Puerto Rico bankruptcy parties object to Oversight Board deal

Several Puerto Rico bankruptcy parties objected to the Oversight Board’s proposed bankruptcy deal documents, saying they were discriminatory, did not respond to the judge’s directions, and attempted to breach applicable bankruptcy law.

Among the objecting parties filing objections to revised documents the board filed with the bankruptcy court were Puerto Rico’s Fiscal Agency and Financial Advisory Authority, eminent domain objectors Suiza Dairy and Finca Matilda, bondholder Peter Hein, and several teachers’ unions.

Judge Laura Taylor Swain earlier in December filed an order directing the board to revise its proposed documents or, in some cases, to justify document passages. The board provided this on Dec. 20 and 21. As of early Monday afternoon, Swain had not responded to the objections.

In its filing with the court, FAFAA said the Oversight Board “continues to insist on using Title III” of the Puerto Rico Oversight, Management, and Economic Stability Act to address fiscal plan measures “that are properly addressed under PROMESA Title I and Title II.”

“The board’s latest (and arguably most heavy-handed) attempt to conflate the Title III debt restructuring process with the Title II budgetary process is reflected in the board’s newly contrived condition that the plan can only go effective if Acts 80, 81, and 82 and Joint Resolution 33 (collectively, the ‘August 2020 Laws’) are preempted or nullified,” FAFAA lawyers argued.

The board filed suit against FAFAA, the governor and other agencies last week to stop implementation and enforcement of pension laws it says will add $8.3 billion of retirement benefits for government employees. Last week board spokesman Matthias Rieker said if certain pension laws were allowed to stand, the Plan of Adjustment would not be feasible.

FAFAA told Swain, “This court should not allow such a condition to be inserted in the plan at this late stage, particularly when doing so is nothing more than a thinly veiled attempt by the board to short-circuit the Title II process and predetermine its outcome.”

FAFAA lawyers also argued the court should not allow the board to use Title III to “take away protections and powers reserved to the government under PROMESA Title I and Title II, particularly where there are specific guardrails under such titles that preserve PROMESA’s unique balance of power between the board and the government.”

FAFAA called for Swain to order the board to remove the laws from the deal documents’ preemptions.

Among bondholder Peter Hein’s arguments were that the local government’s enactment of the above-mentioned pension laws show that the board-proposed Plan of Adjustment is neither feasible nor in the best interest of creditors.

Hein also said the board’s delay of the deal’s effective date to March 15 made it clear that the court should obtain a determination from the U.S. Internal Revenue Service of tax-exempt status of the resulting bonds before the court confirms the deal.

Finca Matilda, Inc. has a claim against Puerto Rico’s government based on eminent domain claims. In her mid-December order Swain indicated she was opposed to the board’s proposed deep cuts to these claims.

After this, “the court ordered the [board] to either submit a proposal of modifications ‘consistent with its memorandum order’ or a ‘showing of cause as to why the motion for confirmation should be denied in absence of such modifications.’ … The Oversight Board did both but complied with none,” Finca Matilda said.

Finca Matilda argues the newly proposed plan materials “constitute a blatant attempt to end run around” the court’s memorandum order conclusions on eminent domain claims in inverse condemnation claims, as well as the jurisdictional constrains of the Rooker Feldman doctrine, and to unlawfully shift to the creditors the burden of proof in the claim objection process established in bankruptcy laws and under PROMESA.

“The Rooker-Feldman doctrine deprives federal and bankruptcy courts of jurisdiction over suits that are essentially appeals from state-court judgements,” Finca Matilda said.

The board’s response to the judge’s concerns about the deal’s treatment of eminent domain claims “is merely a motion for reconsideration that does not comply with the applicable standard of Rule 9023. There is no newly discovered evidence, there is no manifest error of law or fact, no manifest injustice, and no intervening change in controlling law,” Finca Matilda said.

Fellow eminent domain party Suiza Dairy said in its case, “it should be clear that a regulatory taking occurred and an agreement for repayment of the taking was reached.”

“Furthermore, the newly proposed plan now discriminates against Suiza, inasmuch as the plan proposes to pay 100% on all other taking claims, but only provides payment of 50% to Suiza Dairy,” Suiza said. Suiza asked Swain to deny approval of the board’s proposed deal unless it includes an amendment allowing 100% payment for Suiza.