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Court Says Puerto Rico Bankruptcy Does Not Replace Eminent Domain Claims

The United States Court of Appeals for the First Circuit ruled that Puerto Rico must pay $400 million for eminent domain claims in its bankruptcy, despite arguments to the contrary by the Board of Supervisors.

The decision will not affect how much bondholders are legally owed, but will affect how much the government of Puerto Rico has to make payments.

Before the adjustment plan was approved in January, the board argued with U.S. District Judge Laura Taylor Swain that most eminent domain and reverse conviction claims could be treated as general unsecured claims in the bankruptcy.

The United States Court of Appeals upheld Puerto Rico Bankruptcy Judge Laura Taylor Swain’s treatment of eminent domain claims in the adjustment plan.

Although the board did not provide a financial calculation, the board’s legal arguments and circumstances suggest it would get about 25% of the total $400 million in claims.

Swain said the “takes clause” of the Fifth Amendment to the Bill of Rights and subsequent case law on government takes in bankruptcies indicated that claims must be paid in full. The board agreed to submit an adjustment plan paying them in full but reserved the right to appeal.

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

Kayatta, writing for the appeals court panel, noted that Puerto Rico’s Supervision, Management, and Economic Stability Act states that the bankruptcy court must confirm an adjustment plan if it meets certain conditions. , including that “the debtor is not prohibited by law from taking any action necessary to carry out the plan. Obstructing eminent domain and reverse conviction offsets would have been illegal, he wrote.

Eminent domain claims arose when the government took private property through eminent domain and therefore owed the owners just compensation. ‘Reverse condemnation’ claims ‘arose from grips in which the Commonwealth [government] allegedly restricted a landlord’s property rights without first posting a bond [for potential compensation].”

Kayatta said he and his fellow justices concluded that the “Fifth Amendment precludes the impairment or nullification of pre-petition claims for just compensation in [PROMESA] Title III Bankruptcy. While the US Constitution deals with bankruptcy, the US Supreme Court has found that bankruptcy laws are subordinate to the grab clause.

Responding to the First Circuit ruling, Puerto Rico attorney John Mudd said, “It was to be expected and the board said they could afford it.”

The council and local government have set aside the money to pay eminent domain claims, but it will not be released until the decision is final after the deadline for appealing the decision, the council told The Bond Buyer.

There are some appeals of the central government’s adjustment plan pending. None of them disputes the terms of the plan bonds.