US Justice Dept. defends PROMESA against creditor claims of special treatment for PR

By The Star Staff

The U.S. Justice Department over the weekend defended the constitutionality of the Puerto Rico Oversight, Management and Economic Stability Act of 2016 (PROMESA) from claims it discriminates against creditors.

Puerto Rico bond insurer Ambac Assurance Corp. sued the Financial Oversight and Management Board in May arguing that PROMESA — created only for Puerto Rico — violated the U.S. Constitution’s uniformity clause, which allows Congress to pass laws related to bankruptcy, but only if they don’t arbitrarily subject creditors to unique statutory provisions.

According to Ambac, Congress singled out the commonwealth and its instrumentalities for special treatment in bankruptcy in violation of the U.S. Constitution.

The U.S. Justice Department in a reply Saturday said that Congress enacted PROMESA in 2016 during the worst fiscal crisis in Puerto Rico’s history. As the U.S. Supreme Court recently recognized in Financial Oversight & Management Board for Puerto Rico v. Aurelius, PROMESA is a “local debt-related law” enacted under Article IV of the U.S. Constitution, which allows Congress to “‘make all needful Rules and Regulations respecting a territory.’”

The U.S. government said the uniformity law does not apply when Congress is legislating for the territories.

“Ambac is incorrect, and PROMESA is constitutional,” the U.S. government says. “To start, the uniformity requirement in Article I, Section 8 serves as a limitation on Congress’s exercise of its enumerated powers under Article I and does not apply when Congress exercises its broad authority to legislate in the territories under Article IV. The Supreme Court has never limited Congress’s Article IV power in such a way. To the contrary, the Supreme Court has long held that the requirement for uniformity in the context of taxation does not apply when Congress legislates with respect to a territory, such as Puerto Rico.”

Even if the uniformity requirement did apply when Congress exercises its power to legislate in the territories, PROMESA would still be constitutional, because the statute is uniform within the meaning of the uniformity clause, the Justice Department says.

Consistent with the history and purpose of the uniformity requirement, the Supreme Court has long recognized that Congress retains the power to craft bankruptcy legislation to resolve geographically isolated problems, as Congress did in PROMESA, the Justice Department said.

Even if the U.S. District Court were to conclude that PROMESA runs afoul of the uniformity requirement, it should not invalidate PROMESA because Congress itself provided the remedy to that, which is to extend the statute’s coverage to other similarly situated territories that adopt a resolution for a financial oversight and management board.

The suit is an adversarial proceeding filed by Ambac within Puerto Rico’s bankruptcy process under PROMESA to restructure some $70 billion in debt.

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