Fin. Oversight & Mgmt. Bd. for P.R. v. Urrutia (In re Fin. Oversight & Mgmt. Bd. for P.R.)
| Decision Date | 13 October 2021 |
| Docket Number | No. 17-BK-3283-LTS (Jointly Administered),Adv. Proc. No. 21-00072-LTS,17-BK-3283-LTS (Jointly Administered) |
| Parties | IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of The Commonwealth of Puerto Rico et al., Debtors. The Financial Oversight and Management Board for Puerto Rico, Plaintiff, v. Hon. Pedro R. Pierluisi Urrutia in his official capacity as Governor of Puerto Rico ; The Puerto Rico Fiscal Agency and Financial Advisory Authority; Hon. José Luis Dalmau Santiago, in his official capacity as a representative of the Puerto Rico Senate; and Hon. Rafael Hernández Montañez, in his official capacity as a representative of the Puerto Rico House of Representatives, Defendants. |
| Court | U.S. District Court — District of Puerto Rico |
Hermann D. Bauer Alvarez, Carla Garcia Benitez, O'Neill & Borges LLC, San Juan, PR, Martin J. Bienenstock, Mark D. Harris, Hadassa R. Waxman, Proskauer Rose LLP, New York, NY, Timothy W. Mungovan, Proskauer Rose LLP, Boston, MA, for Plaintiff.
Victor D. Candelario Vega, Quinones Arbona Candelario PSC, Luis Vega Ramos, San Juan PR, for Defendant Hon. Jose Luis Dalmau Santiago.
Peter Friedman, O'Melveny & Myers LLP, Washington, DC, Luis C. Marini Biaggi, Carolina Velaz Rivero, Marini Pietrantoni Muniz LLC, San Juan, PR, William J. Sushon O'Melveny & Myers LLP, New York, NY, for Defendant The Puerto Rico Fiscal Agency and Financial Advisory Authority.
Jorge Martinez-Luciano, Emil Rodriguez Escudero, ML & RE Law Offices, San Juan, PR, for Defendant Hon. Rafael Hernandez Montanez.
PROMESA Title III
On July 2, 2021, the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board") brought this adversary proceeding against Governor Pedro R. Pierluisi Urrutia (the "Governor"), the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF" and, together with the Governor, the "Executive Defendants"), the Honorable José Luis Dalmau Santiago (the "Senate President"), and the Honorable Rafael Hernández Montañez (the "House Speaker" and, together with the Senate President, the "Legislative Defendants") requesting that this Court nullify and bar the implementation and enforcement of Act 7-2021 ("Act 7" or the "Act"), which was enacted by the Commonwealth of Puerto Rico on June 9, 2021.2 (See Docket Entry No. 1, the "Complaint"). The Oversight Board argues that Act 7 was enacted in violation of numerous provisions of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA").3
Now before the Court is the Oversight Board's motion for summary judgment, which is brought on the grounds argued in its Memorandum in Support of the Financial Oversight and Management Board's Motion for Summary Judgment Pursuant to Bankruptcy Rule 7056 (Docket Entry No. 17, the "Motion for Summary Judgment").4 The Court has carefully considered all of the written submissions made in connection with the Motion for Summary Judgment.5 For the reasons that follow, the Motion for Summary Judgment is granted in part and denied in part. The Oversight Board's Motion for Summary Judgment is granted with respect to Counts I, II, and III, is denied with respect to Counts IV and V, and the Court declines to reach Count VI. Pursuant to PROMESA sections 204(a) and 104(k), Act 7 is hereby declared nullified, unenforceable, and of no effect. Defendants are enjoined from implementing and enforcing Act 7. Further, pursuant to PROMESA section 108(a)(2) and 104(k), section 1.02, section 5.02, Chapter 2, Chapter 3, Chapter 4, and the last sentence of section 5.01 of Act 7 are declared nullified, unenforceable, and of no effect. Defendants are enjoined from implementing and enforcing those provisions of Act 7.
The following facts are undisputed, except as otherwise indicated.6 The discussion assumes the reader's working knowledge of the provisions of Titles I, II, III and VI of PROMESA.
This adversary proceeding arises from an ongoing dispute between the Oversight Board and the Executive and Legislative Defendants regarding the character and impact of Act 7. Specifically, the Oversight Board maintains that Act 7 violates sections 108(a), 204(a), 204(c), and 207 of PROMESA, and therefore, under PROMESA section 104(k), the Oversight Board is entitled to judicial relief enjoining the implementation of Act 7 and nullifying its provisions. (Compl. at Counts I-V). The Oversight Board further argues that PROMESA preempts Act 7 and therefore, because Act 7's provisions are inconsistent with PROMESA, the Act also violates the Supremacy Clause of the United States Constitution and section 4 of PROMESA. (Compl. at Count VI). Defendants generally characterize the Act's provisions as aspirational or conditional and contend that the issues raised by the Oversight Board are not ripe for adjudication. The Court has subject matter jurisdiction of this adversary proceeding pursuant to 48 U.S.C. § 2166.
