Tuesday, April 24, 2018

Creatures of U.S. Congress come to grips with Puerto Rico management act

By on April 6, 2018

Editor’s note: The following article was originally published in the April 5-11 print edition of Caribbean Business.

ANALYSIS—During any bankruptcy proceeding—such as what the Puerto Rico government and some of its corporations are going through—it is natural for stakeholders to employ all available legal strategies to protect their interests. While most challenges filed under the Title III insolvency proceedings by creditors and other officials against the Financial Oversight & Management Board (FOMB), with the latter representing the commonwealth, have been legitimate, most have not succeeded in obtaining favorable rulings because of limitations in the federal Promesa law that impede the court’s involvement. Federal Judge Laura Taylor Swain and the Oversight Board have been at the center of decisions that are often perceived as convenient for the Puerto Rico government but are contrary to existing federal and local laws that tend to protect creditor liens upon debt.

The Puerto Rico Energy Commission (PREC) recently challenged the scope of the Oversight Board’s (FOMB) powers, contending the board was interfering with the commission’s regulatory powers over the Puerto Rico Electric Power Authority (Prepa). PREC sought a determination stating the proposed Prepa fiscal plan could be certified absent PREC’s preapproval of elements that touch on matters characterized as “substantive energy actions.”

Under the federal P.R. Oversight, Management & Economic Stability Act (Promesa), the Oversight Board and governor are specifically tasked with devising the fiscal plan. As a result, during a recent hearing, PREC’s lawyer, Scott Hempling, abandoned PREC’s focus on the fiscal plan process and requested a declaration that the sphere of energy-related decisions remain under PREC’s exclusive control, and the FOMB’s area of authority is limited to “fiscal” matters.

Swain said PREC was seeking a legal opinion and declined to issue the injunction, contending the court could not intervene without a concrete dispute before it. However, she acknowledged in the decision that PREC has little chance of prevailing in the case.

The Oversight Board, according to Promesa, has broad powers that include approving a fiscal plan and government’s budget, cause legislative acts to not be enforced, and approve or disapprove critical projects.

The FOMB also has the power to obtain information, including written and electronic documents and data from federal agencies (with the consent of the agency head) and agencies and entities of the government of Puerto Rico; issue subpoenas; request administrative support services from the U.S. General Services Administration (GSA); enter into contracts; enforce laws of Puerto Rico prohibiting public-sector employees from participating in a labor strike or lockout; initiate civil actions to carry out its responsibilities; and investigate how Puerto Rico government bonds were sold to small investors.

Tied by Section 305

Then there is Section 305 of Promesa. This section of Promesa states the court would not be able to interfere in any way with any of the debtors’ political or governmental powers; property or revenues; or use and enjoyment of any income-producing property unless the Oversight Board either consented to such interference or allowed it within the plan proposed by the FOMB.

As a result, Swain, who is facing numerous complex decisions and multiple debtors, has issued opinions dismissing creditor complaints in a manner that critics say has disrupted the legal protections that municipal bonds have in bankruptcy scenarios.

A notable example was Swain’s ruling in the Puerto Rico Highways & Transportation Authority (HTA) Title III proceeding that holders of special revenue bonds are not entitled to pursue relief to compel the debtor bond issuer to use the net special revenues to pay debt. While Section 922 of the Bankruptcy Code provides an exception to allow a creditor to compel a debtor to apply net special revenues to debt, Swain said the section does not authorize such actions.

Judge Swain went further and sided with the government’s assertion that her court lacked the power to order payment of pledged special revenues to HTA bondholders. She said Section 305 of the Promesa federal law deprived her court of jurisdiction to grant the relief of bondholders and bond insurers.

 

–Read the rest of this article in Caribbean Business’ epaper here.

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