plan of Adjustment (PAD by its Spanish acronym).

“It is imperative that Puerto Rico complete the debt restructuring process under Title III. This order, which indicates amendments that the Financial Oversight and Management Board must implement in the PAD, does not result in the rejection of the PAD by Judge Swain,” Marrero Díaz said. “The order affirms our reiterated position during this process, in that the AAFAF and the Government of Puerto Rico are an indispensable part of the PAD process.”

The order comes after Swain held debt deal confirmation hearings irom Nov. 8 to Nov. 23, almost five years after the oversight board filed for bankruptcy in 2017. The plan has gone through various changes since then. The PAD faced steep opposition from bondholders, Puerto Rico retirees and other citizens, and several creditors.

Most of Swain’s objection centered around the proposed findings of facts and conclusions, including findings concerning the preemption of commonwealth law that she said were problematic. The oversight board proposed to displace numerous laws to execute the plan.

She said the preemption provisions in the proposed plan materials are overly vague and broad and appear to be inconsistent with the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), according to the order. Swain said to the extent that the plan language simply reiterates the effect of PROMESA, it is too vague because it is not clear what, if any, independent effect or purpose it serves. The judge said it also appears too broad to the extent that it would preempt the entirety of statutes that may not be focused solely on financial obligations, the application of funds, or other economic structures or measures.

Swain said a preemption provision should be directed to specified legislation and should include language specifically addressing the scope of preemption.

In the order she said “it appears that the intention of the Oversight Board is that laws must be preempted if they (i) require the Commonwealth to spend its money to repay its current general obligation and guaranteed debt in full without regard to the fiscal plans and budgets certified by the Oversight Board, (ii) authorize the Commonwealth to issue debt without obtaining Oversight Board approval, (iii) require the Governor to approve any debt the Commonwealth issues, regardless of whether that debt issuance is authorized under PROMESA or the Plan, (iv) require the Commonwealth to transfer money to numerous other entities to spend on various purposes, outside the Oversight Board’s certified budget, fiscal plan and Plan, and/or (v) require the Commonwealth to provide pension and other benefits or payments to various retirees at specified rates without regard to whether such pensions and other benefits are provided for in a certified budget or fiscal plan or Title III plan of adjustment.”

In that regard, Swain said express language clarifying the intended scope of preemption would appear to serve the goals of the oversight board while providing adequate information to the court.

While non-inclusion of a particular obligation in a budget or fiscal plan may preempt the commonwealth’s appropriation of governmental resources to pay that obligation, the judge said, the debtors have not shown that there is any clear basis to conclude that preemption invalidates the law creating an obligation in the first place, or that it invalidates the obligation to pay where a creditor provides beneficial postpetition consideration to a debtor.

Swain also objected to the proposed plan’s treatment of “unsecured” portions of allowed eminent domain claims, and the “absence of any appropriate treatment for allowed inverse condemnation claims.”

The judge said this is materially defective because the plan doesn’t provide for full payment of the “unsecured” portion of those claims and the takings clause of the U.S. Constitution prohibits the debtor from impairing and discharging any obligation to provide “just compensation” for the physical taking of private property for public use.

Allowed eminent domain claims are separately classified in the plan, the judge noted. Judge Swain said the holders of those claims assert they hold prepetition constitutional claims based on seizures of property under the commonwealth’s eminent domain power.

Swain concluded that for “unsecured” eminent domain and inverse condemnation claims that are ultimately allowed, the proposed plan as currently written is defective because the treatment of the claims would violate the takings clause of the Constitution.

Likewise, the judge expressed concern about the inclusion of Acts 80-2020, 81-2020 and 82-2020, which have to do with pensions. She argued that the oversight board must present evidence and documentation that supports that these statutes are inconsistent with the plan of adjustment.

“It should be noted that the [oversight board] requested the annulment of these laws in the PAD without entrusting itself to the processes established in PROMESA,” Marrero Díaz said. “This Order vindicates the position of the Government of Puerto Rico and allows us to continue fighting for the benefit of our public servants.”

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