On June 30, 2016, Congress enacted PROMESA to address Puerto Rico's "fiscal emergency" created by a "combination of severe economic decline, and, at times, accumulated operating deficits, lack of financial transparency, management inefficiencies, and excessive borrowing." PROMESA § 405, 48 U.S.C. § 2194(m). PROMESA provided for the establishment of the Oversight Board. PROMESA § 101, 48 U.S.C. § 2121. "The purpose of the Oversight Board is to provide a method for [Puerto Rico] to achieve fiscal responsibility and access to the capital markets." Id. § 2121(a). The Oversight Board is given broad powers under PROMESA to fulfill its mandate, including the authority to "certify the fiscal plans and budgets of the Commonwealth and its instrumentalities, override Commonwealth executive and legislative actions that are inconsistent with certified fiscal plans and budgets, review new legislative acts, and commence a bankruptcy-type proceeding in federal court on behalf of the Commonwealth or its instrumentalities." Fin. Oversight & Mgmt. Bd. for P.R. v. Vásquez Garced (In re Fin. Oversight & Mgmt. Bd. for P.R.), 403 F. Supp. 3d 1, 5 (D.P. R 2019) (citing 48 U.S.C. §§ 2141 - 2152, 2175(a) ). However, PROMESA "does not preclude the government from pushing back and seeking court determinations regarding the [Oversight Board's] interpretations of PROMESA." In re Fin. Oversight & Mgmt. Bd. for P.R., 583 B.R. 626, 637 (D.P.R. 2017).
This Court has previously addressed the unique dynamic PROMESA created between the Oversight Board and the Commonwealth government. While PROMESA grants the Oversight Board significant powers to achieve its purpose, the statute does not, subject to the provisions of Titles I and II, "impair the power" of Puerto Rico "to control, by legislation or otherwise ... the exercise of the political or governmental powers." PROMESA § 303, 48 U.S.C. § 2163. Thus, PROMESA has created "an awkward power-sharing arrangement," in which the Oversight Board has significant tools to shape Puerto Rico's financial operations, but it has "not been given power to affirmatively legislate." Rosselló Nevares v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.) ("Rosselló Nevares"), 330 F. Supp. 3d 685, 701 (D.P.R. 2018). The provisions governing the formulation and confirmation of plans of adjustment under PROMESA further reflect this division of responsibilities between the Oversight Board and the Commonwealth government. "Only the Oversight Board" may file a plan of adjustment. PROMESA § 312(a), 48 U.S.C. § 2172(a). Yet, the statute also provides that a plan of adjustment cannot be confirmed unless the Oversight Board obtains "legislative, regulatory, or electoral approval necessary under applicable law in order to carry out any provision of the plan" or confirmation is "expressly conditioned on such approval." PROMESA § 314(b)(5), 48 U.S.C. § 2174(b)(5). This provision gives the Commonwealth government the ability to "obstruct implementation" or "complicate" the Oversight Board's efforts to produce a confirmable plan of adjustment. Rosselló Nevares, 330 F. Supp. 3d at 701. The Oversight Board, on the other hand, has at its disposal its "budgetary tools," other statutory powers, and negotiations in seeking "to elicit any necessary buy-in from the elected officials and legislators." Id. 7
On July 30, 2021, the Oversight Board proposed the Seventh Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al. (Docket Entry No. 17627 in Case No. 17-3283, the "Seventh Amended Plan of Adjustment"), which includes cuts to certain pensions and negotiated levels of recovery for bondholders. Voting in connection with the Seventh Amended Plan of Adjustment is underway and a confirmation hearing is scheduled to begin on November 8, 2021. (See Order Establishing Procedures and Deadlines Concerning Objections to Confirmation and Discovery in Connection Therewith (Docket Entry No. 17640 in Case No. 17-3283)).
Act 7 begins with a preamble, statement of motives, and a "declaration of [a] state of emergency" in chapter 1, that embrace full restoration and preservation of public employee pension rights and condemns the Oversight Board's proposed plan of adjustment, including its provisions for payments to bondholders based on negotiated compromises. It proposes a return to a defined-benefit public employee pension structure funded by, among other sources, monies to be saved on debt service if certain bond issues that have been challenged are invalidated. It includes a proposal for a plan of adjustment that would implement the pension and bond liability policies, and forbids government entities from devoting funds and efforts to the Oversight Board's proposed plan of adjustment, effective immediately. Its pension changes include amendments to Act 106-2017 ("Act 106"), the...
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