By The Star Staff
The U.S. Justice Department has filed a motion defending the constitutionality of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) from charges that it is unconstitutional as pertaining to the Puerto Rico Electric Power Authority’s (PREPA) debt adjustment plan.
The bondholders in a recent suit said PROMESA goes against the Bankruptcy Code, which must be applied uniformly in all U.S. jurisdictions.
“Since PROMESA was enacted, the Board has proposed – and this Court has confirmed – three Title III plans of adjustment for the commonwealth and various public entities. Several creditors now object to the Board’s proposed plan of adjustment for PREPA on the grounds that PROMESA is unconstitutional either on its face or as applied to the Plan, if approved,” the Justice Department said. “Specifically, municipal bond insurers Assured Guaranty Corporation and Assured Guaranty Municipal Corporation assert that PROMESA violates the Uniformity Clause, found in Article I, Section 8 of the Constitution.”
In addition, creditor Isla del Rio Inc. objects to the plan’s proposal to pay just compensation claims in cash, asserting that this poses a potential violation of the Fifth Amendment’s Takings Clause. The Electrical Industry and Irrigation Workers Union (UTIER by its Spanish acronym), which is PREPA’s union, for its part asserts that the plan cannot be confirmed without violating the due process clause because some unknown creditors may not receive sufficient notice of the plan.
UTIER also objects to the plan on the grounds that PROMESA is unconstitutional because it is allegedly founded on the Insular Cases, which UTIER contends should be overruled.
The Justice Department said Assured’s Uniformity Clause contentions have previously been rejected by the court and fail under Supreme Court precedent. The uniformity requirement serves as a limitation on Congress’ exercise of its enumerated powers and does not apply when Congress exercises its broad authority under Article IV to legislate for the territories.
“And even if the uniformity requirement were to apply, PROMESA does not run afoul of it,” the federal agency said. “The Supreme Court has long recognized that Congress retains the power to craft bankruptcy legislation to resolve geographically isolated problems, and that is precisely what PROMESA does. PROMESA applies uniformly to the Commonwealth and its public corporations; that is all that is required under the Constitution.”
Regarding Isla del Rio’s just compensation objection, the Justice Department said it has merit only to the extent that there may not be sufficient funds to fully compensate those creditors. Binding precedent holds that the Fifth Amendment requires the payment of just-compensation claims in full, so the debt adjustment plan must assure full payment.
The Justice Department also said the court need not consider UTIER’s due process challenge because the challenge is unripe, and UTIER lacks standing to raise the argument.
“In any case, PROMESA provides a means for avoiding UTIER’s concern about proper notice,” the Justice Department said. “Moreover, UTIER’s arguments about the Insular Cases do not present a constitutional challenge to the Plan or to PROMESA.”
PREPA bond insurer Assured Guaranty filed a constitutional challenge in October 2023 to the federal law overseeing PREPA’s bankruptcy. It was the second time the bondholders have challenged PROMESA’s constitutionality.
The uniformity clause of the U.S. Constitution establishes that a bankruptcy statute must apply uniformly to a defined class of debtors.
Assured had challenged PROMESA because the law treated Puerto Rico differently from other U.S. jurisdictions. The challenge was part of its objection to PREPA’s debt adjustment plan to restructure the utility’s $9 billion debt.