PR Constitution

GRIJALVA’S AMENDMENTS TO PROMESA

 

 

The Chair of the House Natural Resources Committee, in cahoots with Nydia Velázquez, have introduced a bill on May 21, 2020 for the purported purpose of amending PROMESA. With the 2020 November election looming large, it is highly unlikely that the House, much less the Senate, will have the time or the inclination to evaluate such an important legislation, much less approve it, this year. In reality, the Bill is nothing less than an attempt to please the Puertorrican “diaspora” in NYC, without in reality making any meaningful changes. I will attempt to explore this Bill, examining its salient points.

 

Section 3 of the Bill, quite correctly, prohibits those who issued debt in the past for the territorial government, its corporations or who was a part of the financial entities who purchased or insured the bonds, from serving as Board members, Executive Directors or Staff. It also forces the Board to create an Ethics Board within to consider its compliance with “applicable Federal laws regulating the conduct of the Oversight Board, including conflict of interest, financial disclosure and open government laws.” Problem is, this section does not explain what this Committee may do about said violations. Total waste of time.

 

Section 3(c)(there are two c’s in section 3), limits the total cost of the contracts entered by the Board for any fiscal year to 5%  of the operating budget. In other words, if the Board has a $60 million budget, it cannot enter into contracts above $3 million, which would immediately eliminate its lawyers, to say nothing of all other experts. You may argue that the Board has spent too much on lawyers and experts but on the other hand, restructuring $72 billion in bond debt, another $45 billion in pension debt and a few other billions in unsecured debt cannot be done on that budget.

 

Section 3(d)(and another c) requires that each individual Board member or potential Board member do the following before serving:

 

‘‘(1) has issued a formal statement regarding  that individual’s past and present compliance, and intent of future compliance with all applicable Federal laws regulating the individual’s conduct, including conflict of interest, financial disclosure, and open government laws; and

 

‘‘(2) has committed in writing to strictly abide by section 208 of title 18, United States Code, and other applicable Federal laws regulating their conduct, including conflict of interest, financial disclosure, and open government laws.

 

How can an individual certify compliance with past federal laws that did not apply to him? Why does he have to certify compliance with federal laws that apply to him since he has a legal obligation to do so  anyway. This is something that has no value except to make sectors of the “diaspora” feel empowered. There are other ethical requirements which are good ideas that won’t make a real difference if members want to lie, but there is a requirement of an annual ethics report to the President and Congress. Don’t see the use of it either.

 

Section 4 requires federal appropriations for the Board, which Congress will never approve. Section 5 requires that essential services be fully funded, which is no real change since the Board is the one who determines what this means in the Fiscal Plan and it cannot be reviewed by the District Court until the plan of adjustment, if at all. This section also includes public education, public safety, public health and pensions purportedly as essential services. Are pensions an essential service? Who does paying pensions serve? Not general public for sure.

 

Section 6 adds a list of other things in which the Fiscal Plan must provide as investment, which is fine, but again, it is determined by the Board and is unreviewable.

 

Section 213 is new purports to give back the UPR its previous funding but in a dwindling student population, does this make sense?

 

Section 318 is amended to include important disclosures by professionals employed by Court order, which is a good idea. Problem is that this is required retroactively by section d and this may be problematic.

 

Section 319 is added requiring disclosures by professionals hired by debtor, which is also a good idea, but 319(a) at the end  requires that the  professional disclose individual connections with debtors, creditors, etc. Problem is, what does connections mean? If I went to high school or played little league as a child with the person, does this count? Further refining is needed. Also, section 319(b) prohibits the claim of privilege in this endeavor, defeating federal and state public policies. Makes more sense to limit it to certain privileges such as deliberative process or maybe business secrets. Or it should be left to the discretion of the Court to decide in a balancing of interests. Another example of this Bill not been thought through but rather one that is to please certain constituents. Also, the disclosures are retroactive to June 30, 2016, when PROMESA was originally enacted.

 

Section 320 is new and requires that public information be readily available. Being one of the persons that objected to the secrets in the PR bankruptcy, this is a good idea. Section 110 is added requiring the Comptroller General of the United States to report to the President and the House Natural Resources Committee on an audit on the use of federal funds etc. Not a bad idea. Also, a good idea was the repeal of Title V of PROMESA, the Puerto Rico Infrastructure Revitalization which has been totally unproductive to date.

