Two New Lawsuits Challenge Puerto Rico’s ‘Bankruptcy’

By Reed Yurchak July 31, 2018

Two new complaints were filed that challenge the board appointed to oversee Puerto Rico’s financial restructuring and the fiscal plan that it allegedly coerced the commonwealth government to adopt.

The lawsuits, brought July 25 by politicians representing the minority party in the island’s legislature and by two unions connected to the government’s work-place insurance agency, come less than two weeks after the court overruled a creditor’s objection that the oversight board was unconstitutional.

Minority Dissent

Fifteen members of the commonwealth’s House of Representatives, three members of its Senate, and 15 mayors of small municipalities joined as plaintiffs suing the Financial Oversight and Management Board of Puerto Rico, seeking a judgment declaring the appointment of the members of the board to be unconstitutional. The plaintiffs acknowledge that the court July 13 rejected this argument in another action brought by Aurelius Capital, but they remake the argument in order to preserve the right to pursue it on appeal.

Alternatively, they ask for a judicial declaration that the delegation of executive and legislative authority to the board violates the separation of powers doctrine of the Constitution and that its exercise of authority over budgeting constitutes an “impermissible interference with federally-protected legislative autonomy.”

All of the plaintiffs are members of the Popular Democratic Party, or PDP, the minority political party in the territory. They claim the majority New Progressive Party “buckled under the political pressure” applied by the governor and Oversight Board to adopt the latter’s proposed budget, signed as law on July 2, and other legislation, including the repeal of “Law 80,” which provided that private sector employees could not be dismissed without just cause.

They also argue that the elimination of a substantial Christmas bonus is an example of the board exceeding its authority under the Puerto Rico Oversight, Management and Economic Stability Act, passed by Congress in 2016 to create the framework for the commonwealth’s financial reconstruction.

In essence, plaintiffs claim that the board uses its “authority over budgetary affairs” to unduly pressure the commonwealth to enact legislation.

By “imposing” its own version of the budget, the board has become a “two-headed beast,” usurping the legislative and executive branch’s authority in violation of the Constitution’s provisions for the separation of powers, they allege. They accuse the board of coercing and intimidating legislators into “surrendering public policy to the whims of a body of seven non-elected private actors.”

“It is simply impossible to conceive a scenario in which Congress may forsake the guarantee against tyranny that is separation of powers by creating a body such as the Oversight Board to usurp both executive and legislative powers,” they said.

Unions Unite

The second lawsuit was brought against the Oversight Board and the State Insurance Fund Corporation by two unions providing services to the state fund. One union represents 1900 members responsible for the “general operations” of the fund, which is the exclusive provider of insurance coverage for work related accidents, deaths, and illness.

The second union represents 119 physicians providing medical services for the state fund.

The unions argue that the fiscal plan certified by the Oversight Board June 29 violates PROMESA and the U.S. and Puerto Rico constitutions.

The fiscal plan violates PROMESA because it fails to “identify expenses for essential public services,” as required by the law, they say. The plan violates the U.S. Constitution’s contracts clause by altering the collective bargaining agreements entered between the unions and the commonwealth, and the right to collective bargaining conferred by Puerto Rico’s constitution, they argue.

The unions ask the court to find the fiscal plan unlawful, such that it can’t be the basis for a plan of adjustment in the bankruptcy-like proceedings.

They say the plan destroys or impairs their collective bargaining agreements by changing policy over vacation and leave, and by dramatically reducing the employees’ Christmas bonuses, from up to $35,000 a year to $600.

PROMESA incorporates significant portions of the Bankruptcy Code, including Chapter 9. In Chapter 9 bankruptcy cases filed by cities or counties in the U.S., it’s simpler to reject a CBA than it is in Chapter 11, according to Bloomberg Law: Bankruptcy Treatise, Pt. IV, Ch. 132 (Samir D. Parikh et al., Eds., 2017).

Like Chapter 9, PROMESA doesn’t incorporate 11 U.S.C. § 1113, which imposes more exacting requirements for rejecting a CBA.

Counsel for the PDP plaintiffs includes Aníbal Acevedo Vilá, San Juan, Puerto Rico. The unions are represented by Bufete Emmanuelli C.S.P.

The cases are Hernandez-Montanez, et al. v. Financial Oversight and Management Board of Puerto Rico, Bankr. D.P.R., 17-03283, Complaint 7/25/18 and Hermandad De Empleados Del Fondo Del Seguro Del Estado, Inc., et al. v. Commonwealth of Puerto Rico, et al., Bankr. D.P.R., 17-03283, Adversary Complaint 7/25/18.

To contact the reporter on this story: Daniel Gill in Washington at [email protected]

To contact the editor responsible for this story: Jay Horowitz at [email protected]

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