In a friend of the court brief submitted in an appeal to the U.S. First Circuit Court of Appeals, U.S. House Committee on Natural Resources Chairman Rob Bishop, who drafted the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) as Congress’ response to Puerto Rico’s debt crisis, says the board violated Promesa’s intent.
Bishop’s friend of the court brief, in which he urged the court to “respect the letter and intent of Promesa,” was filed June 29 in the appeal filed by Ambac Assurance Corp. In February, U.S. District Judge Laura Taylor Swain had said she lacked jurisdiction to evaluate challenges to Puerto Rico’s five-year fiscal plans and could not adjudicate Ambac’s claims that payments on Highways & Transportation Authority (HTA) special revenue bonds were being unconstitutionally diverted to government coffers. The district court dismissed several claims made by Ambac, including a special revenues claim under Sections 922 and 928 of the Bankruptcy Code, because the court did not read either section as empowering it to order the government to pay Pledged Special Revenues to HTA bondholders.
While Bishop said he was not siding with anybody in the brief, the document appears to side with Ambac. He said Promesa pre-empts the unilateral debt-related measures Puerto Rico deployed prior to Promesa’s passage, and prevents Puerto Rico from taking such actions while the oversight board exists. The purpose of the pre-emption is to establish federal law as the only debt-relief regime available and to protect creditors’ rights.
Bishop noted that special revenue bonds, such as those owned by Ambac, should have continued to be paid despite being in Title III bankruptcy. Furthermore, Sections 922 and 928, “the “special revenue” provisions of Chapter 9 of the Bankruptcy Code, are intended to ensure that revenue streams pledged to bondholders continue to pay out during a Title III proceeding, just as they would during a Chapter 9 bankruptcy by municipal debtors. Title III also contains creditor protections that apply at confirmation of a plan of adjustment, the means by which a debtor exits Title III,” Bishop said.
Furthermore, Bishop said a debt-adjustment plan for the bankrupt entities cannot be confirmed unless the government complies with the fiscal plan, which itself must respect payment priorities and liens.
Bishop also noted that under Promesa, the intention of Congress was to