 

Title VIII is added for allegedly Territorial Relief, in other words, a non-Court centered way in which the territory can get rid of debt. When you read it, however, you see it is not as terrible as it seems. It only applies to non-secured financial obligations (security or loan, swap, repurchase agreement, guaranty). It does not apply to claims by vendors, service providers, employees, pending tax refunds or credits. In essence, the procedure would relieve the Territory of this debt (small as it would be) once every 7 years, a territorial Shemittah. If you give this power to politicians, do you have any doubt they will use it? Of course, it can only be used for small amounts of money in practical terms, but it is still something ripe for abuse. Also, only a territory whose population has decreased by 10% in a 10-year period or has received major disaster assistance via the Robert T. Stafford Disaster Relief and Emergency Assistance Act during the 5-year period ending on the date of the discharge and that has a per capita debt greater  than $15,000 (as defined by the section). What a coincidence that PR qualifies in all of them. This discharge requires the vote of both over 50% of both houses of the legislature and the signature of the Governor and works similarly to a bankruptcy discharge. According to section 802(c):

 

Notwithstanding any other provision of Federal, State, or territorial law, the ability of a qualifying territory to obtain a discharge under this title shall not be stayed, avoided, or otherwise limited by operation of any provision of law or by order of a court, an Oversight Board, or an administrative agency in any proceeding.

 

In other words, only future Congressional law will prohibit this practice, which again, will affect an infinitesimal amount of the Territories debt and will only affect bondholders. Talk about discrimination.

 

Section 804(a) reverses the general presumption that all transactions have been conducted in a lawful way by stating that:

 

Any financial obligation is conclusively deemed to be an unsecured financial obligation except to the extent that the holder of that obligation proves that the financial obligation is a secured financial obligation in an action for a declaratory judgment that is filed—

“(1) in—

 

‘‘(A) an appropriate territorial court of the qualifying territory; or

   (B) a district court of the United States  in the qualifying territory; and

 

2) not later than 180 days after the date of  a discharge under section 802.

 

Hence, after the Territory conducts its unilateral discharge of said debt, the affected party has only 180-days to rush to Court and object and can go to federal or territorial court. In addition, section 804(b) changes the burden of proof of the person challenging the unilateral action of the Territorial Government, used in both federal and territorial courts in civil cases, from a preponderance of the evidence (50+1) to clear and convincing evidence (probably between 65-70% probability). Talk about empowering the Government. Moreover, section 804(c) provides:

 

Notwithstanding title 28 [Federal Court Jurisdiction and Venue statutes], United States Code, a court described in subsection (a)(1) shall have exclusive jurisdiction over an action involving, arising from, or related to the status of a financial obligation as a secured or an unsecured financial obligation under subsection (a), including—

 

‘‘(1) any action asserting a taking under the fifth article of amendment to the Constitution of the  United States; and

   (2) any action for declaratory judgment.

 

Therefore, if a party sues to question the discharge and has to include as defendants others who are indispensable parties (legalese, trust me on this), those parties, if sued in territorial court, could not remove the case to federal court. Also, if one party goes to territorial court, can another go to federal court or is it prohibited by this section. Very unclear.

 

Also, section 804(h) provides the territory with a procedure for avoidance of security interests as if it were a Trustee in a Chapter 7 case. So now we have Title III, a bankruptcy like procedure based on Chapter 9 and this avoidance based on Chapter 7. The  territory has two years after the date of the discharge in 804 to do this and can file in territorial or federal court. Most territorial courts, however, have no idea how bankruptcy law works so filing there may be an enormous headache.

A very  important limitation is contained in Section 806. This Title does not apply to American Samoa, the Commonwealth of the Northern Mariana, Guam or the Virgin Islands. Considering that the United States has only 5 permanently populated territories, this means that Title VIII applies only to Puerto Rico, violating the doctrine of Railway Labor Executives’ Assn. v. Gibbons, 455 U.S. 457 (1982). In that case, Congress passed a bankruptcy law that would benefit only one railroad and the Court decided this violated the provision of the Constitution where Congress could enact “uniform” bankruptcy laws, and this was not uniform. To the argument of Congressional power over interstate commerce, the Court scoffed at the idea that Congress could use one power to defeat limitations of said power. As it is, this section is probably unconstitutional but even if applied to all territories, this bankruptcy like procedures seem to violate the uniformity clause. As some bondholders have told me, PROMESA is likely unconstitutional for the same reason, although until this date, no party has actually filed such challenge. But as Curly in City Slickers said “Day ain’t over yet.”

