(Read ourarticle on Puerto Rico’s Public Corporations Debt Enforcement and Recovery Act here.)
The Act has been challenged in Puerto Rico’s federal district court by the Franklin and Oppenheimer Funds (Franklin California Tax-Free Trust for the Franklin California Intermediate Term Tax Free Income Fund, et al. v. The Commonwealth of Puerto Rico” Case. No. 14-1518) wherein the plaintiffs seek a declaration that the Act enacted by the Commonwealth of Puerto Rico violated multiple provisions of the United States Constitution.
The Takings Clause
BTIG’s Mark Palmer writes on his blog (“Assured Guaranty, MBIA, Ambac Financial Group: What is the “Takings Clause” and Why Should It Matter to Investors in AGO, MBI and AMBC Concerned About the Impact of Puerto Rico’s Debt Enforcement Act?” July 17, 2014) clarifying the significance of the Takings Clause, the last clause of the Fifth Amendment to the US Constitution, and how this clause could be instrumental in deciding the constitutionality of the Act.It has been held by the Supreme Court that the federal government and each state has the power of eminent domain—the power to take private property for “public use”. The Takings Clause limits this power by requiring that “just compensation” be paid if private property is taken for public use.
The Franklin and Oppenheimer Funds, in their complaint above, have objected to Section 322 ( c ) of the Act which enables the petitioner, after court authorization, to “the obtaining or credit or the incurring of debt secured by a senior or equal lien on the petitioner’s property that is subject to a lien.”
According to the Funds, this would constitute a taking in violation of the Takings Clause because it would enable the creation of a superior lien on already liened property without paying compensation to the lienholders.
It may be noted that there could be other constitutional infirmities in the Act, but the alleged violation of the Takings Clause is the most serious, and the one most likely to succeed in a constitutional challenge.
Puerto Rico authorities put up a determined front, however
Regardless, in a webcast yesterday, Puerto Rico has asserted the legality of the Act and its determination to defend it – see the yellow shaded portion in the slide below.Puerto Rico authorities put up a determined front, however
Regardless, in a webcast yesterday, Puerto Rico has asserted the legality of the Act and its determination to defend it – see the yellow shaded portion in the slide below.
The Commonwealth’s arguments
In any case, Puerto Rico may well have anticipated these challenges. According to an alert dated July 16 by Orrick, Herrington & Sutcliffe LLP, the Commonwealth’s arguments for the constitutionality of the Act, as per the Senate bill, run as follows:“The Commonwealth has the police power to enact orderly debt enforcement and recovery statutes when facing an economic emergency, based on the power conferred on the Commonwealth under the Commonwealth’s constitution and enabling statutes. The Commonwealth asserts that it may enact its own laws, as long as the law does not conflict with the Commonwealth’s constitution, the Constitution of the United States or applicable federal law. The Commonwealth asserts that the debt enforcement act is constitutional because the United States Supreme Court has held that states may enact their own laws for entities Congress has not rendered eligible under applicable federal law.”
Puerto Rico to respond on July 22
“Puerto Rico is slated to respond to the bond funds’ lawsuit on July 22, a response that almost certainly will include a motion to dismiss and may address some of the funds’ arguments,” says BTIG’s Palmer.
Sign Up For Our Free Newsletter to never miss an article.by Saul Griffith
Puerto Rico Recovery Act May Be Struck Down
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