Puerto Rico's bankruptcy court has agreed to accelerate consideration of Gov. Ricardo Rosselló suit against the Oversight Board over the budget and fiscal policy. The outcome may have implications for long-term bond recoveries.

Title III bankruptcy Judge Laura Taylor Swain agreed to hear oral arguments on July 25 and to require written submissions on earlier dates. The governor’s lawyers filed the adversary complaint on July 5.

Puerto Rico Gov. Ricardo Rosselló
Puerto Rico Gov. Ricardo Rosselló says that the Oversight Board has been trying to make policy decisions that PROMESA doesn't allow it to make.

On July 6 his attorneys asked Swain to require the board to answer the complaint or motion to dismiss by July 12. These lawyers said they would file a motion of summary judgment or judgment on the pleadings on July 16. In their proposal several deadlines would then follow for each side up to the July 25 hearing.

“The court should expedite resolution of this case to address the injury to the commonwealth and its people occurring every day due to the board’s attempt to seize day-to-day control of Puerto Rico’s government,” Rosselló’s lawyers said on July 12.

The board asked for more time, but on July 7 Swain ruled in favor of the governor’s schedule.

Adding to the mix, Puerto Rico Senate President Thomas Rivera Schatz and House President Carlos Méndez Núñez filed a similar suit against the board on July 9, asserting that the board was impinging on the legislature’s rightful powers.

While the board and the governor have generally been in agreement this year in their fiscal plans on how much money should be given to bondholders, the board has claimed that its policies must be followed for there to be money available for bond payments. The board's plan shows a surplus of $6.5 billion from this fiscal year through fiscal year 2023 potentially available for bond payments.

Swain’s decision to grant Rosselló’s request for oral arguments on July 25 “means it is unlikely she will grant the board any time for discovery on any issue[, which the board had requested,] and that she wants to rule on the issues quickly,” said Puerto Rico attorney John Mudd in his Control Board Watch blog.

“This unholy mess was created for political reasons” after a board plan to ease labor protections failed, Mudd said. “Since the president of the Senate refused to eliminate Law 80, the board imposed a far stricter budget. Senator Rivera Schatz threatened he would go to court and if he did, even if he lost, he would be a hero in the minds of many. Gov. Rosselló, who wanted the Law 80 deal, calculated that he would not lose anything by challenging the board. Although, it is obvious to everyone he will probably lose.”

In the suit Rosselló’s lawyers quote from Swain’s November 2017 opinion and order denying the board’s motion to replace the then-chief executive of the Puerto Rico Electric Power Authority with the board’s own appointee. “Congress did not grant the [Oversight Board] the power to supplant, bypass, or replace the commonwealth’s elected leaders and their appointees in the exercise of their managerial duties whenever the Oversight Board might deem such a change expedient.”

The governor’s lawyers said that the board was trying to expand its powers beyond those that the Puerto Rico Oversight, Management, Economic Stability Act had given it.

Under Puerto Rico’s Act 230 the commonwealth’s executive branch can use unused appropriations from one year in the following year as it sees fit. The board has been seeking to gain control over this “reprogramming” of appropriations. “Plaintiffs are entitled to a judicial declaration … that the suspension of Act 230 and reprogramming authorization for prior fiscal years under board fiscal plan section 11.2.1 … is a non-binding recommendation,” the local government argued in its July 5 suit against the board.

The governor’s lawyers said, “Plaintiffs are entitled to a judicial declaration … that the provisions seeking to impose government agency consolidations under board fiscal plan section 12 … are non-binding recommendations.” They go on, “Plaintiffs are entitled to a judicial declaration … that the provision requiring automatic budget reductions for future fiscal years (including intentional workforce reductions) … is a non-binding recommendation.”

In their filing, the board said, “defendants take exception to plaintiffs’ argument that the briefing schedule for the dispute last fall regarding appointment of a chief transformation officer (“CTO”) for PREPA should somehow be the yardstick for the present dispute. Although the CTO issue was significant, it did not raise anything close to the number of substantive and jurisdictional issues raised here.” The board said it would seek discovery for information and would contest the local government on jurisdictional issues.

In news related to PREPA, on Wednesday the authority announced the resignation of executive director Walter Higgins and his replacement by heretofore PREPA board member Rafael Díaz Granados. Higgins started in the position in late March.

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