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Judge seeks changes to gov’t debt plan by Friday, but is confirming it and sustaining PROMESA


U.S. District Court Judge Laura Taylor Swain

By The Star Staff


While Judge Laura Taylor Swain, who is presiding over Puerto Rico’s Title III bankruptcy cases, gave the government until Friday to submit to the court revisions to the Eighth Amended Title III Joint Plan of Adjustment, she also prepared documents this week approving the debt deal, whose main effect will be the preemption of numerous local laws that go against the plan.


The judge, in findings of fact and conclusions submitted as attachments to the order requiring the Jan. 14 submission, also states that the federal Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) is constitutional, declining to wait for federal officials to submit writings defending the constitutionality of the law.


PROMESA is the law that established the Financial Oversight and Management Board and created the bankruptcy process for Puerto Rico.


“For the reasons explained in the following Findings of Fact and Conclusions of Law, the Court finds that, with the incorporation of certain specified revisions, the Plan proposed by the Oversight Board meets the confirmation requirements of PROMESA and does not violate the Constitution,” the judge said. “The Court has also determined that PROMESA itself does not violate the Constitution. In moving forward following confirmation, the Court urges the people of Puerto Rico to use their resources and voices well, and urges those who govern and those who oversee Puerto Rico to listen to those voices, to make wise choices and explain them well, and to lead Puerto Rico to a better, brighter, and more vibrant future of growth and economic stability.”


Nonetheless, she asked the government to revise the plan by Friday with respect to eminent domain and inverse condemnation claims, revisions that must be made so that claimants are not paid as unsecured creditors but instead the courts must determine the just compensation for the claims. The proposed plan would restructure some $33 billion in government debt.


“For the following reasons, the Plan is hereby confirmed and any remaining objections are overruled except to the extent expressly stated herein,” Swain said. “For the avoidance of doubt, to the extent that a particular objection or issue is not specifically addressed in these Findings of Fact and Conclusions of Law, it has been considered thoroughly and is overruled. The overruled objections, and the Oversight Board’s positions as to the proper scope of preemption and the proper treatment of Eminent Domain/Inverse Condemnation Claims are preserved for appeal.”


In her order, the judge said the confirmation order is final and intended to be binding on all parties in interest, and shall not be subject to collateral attack or other challenge in any other court or other forum, except as permitted under applicable law.


“Confirmation of the Plan constitutes a judicial determination, pursuant to section 4 of PROMESA, that all laws, rules, and regulations giving rise to obligations of the Debtors discharged by the Plan and this Confirmation Order pursuant to PROMESA are preempted by PROMESA and such discharge shall prevail over any general or specific provisions of territory laws, rules, and regulations,” Swain said.


With respect to preemption of local laws by PROMESA, the judge said all laws or such portions thereof of the Commonwealth of Puerto Rico, other than budgets certified by the oversight board, inconsistent with PROMESA, have been preempted.


Such preempted laws include, without limitation, laws enacted prior to June 30, 2016 that provide for transfers or other appropriations after the enactment of PROMESA, including transfers from the commonwealth or one of its instrumentalities to any agency or instrumentality, whether to enable such agency or instrumentality to pay or satisfy indebtedness or for any other purpose.


Such laws shall not be enforceable to the extent they are inconsistent with the plan’s discharge of the debtors’ obligations.


“All laws enacted from and after the commencement of the Title III Cases to the extent they are inconsistent with the transactions contemplated by the Plan are also unenforceable,” Swain said.


The plan also makes changes to pensions. By reason of the plan’s provisions freezing defined benefit accruals and future costs of living adjustments, the judge said that upon the plan’s effective date, PROMESA preempts Acts 91-2004, establishing the Teachers Retirement System (TRS), and 12-1954, establishing the judiciary retirement system (JRS), providing for the future accrual of defined benefits and future cost of living adjustments.


“Absent preemption, the amount of Commonwealth revenues that would need to be spent on TRS and JRS pension benefits in fiscal year 2022 is $984 million,” Swain said. “Absent preemption, these inconsistent statutes would undermine the restructuring contemplated by the Plan. Enabling legislation is not required to establish the freeze of defined benefits or the elimination of COLAs [cost of living adjustments]. Obligations arising from Commonwealth statutes, including statutes providing employees the right to accrue pension or other retirement benefits, give rise to claims which can be impaired and discharged pursuant to the Plan.”


She maintained a separate classification for pensioners. “Active and retired employees holding pension Claims comprise Classes 51A-51L. The services that are and have been performed by these current and retired employees are integral to the basic provision of governmental services to the Commonwealth’s residents and the Government could not function without them,” the judge said. “Moreover, the best interests of the Commonwealth and all of its stakeholders are served by ensuring that pensioners receive monthly benefits to maintain the ability to support themselves without requiring additional future support from the Commonwealth.”

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