Puerto Rico bankruptcy Judge Laura Taylor Swain said the Oversight Board’s preemption of pension laws in the Oversight Board’s proposed bankruptcy documents are problematic and she sought more information from it.
On Tuesday evening Swain filed an order on the Oversight Board’s proposed documents supporting the central government Plan of Adjustment in which she made several critiques. She said there is not enough legal support for pre-empting local laws that affect pension benefits.
“The Oversight Board’s addition of [pension-related] Act 80-2020, Act 81-2020, and Act 82-2020 to the amended list of preempted statutes in the Proposed Plan Materials occurred after the close of evidence at the Confirmation Hearing, and thus the court finds little factual basis in the record for inclusion of those statutes in any list of preempted statutes,” she wrote
In a footnote she said a declaration a board consultant filed earlier this year in the bankruptcy briefly discussed the cost of Act 81 but not the costs of Acts 80 or 82.
The Oversight Board's proposed Findings of Fact and Conclusions of Law for the debt deal was
Board attorney Martin Bienenstock has said if the pension laws are allowed to stand, the Plan of Adjustment might not be feasible, since implementation would cost about $5 billion, which the island cannot afford.
Puerto Rico attorney John Mudd said Swain’s challenge to the board’s preemption was one of the two most significant parts of Swain’s actions in her written statement and then in oral comments at Wednesday’s omnibus hearing.
The other, according to Mudd, was Swain's ruling that eminent domain claimants will have to receive “just compensation” from the Puerto Rico government and thus should be left untouched by the bankruptcy. In her ruling, she said “just compensation” was not necessarily the same thing as “full compensation.”
Bienenstock has said in recent weeks the board believed it could accommodate the claims of the eminent domain parties, which are in the hundreds of millions of dollars, without having to retract the Plan of Adjustment.
These were two among a slew of objections that Swain made in her written order. She also objected to other aspects of the board’s proposed scope of preemption provisions and to miscellaneous other provisions of the proposed documents.
The board is “hereby ordered to submit either (i) a proposal of modifications consistent with this Memorandum Order or (ii) a showing of cause as to why the motion for confirmation should not be denied in the absence of such modifications,” Swain wrote.
Prior to the board’s submission of this document, which is due Monday, the board is ordered to meet and confer with relevant parties in interest, including the Puerto Rico Fiscal Agency and Financial Advisory Authority. Swain said parties of interest will have until Dec. 23 to file a response.
At Wednesday’s hearing, FAFAA attorney Peter Friedman said he was concerned FAFAA will not have a productive conference with the board, but Swain said she had included the conference requirement so the board’s proposal will be satisfying to many of the parties.
Mudd said he expected the board will try to keep the language preempting Acts 80, 81, and 82 in the proposed Confirmation Order but that it will also try to file a lawsuit as an adversary proceeding against the acts. Swain would hear this suit.
On a different topic, the Oversight Board said it planned to submit plans of adjustment for the Puerto Rico Electric Power Authority and the Highways and Transportation Authority by the end of March.
In a board filing with Swain on Tuesday afternoon, it said it has been continuing to “evaluate implementation” of the May 2019 Restructuring Support Agreement for PREPA.
It has had discussions with bondholder representatives. “These discussions have been productive, but have difficult obstacles to overcome.”
The board said the PREPA RSA would require local legislation to create “securitization bonds.” The board says it plans to speak to the local government about this legislation.
“The Oversight Board is also evaluating alternatives to the securitization bonds, and treatment of non-bond claims under a Title III [bankruptcy] plan. Alternatives are highly likely to be more expensive for the Commonwealth [of Puerto Rico] and will only be utilized if the government does not cooperate,” the board told Swain.
“I have very little faith in [the board] to support a debt deal that meets the needs of the electricity system and can be sustained by a negative growth economy," said Tom Sanzillo, director of financial analysis at Institute for Energy Economics and Financial Analysis. "The tone of this document is that the [the board] intends on strong-arming the governor and legislature in the coming months.
“This plan is a recipe for a long-term state of fiscal and economic decay and calamity for Puerto Rico,” Sanzillo said. “It solves nothing.”
The board said the HTA/Convention Center District Authority Related Plan Support Agreement, “obligated [it] to endeavor to file a plan of adjustment for HTA” by Jan. 31. However, the board said it was hoping to file such a plan by the end of March.
Additionally, the board said it planned to file a Plan of Adjustment for the Public Finance Corp. The central government Plan of Adjustment specifies payment of $0 to PFC bondholders. However, this is from the central government. The Plan of Adjustment will for be claims against the PFC itself.
On Swain’s order on the central government bankruptcy, one attorney involved in the case said he thought it was positive and that Swain had moved efficiently to address several problems.
Puerto Rico Clearinghouse Principal Cate Long said there were several aspects to Swain’s order on preemptions. For example, Swain told the board to be clearer on the legal foundations for its proposed preemptions. Parties will challenge the board’s arguments and the “court will have to judge whether [the board] has the statutory and constitutional authorities they claim.”
“What is unknown at this point is whether [bondholder] PSA creditors will be satisfied with any preemption justification that [the board] establishes because this will form the basis of the security interest for the restructured debt,” Long said. “Given how unwilling the Puerto Rico government has been to honor their contractual commitments this needs to airtight for the life of the new bonds.”