Finally, we come to one of the “diasporas” most cherished ideas, “The Puerto Rico Credit Comprehensive Audit Commission.” In spite of the Kobre & Kim Report on the debt and many (including myself) mentioning that all politicians since 1974 are responsible for the debt, the “diaspora” (and the Puertorrican left) have wanted a Commission would audit the debt to discover who is responsible for it and what debt is illegal. Congresspersons Grijalva and Velázquez heeded their cries with this section. The Commission would be part of the Puerto Rico Government and proceed to:

‘‘(1) order a comprehensive audit of all public debt of Puerto Rico and its instrumentalities, in conformity with the Government Accountability Office’s Generally Accepted Government Auditing Standards (also known as the ‘Yellow Book’); and

‘(2) audit all public debt issued during the period beginning on the first day of fiscal year 1972 and ending on the date of enactment of this section, including—

 

‘‘(A) a current and complete accounting as to the amount of outstanding indebtedness as of the date of the enactment of this section;

‘‘(B) an analysis of the sustainability of outstanding debts;

‘‘(C) an assessment of how rules, policies, and controls over the use of debt can be improved upon to ensure that in the future Puerto Rico’s debt load is sustainable and issued in a manner that effectively protects the legal and financial interests of the Government of Puerto Rico; and

‘‘(D) an investigation into any irregularities, apparent or alleged, wherein probable cause of malfeasance or misfeasance is found.

 

The Commission would be comprised of individuals from the unions, cooperativists, economics, finance, accounting, statistics, law, sociology (I am sure a certain professor of sociology in NYC was instrumental in this) professors from a university in PR, a business community representative, preferably small business and a certified translator. They will be appointed by the Governor no later than 360-days after the amendments are approved and if the does not act, the President of the Senate and the Speaker of the House shall jointly appoint them. The Bill requires that there be sufficient funding but does not say who had to fund it or if its members will be compensated. Give the duties and responsibilities they are entrusted with, not many will accept this appointment.

 

There are several problems with this section. What does probable cause mean? Rule 6 of the Puerto Rico Rules of Criminal Procedure  or Rules 5.1 or 41  of the Federal Rules of Criminal Procedure? Moreover, much of what the Bill requires was done by Kobre & Kim, so why do it again? Also, much as I would love to  put the culprits behind bars, the 5-year statute of limitations of both Puerto Rico and Federal Criminal Codes have long expired. What would a declaration of a Commission of this nature do? What weight would it have? Who will pay for it? How much will it cost? Finally, by the time the persons are appointed, and they have done their duty, the Puerto Rico Title III cases will have been completed or the cases dismissed.

 

Also, nothing is done in this Bill about the Puerto Rico’s Government’s objections to PROMESA, to wit, the Board’s control over it. It does nothing to weaken it or strengthen it. It provides no funding for PR except to say that the Federal Government will pay the Board’s expenses. It is not, like a local politician dubbed it, “a step in the right direction.”  Why do all this, then? To please the NYC Puertorrican “diaspora,” nothing else. The Bill is not even to get serious consideration given the time constraints. This is not the purpose of  Congress.

 

 

 

 

 

LA TRIFULCA VENIDERA

 

La Junta de Supervisión Fiscal nos ha dicho que va a certificar un plan fiscal para el ELA para el 30 de marzo del corriente. La Junta revisó el plan fiscal que el Gobierno le entregó el 24 de enero y solicitó cambios;  entre ellos más reforma laboral, reforma fiscal, y muchos otros. Específicamente, la Junta requirió que aquellas pensiones donde el pensionado recibe del gobierno y Seguro Social más de $1,000 se reduzca en 25% para una reducción que sume el 10% del Sistema. En cuanto a los empleados públicos, la Junta requiere “that the Proposed Plan include specific reference to services that can be reduced, eliminated, externalized, or taken over by other entities, as well as which types of employees are currently fulfilling those services. Further, the Proposed Plan must include a specific implementation plan and timeline for such agency rightsizing.”

Como era de esperarse, el plan fiscal que envió el Gobernador a la Junta carece de todos estos elementos por la obvia razón del costo político de cumplir con la encomienda. ¿Que hará la Junta? Con toda probabilidad anunciará el 30 de marzo que el plan fiscal del gobierno no cumple con lo que ha requerido y certificará su propio plan fiscal que incluirá lo antes mencionado. ¿Que hará el Gobierno de Rosselló? Argumentará que no hay que hacerlo, que hay los fondos, se rehusará a cumplir con una retórica que haría orgulloso a Rubén Berríos. La Junta tendrá que demandar a Rosselló como ya lo hizo y solo otro huracán salvará al Gobierno de tener que cumplir con lo indicado en el plan fiscal impuesto por la Junta.

