Yesterday governor Alejandro García Padilla, just a day after PROMESA became law, and in cahoots with the US Treasury and President Obama, defaulted on the payment of the General Obligations bonds guaranteed by the Constitution in excess of $800 million. This was not coincidence. I have time and again mentioned that the struggle over the payment of PR’s debt is the spearhead of a greater struggle over the sanctity of these GO bonds that has great repercussions over such Democrat strongholds as Illinois, California and New York.
By defaulting on these GO bonds, formerly considered sacred and protected by the PR Constitution, the Governor not only violates his oath to protect and defend the Constitution, but also frightens away future holders of PR bonds. He did it under the theory that PR cannot be sued during the stay provided by PROMESA (section 405). But as usual, the governor misunderstands the stay. PR cannot be sued for collection of moneys during the stay, but it expires on February 15, 2017 and it is only extendable for 75 more days, to wit, May 2017 (section 405(d)). Also, the stay may be lifted after a notice and a hearing for cause shown (section 405(e)).
In addition, GO bondholders may go to Federal Court in a declaratory judgment requesting a declaration that the governor’s actions violate the Constitution, 11 U.S.C. § 903 (section used by the Federal Courts to invalidate the Recovery Act) without seeking collection of money and at the same time request the lifting of the stay. We must remember that section 405(k) of PROMESA says that “[t[his section does not discharge an obligation of the Government of Puerto Rico or release, invalidate, or impair any security interest or lien securing such obligation.” Finally, la section 405(l) states:
Nothing in this section shall be construed to prohibit the Government of Puerto Rico from making any payment on any Liability when such payment becomes due during the term of the stay, and to the extent the Oversight Board, in its sole discretion, determines it is feasible, the Government of Puerto Rico shall make interest payments on outstanding indebtedness when such payments become due during the length of the stay.
In other words, the governor’s actions are not necessarily protected by PROMESA. Let’s see what happens.