Court says Puerto Rico bankruptcy doesn’t override eminent domain claims

The U.S. Court of Appeals for the First Circuit ruled Puerto Rico must pay $400 million eminent domain claims in its bankruptcy, despite the Oversight Board’s arguments to the contrary.

The ruling will not affect the amount bondholders are legally owed but will affect how much money the Puerto Rico government has to make the payments.

Before the Plan of Adjustment was approved in January, the board argued to U.S. District Judge Laura Taylor Swain most of the eminent domain and reverse condemnation claims could be treated as general unsecured claims in the bankruptcy.

While the board did not provide a financial calculation, the board’s legal arguments and circumstances suggests they’d get about 25% of the total $400 million in claims.

Swain said the Bill of Rights’ Fifth Amendment “Takings Clause” and subsequent jurisprudence on government takings in bankruptcies indicated the claims had to be paid in full. The board agreed to submit a Plan of Adjustment paying them in full but reserved its right to file an appeal.

Judges William Kayatta Jr., O. Rogeriee Thompson, and Jeffrey Howard this week upheld the Plan of Adjustment and the lower court’s findings.

Kayatta, writing for the appeals court panel, noted that the Puerto Rico Oversight, Management, and Economic Stability Act says the bankruptcy court shall confirm a plan of adjustment if it meets certain conditions, including that “the debtor is not prohibited by law from taking any action necessary to carry out the plan.” Impeding the eminent domain and inverse condemnation compensations would have been illegal, he wrote.

The eminent domain claims arose when the government took private property through eminent domain and therefore owed property holders just compensation. The “inverse condemnation” claims “arose out of takings in which the commonwealth [government] allegedly curtailed an owner’s property rights without first tendering a deposit [for potential compensation].”

Kayatta said he and his fellow judges found the “Fifth Amendment precludes the impairment or discharge of prepetition claims for just compensation in [PROMESA] Title III bankruptcy.” While the U.S. Constitution addresses bankruptcy, the U.S. Supreme Court has found bankruptcy laws are subordinate to the Takings Clause.

Responding to the First Circuit’s ruling, Puerto Rico Attorney John Mudd said, “It was to be expected and the board said it could pay it.”

The board and the local government have set aside the money to pay the eminent domain claims, but it will not be released until the decision becomes final after the time to appeal the decision has passed, the board told The Bond Buyer.

There are a few appeals of the central government plan of adjustment outstanding. None of them challenge the plan’s bond terms.