Ya la Juez Swain ha indicado que carece de jurisdicción para revisar el plan fiscal aprobado por la Junta. Más aún, cuando Martin Bienestock comenzó su argumento oral para imponer a Noel Zamot como CEO de la AEE, la Juez Swain le preguntó si era su contención que esta última no estaba cumpliendo con el plan fiscal. Bienestock dijo que no y lo demás es historia. Si la Junta incluye reducción de jornada y de pensiones en el plan fiscal, no me cabe duda que la Juez Swain los va a hacer cumplir. Recordemos que en la quiebra de Detroit también se redujeron las pensiones en 10% y en Chrysler se redujeron mucho más.

Quiero mencionar un detalle del plan fiscal de la AEE y la AAA, ninguno de los cuales ha sido hecho público por el “Gobierno de la Transparencia”. He mencionado en las redes sociales que el Proyecto de ley para la venta de la AEE es sumamente escueto sobre los asuntos importantes de la venta y el Gobernador y algunos senadores indican su preferencia por alianzas público privadas. Por el otro lado, el Sr. Carrión ha sido muy claro al indicar que la AEE se debe vender, algo con lo que concuerdo. ¿La pregunta es si como probablemente ocurra con al plan fiscal del ELA, la Junta impone el suyo en la AEE y éste requiere la venta de la misma, ¿si esto hace el Proyecto superfluo? Esto definitivamente traerá malestar entre la Junta y el ELA, aumentando enormemente los gastos en el caso de la quiebra de PR. Como le indiqué a todos lo que clamaban porque se radicará el Título III y ahora se quejan del costo, be careful what you wish for, you may get it.

Finalmente, y hablando de gastos, quiero mencionar el pleito radicado por la Comisión de Energía contra la Junta para que no pueda certificarse plan fiscal de la AEE sin la aprobación del ente regulador. Resulta que los abogados de la Comisión de Energía, que incluye a uno de USA, Scott Hempling, los abogados de la Junta, de AFFAF y del UCC, TODOS son pagados por lo contribuyentes de PR. Para colmo de males, nada de lo que se esta litigando tendrá utilidad alguna para los contribuyentes, aún si gana la Comisión. Es todo un “pissing contest” sobre quien determinará la transformación de la AEE. Pérdida de tiempo y de recursos que demuestra que los que clamaban por la quiebra de PR, que nunca han visto un caso, mucho menos uno federal o un caso de quiebras, no sabían de lo que hablaban.

GO BONDHOLDERS SUE PUERTO RICO BASED ON PROMESA

 

 

Ever since President Obama signed PROMESA into law, Governor García Padilla crowed that now bondholders could not sue PR. Not only was he wrong, he was proven wrong today when a group of GO bondholders sued him for violating PROMESA.

 

The Group, that includes Lex Claims, LLC, Jacana Holdings (who also sued in NY Supreme Court), MPR Investors, Rolgs, RRW and SL Puerto Rico Fund, not Stone Lion and Aurelius as originally reported by Reuters. They claim, quite correctly in my view, that PROMESA prohibits the default of GO’s Governor García Padilla has done. Plaintiffs invoke section 204(c)(3) of PROMESA which states:

 

“During 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.”

 

The complaint avers, quite correctly, that the PR Constitution guarantees the payment of GO’s as a priority, see Article VI, sections 2 and 8. Moreover, PR law prioritizes the payment of this Constitutional debt. Although Governor García Padilla justified his default on the GO debt on the power granted to him by the Moratorium law enacted by the PR legislature, the complaint points out that it is preempted not only by 11 U.S.C. § 903 but also by section 303 of PROMESA.

 

Plaintiffs also aver that not only is the default on GO’s a violation of the PR Constitution and hence PROMESA, but that the 2016-17 budget is a violation of both laws since it does not budget for the payment of the Constitutional debt. It cites Article VI, section 6 of the Puerto Rico Constitution, which states:

 

“If at the end of any fiscal year the appropriations necessary for the ordinary operating expenses of the Government and for the payment of interest on and`amortization of the public debt for the ensuing fiscal year shall not have been made, the several sums appropriated in the last appropriation acts for the objects and purposes therein specified, so far as the same may be applicable, shall continue in effect item by item, and the Governor shall authorize the payments necessary for such purposes until corresponding appropriations are made.”

