US asks Supreme Court to let stand a ruling on pre-bankruptcy eminent domain compensation claims

The U.S. solicitor general said the lower courts in Puerto Rico’s Title III debt restructuring for the commonwealth decided correctly when they ruled that just compensation claims for properties expropriated by the government could not be discharged as part of the bankruptcy.

By THE STAR STAFF

The U.S. solicitor general has asked the U.S. Supreme Court to deny a Financial Oversight and Management Board (FOMB) request to evaluate a lower court ruling that found that pre-bankruptcy claims for just compensation in eminent domain cases must be paid.

The solicitor general said the lower courts in Puerto Rico’s Title III debt restructuring for the commonwealth decided correctly when they ruled that just compensation claims for properties expropriated by the government could not be discharged as part of the bankruptcy and urged the Supreme Court to deny the oversight board’s petition for review.

The board has asked the top court to review the decision that claims for just compensation filed before the bankruptcy filing must be paid. Respondents in the case said Puerto Rico took more than $300 million in property from them via eminent domain before filing for bankruptcy. The oversight board sought to pay eminent domain claims with money deposited into the territory’s court-administered reserve related to the claims, and to treat the remaining amount as general unsecured claims.

The commonwealth debt adjustment plan was confirmed last year but Judge Laura Taylor Swain and the First Circuit found that property owners had a constitutional right to be paid the full amount owed.

“The Fifth Amendment provides: ‘[N]or shall private property be taken for public use, without just compensation.’ U.S. Const. Amend. V. ‘As its language indicates, and as [this] Court has frequently noted, this provision does not prohibit the taking of private property, but instead places a condition on the exercise of that power,’” U.S. officials said.

Even if a bankruptcy court has the right to impair the claims, it has the discretion not to do so, the U.S. argued.

“Interpreting [the federal law overseeing Puerto Rico’s bankruptcy] to authorize the impairment of prepetition takings claims would have raised serious constitutional questions,” the U.S. argued. “Therefore … it would have been proper as a matter of constitutional avoidance for the district court to exercise its discretion … to treat the takings claims as nondischargeable.”

The oversight board said the court rulings conflicted with a decision by the Ninth Circuit involving a municipal bankruptcy, Cobb v. Stockton. Puerto Rico is under the First Circuit.

The case before the Supreme Court is FOMB v Cooperative de Ahorro y Credito Abraham Rosa.