Is Gov. García Padilla Violating Promesa?
Two weeks ago, the University of Puerto Rico (UPR) bond trustee, U.S. Bank Trust National Association, filed a lawsuit against UPR and the Commonwealth of Puerto Rico, alleging that Gov. Alejandro García Padilla is illegally diverting tuition revenue and other money pledged for UPR bondholders.
The suit is the latest in a string of lawsuits filed by bondholders that will likely continue over the next several months, but it is interesting in its similarity to other lawsuits filed against the government, which allege that the governor is violating the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) through illegal budget appropriations that are inconsistent protections established by the law.
For the time being, these lawsuits are mostly symbolic—nothing will become of them until the legal stay enacted by Promesa is lifted—but they pose an interesting question about Gov. García Padilla’s action in the aftermath of long-awaited federal intervention, to wit; is he violating the very law that he spent months lobbying for in a rush to reallocate the Commonwealth’s resources before the fiscal control board is in place?
Section 204(c)(3) of Promesa provides for the prohibition of budgetary adjustments until the control board is appointed. It reads, “[d]uring the period after a territory becomes a covered territory and prior to the appointment of all members and the chair of the Oversight Board, such covered territory shall not enact new laws that either permit the transfer of any funds or assets outside the ordinary course of business or that are inconsistent with the constitution or laws of the territory as of the date of enactment of this act, provided that any executive or legislative action authorizing the movement of funds or assets during this time period may be subject to review and rescission by the Oversight Board upon appointment of the Oversight Board’s full membership.”
This straightforward language was expressly included by Congress to quell bondholder’s fears that García Padilla would empty the government’s coffers into the hands of allies and labor union pension funds on his way out of office. Seems bondholders were right.
In addition, bondholder groups that have filed suits have identified areas in which there is a strong argument that various appropriations and other enacted and pending laws divert funds in ways that “are inconsistent with the constitution or laws of the territory.”
Aside from U.S. Bank’s claims about diverted tuition revenue, which they claim illegally robs investors of collateral, bondholders have identified several other infractions including funding increases to pension funds, $375 million for the failed Government Development Bank and $1 million for the “Puerto Rican Academy of Jurisprudence & Legislation,” an organization chaired by the governor’s brother Antonio, which purports to be focused on rehabilitating a historic building in Puerta de Tierra, San Juan. Moreover, the governor has announced his intention to hold a special session for the stated purpose of legislating an additional $400 million funding increase to pension systems.
All of these actions, bondholders argue, are in one way or another a violation of the aforementioned provision of Promesa, and it is hard to find fault in their claims. Any one of the new budget allocations, it could easily be argued, is in violation of priorities held by senior bondholders and, hence, can be construed as “inconsistent with the constitution or laws of the territory.” Laws enacted to increase pension funding during a special session, on the other hand, seem to be the very definition of “new laws that either permit the transfer of any funds or assets outside the ordinary course of business.” Bondholder fears over the governor emptying the Commonwealth’s coffers seem well-founded.
Despite Congress’ intent to offer bondholders some protection until the control board could get up and running, there is no question that the governor is actively violating both the letter and the spirit of the provisions that offer protection to Puerto Rico’s creditors. Time will tell if there is anything that can be done about it before he empties the kitchen cabinets for more friends like Anaudí Hernández Pérez, a Popular Democratic Party fundraiser who has pled guilty to charges of corruption.
On a final note, President Barack Obama has finally appointed the members of the control board, some of which I have profiled on controlboardwatch.org. They are:
Carlos García, former GDB President for Gov. Luis Fortuño; David Skeel, law professor at the University of Pennsylvania; Andrew Biggs, resident scholar of the American Enterprise Institute; José Carrión, leads an insurance brokerage firm on the island called Carrión, Laffitte & Casellas; Ana Matosantos, former budget chief of the state of California; José Ramón González, former GDB President for Gov. Rafael Hernández Colón; Arthur González, former bankruptcy judge in charge of the Enron and Chrysler litigations.
Now that the board members have been named, the real process of solving Puerto Rico’s fiscal problems has finally begun.
— John Mudd is an attorney and legal analyst in Puerto Rico with over 30 years of experience. He is admitted in Puerto Rico, the U.S. District Court for Puerto Rico and the First and Fourth Circuit Courts of Appeals. For more than three years, he has been analyzing the possibility of a control board for Puerto Rico. You can follow him on Twitter @muddlaw and on his blog www.johnmuddlaw.com.