 

Since the 2015-16 budget did include appropriations for GO’s, the Constitution requires that these appropriations be used for payment of the GO debt and plaintiffs in this case so demand. Again, the claim is that violating the Constitution’s provisions on payments also violates PROMESA.

 

Plaintiffs also aver that this complaint is not stayed by PROMESA. As I have discussed before, the stay in PROMESA applies to cases filed after December 18, 2015 and seek:

 

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the Government of Puerto Rico that was or could have been commenced before the enactment of this Act, or to recover a Liability Claim against the Government of Puerto Rico that arose before the enactment of this Act;

(2) the enforcement, against the Government of Puerto Rico or against property of the Government of Puerto Rico, of a judgment obtained before the enactment of this Act;

(3) any act to obtain possession of property of the Government of Puerto Rico or of property from the Government of Puerto Rico or to exercise control over property of the Government of Puerto Rico;

(4) any act to create, perfect, or enforce any lien against property of the Government of Puerto Rico;

(5) any act to create, perfect, or enforce against property of the Government of Puerto Rico any lien to the extent that such lien secures a Liability Claim that arose before the enactment of this Act;

(6) any act to collect, assess, or recover a Liability Claim against the Government of Puerto Rico that arose before the enactment of this Act; and

(7) the setoff of any debt owing to the Government of Puerto Rico that arose before the enactment of this Act against any Liability Claim against the Government of Puerto Rico.”

 

The complaint states that it does not seek payment of the defaulted amounts and hence the stay is inapplicable. That argument has also been made in Brigade Leveraged Capital Structures Fund, Ltd. v. García Padilla, 16-1610; National Public Finance Guarantee Corporation v. García Padilla, 16-2101 and Trigo v. García Padilla,16-2257. I expect Judge Besosa to rule on this and other issues in these cases by August. Only in Ambac Assurance Corporation v. Puerto Rico Highway and Transportation Authority, 16-1893 has the plaintiff acquiesced to the stay since it is seeking a receiver for the defendant. No such receiver is sought by the GO plaintiffs and it is my opinion that the Court will rule that the stay is not applicable to the case.

 

In addition, plaintiffs point out that millions of dollars were clawed back by PR and that the only justification for such clawback would be to pay for the Constitutional debt but it has gone instead to debts of lesser priority. Again, this could be considered a violation of PROMESA since it violates the PR Constitution. Also “[a]dding insult to constitutional injury, the budget contemplates an increase of more than $500 in non-debt service spending.” Page 19, paragraph 54. This includes an increase of $150 million from the previous year’s contribution to the retirement funds. I can see the malevolent hand of the US Treasury helping its ally, organized labor.

 

The complaint also seeks, similar to the complaint in the aforementioned Brigade case, the lifting of the stay if the Court believes it is necessary. Clearly an averment made in an abundant of caution. Not a bad idea.

 

The complaint, at pages 25-26, seeks a judgment:

 

“A. Declaring that the Commonwealth’s post-PROMESA measures permitting

transfers outside the ordinary course of business or in violation of Puerto Rico’s Constitution and laws to the detriment of holders of Puerto Rico’s Constitutional Debt are invalid under Section 204(c)(3) of PROMESA.

 

  1. Enjoining enforcement or implementation of certain of those measures until the

Oversight Board has made a determination as to their propriety, with such injunction:

(1) requiring the Defendants, in their official capacities as Commonwealth

officers, to segregate and preserve all funds clawed back, to be clawed back, or available to be clawed back under contractual and legal provisions expressly acknowledging that those funds are subject to turnover for purposes of paying of Constitutional Debt;

(2) prohibiting the Defendants, in their officials capacities as Commonwealth officers, from implementing the outsized transfers to the public employee pension funds contemplated in the Fiscal Year 2017 budget and limiting the Commonwealth to the contribution it made in Fiscal Year 2016; and

(3) prohibiting the Defendants, in their official capacities as Commonwealth officers, from implementing the diversion to the insolvent GDB the approximately $250 million contemplated by the Fiscal Year 2017 budget, or such other amounts (such as

those allocated in pending legislation).

 

In synthesis, it is a well-written complaint with a good chance of being granted the remedies it seeks. There is, however, one concern. Section 204(c)(3) mentions the Board but does not specifically state that those affected by these violations would have a cause of action. Clearly, GO bondholders have standing since they have not been paid but the question really is whether they have a cause of action. This question, I believe, is ruled by Gonzaga Univ. v. Doe , 536 U.S. 273 (2002) and that plaintiffs do have a cause of action if not under PROMESA, definitely pursuant to 42 U.S.C. § 1983. We shall soon find out.