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Besosa’s recent ruling provides view on how he may rule on Promesa’s stay

By on October 12, 2016

A painting in the likeness of Judge Francisco Besosa is seen in this screenshot of

A painting in the likeness of Judge Francisco Besosa is seen in this screenshot of

SAN JUAN – A recent ruling by U.S. District Court Judge Francisco Besosa could provide a clue as to how he plans to rule in four consolidated cases involving Puerto Rico bondholders who are challenging the constitutionality of the Puerto Rico Emergency Moratorium & Financial Rehabilitation Act.

The plaintiffs in the four cases have until Wednesday (Oct. 12) to file briefs replying to a petition by the Financial Oversight and Management Board to intervene in their cases. Last week, the board requested additional time, or until Oct. 21, to look at the cases.

The plaintiffs in the four consolidated cases want the court to lift the stay imposed by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) on their litigation so their claims can move forward.

While the judge has yet to decide on the petitions, Besosa in a ruling last week allowed lawsuits filed by certain New York-based insurance companies to go forward, contending they may have a cause of action against the government.

Besosa made the comments in a ruling involving suits filed by Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Ambac Assurance Corp that also included Financial Guaranty Insurance Co. The plaintiffs sued the government, seeking a declaratory order that two executive orders signed by Gov. Alejandro García Padilla that changed the priority of debt payments violated the “Takings, Due Process and Contracts.”

In cases of an unbalanced budget, the commonwealth’s Constitution establishes a priority system detailing in what order appropriations will be paid. First priority is assigned to “interest on the public debt and amortization thereof,” while subsequent priorities are established by Puerto Rico law and the Management and Budget Office Organic Act. The government changed the priorities by omitting contractual obligations and “binding obligations to safeguard the credit, reputation and good name of the Government of the Commonwealth of Puerto Rico” from the list, allowing it to clawback revenues, the plaintiffs allege.

Besosa denied the government’s claim that the lawsuits had to be dismissed because the commonwealth was protected by the 11th amendment immunity. The 11th amendment, in essence, grants immunity to states from suits for money damages or equitable relief without their consent. But Besosa used a Supreme Court decision in Ex Parte Young that allows federal courts to enjoin state officials from violating federal law.

“Because plaintiffs’ here properly assert Equal Protection, Due Process, Taking, and Contract Clause violations pursuant to the United States Constitution, the Pennhurst exception does not apply. Consequently, the Ex Parte Young exception to Eleventh Amendment immunity is controlling and defendants are not shielded,” he said.

The judge granted the government’s request to dismiss the plaintiffs’ preemption claims, but in doing so he said that because neither the Puerto Rico Constitution, the Office of Management and Budget Act, the executive orders, nor a circular letter issued by Treasury Secretary Juan Zaragoza relieve or reduce the commonwealth’s obligation to pay the debt owed on the bonds in full, no composition of debt has occurred.

“While Circular Letter 1300-15-16 created by the Working Group may change the payment priority structure established in the OMB Act by removing express mention of contractual and credit safeguarding obligations from the language of the second priority…. Decreasing the priority of payment does not reduce or abate the obligation. The full amount is still due to the bondholder. Changing the payment priority structure, however, while not preempted by Section 903, may still constitute a violation of the Equal Protection, Due Process, Takings, and Contracts Clauses as asserted by plaintiffs,” Besosa said.

The judge also declined to dismiss certain claims against former Government Development Bank President Melba Acosta in her official capacity.


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