On August 4, 2016, my friend Jay Fonseca had a discussion with Rafael “Tatito” Hernández about the bill that Governor García Padilla vetoed that would have provided partial interest payments on General Obligation bonds. During the discussion, Jay stated that PROMESA permitted PR to withhold payment of the General Obligation bonds- and any bondholder payments for that matter- that it could not be sued during the stay. This is not correct. Nothing in PROMESA allows the PR NOT to pay any of its obligations. In fact, section 405(l) states as follows:
“PAYMENTS ON LIABILITIES.—Nothing in this section [the stay 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.”
Moreover, there are seven complaints, as discussed here, that are challenging Puerto Rico’s actions pertaining to the payment of bond debts. If the PROMESA stay prohibited these complaints, one would think the Federal Court would have automatically stayed them pending resolution. Judge Besosa, however, has refused to do so. In addition, contrary to popular belief, the stay in PROMESA is not the same as a stay in Bankruptcy Court. Although in both there must be notice and hearing and the party seeking the lifting of the stay must show cause, in PROMESA, the Court has 45-days from the filing of the petition to decide to MAINTAIN THE STAY. In Bankruptcy it is the other way around; the Court has to specifically determine to lift the stay. In other words, if the Federal Judge DOES NOT rule upon the stay motion, the PROMESA stay is automatically lifted and the case may proceed. Hence, the stay is the exception, not the rule in PROMESA. See, section 405(f) of PROMESA.
Also, section 204(c)(3)(A) of PROMESA states
“PROHIBITION ON ACTION UNTIL OVERSIGHT BOARD IS
(A) During the period after a territory becomes a covered territory and prior to the appointment of all members and the Chair of the Oversight Board, such covered territory shall not enact new laws that either permit the transfer of any funds or assets outside the ordinary course of business or that are inconsistent with the constitution or laws of the territory as of the date of enactment of this Act, provided that any executive or legislative action authorizing the movement of funds or assets during this time period may be subject to review and rescission by the Oversight Board upon appointment of the Oversight Board’s full membership.”
In addition, in Assured Guarantee Corp. v. García Padilla, 16-2384, plaintiffs are invoking sec. 407 of PROMESA, which states:
“(a) PROTECTION OF CREDITORS.—While an Oversight Board for Puerto Rico is in existence, if any property of any territorial instrumentality of Puerto Rico is transferred in violation of applicable law under which any creditor has a valid pledge of, security interest in, or lien on such property, or which deprives any such territorial instrumentality of property in violation of applicable law assuring the transfer of such property to such territorial instrumentality for the benefit of its creditors, then the transferee shall be liable for the value of such property.
(b) ENFORCEABILITY.—A creditor may enforce rights under this section by bringing an action in the United States District Court for the District of Puerto Rico after the expiration or lifting of the stay of section 405, unless a stay under title III is in effect. (underlining ours)”
Here we see another instance where PR would not be protected by the PROMESA stay. I have no idea what Tatito Hernández’ motivations for his bill were, but undoubtedly the payment of the public debt is specifically mandated by Article VI, section 8 of the PR Constitution. Moreover, we can see that PROMESA does not allow the Governor to disregard the PR Constitution (which he swore to defend) and default on the island’s debts. Any such claim is false and against PROMESA.