As most of you know, I participated yesterday in a panel discussion on PROMESA in Washington, hosted by the National Taxpayers Union, along with House Natural Resources Committee Senior Policy Advisor Bill Cooper, Mercatus Center’s J.W. Verret, NTU President Pete Sepp, American Action Forum’s Gordon Gray, and Mayer Brown’s Warren Payne.

Discussion was lively and wide-ranging. I gave an overview of the various legal cases that are pending on the island, similar to those that I have done here and on my MUDDLAW blog, noting the recent ruling by Judge Besosa that the PROMESA legal stay did not apply to the Lex Claims litigation.  Warren Payne talked at length about the government’s tax reform proposal, highlighting the need to easily repatriate profits from Puerto Rico to incentivize investment on the island. Professor Verret discussed potential reform options including Jones Act and federal minimum wage exemptions.

The most interesting tidbits of the day may have been comments made by Bill Cooper, who noted in his opening remarks that PROMESA was drafted with the two goals of restoring fiscal responsibility on the island and allowing Puerto Rico to regain access to the markets. In his words, the debt restructuring provisions of the bill received “undo focus” because PROMESA is “not a debt restructuring bill.”

This strikes me as noteworthy for a couple of reasons. Firstly, because, as Cooper alluded to, the bill has been discussed almost exclusively as a debt restructuring vehicle by nearly every party involved in this process over the last year. Secondly, because it suggests to me that the drafters did not envision the board being overly involved in any potential restructuring process.

Rather, it seems to indicate that the board’s main goal and focus will be to force the Commonwealth to adopt a fiscal plan that, in the board’s view, restores fiscal responsibility and facilitates access to the markets. This makes the next batch of numbers released by the Commonwealth all the more important since, as long as they comport with those two goals, it doesn’t seem that Cooper envisions the board subjecting too many parties to an all-out bankruptcy.  Any debt restructuring that does come with the plan will presumably be of lesser concern to the board so long as it complies with the rules set forth in PROMESA, which stipulates that the bankruptcy proceedings must comply with the relative priorities established in Puerto Rican law. That would put much of the onus for deciding who and what gets restructured on our own government.

Cooper also responded to a reporter’s question the rampant rumors that he is being considered for the board’s executive director seat (something that makes his comments all the more interesting) by saying that, while he has seen his name thrown around by some observers, any such speculation is premature given that the board has not yet elected its chairperson. That election is the first item on the agenda of the board’s first meeting in New York this Friday, and the first item on a long to-do list for the board over the next several months to come.

As has been reported in the media, Governor Garcia Padilla has announced that Richard Ravitch will be his representative as “ex-officio” member of the control board.

This is a move baffling for several reasons, not least of which is Governor Garcia Padilla’s choice of a non-Puerto Rican to represent the Governor of Puerto Rico on the board. But the biggest problem, as I have noted on more than one occasion, are the deep and well documented conflicts of interest that Ravitch has through his role as an adviser to the Garcia Padilla Administration.

He also faced a significant conflict as a member of the board of directors of a bond insurance company, Build America Mutual, which stands to gain from the demise of their competitors that have insured Puerto Rican bonds. No doubt anticipating outcry over this conflict, Ravitch resigned from this board seat yesterday, but this does not ultimately change my opinion that he is a counterproductive board appointment.

Given Ravitch’s clear conflicts of interest, it is difficult to view this appointment as anything other than purposefully antagonistic to creditors.  It also reflects governor’s profound lack of seriousness in solving our crisis and returning the island to growth.

Though much of my time at Control Board Watch has focused on the control board candidates, longtime readers of my work will know that I enjoy covering various legal developments, from the Recovery Act to the Wal-Mart decision, on my original MuddLaw blog.  Because there are so many lawsuits being filed in relation to PROMESA and the control board, I plan to carry some of that work over into the CBW space, and will start by examining Judge Francisco Besosa’s significant ruling from last week in the Lex Claims v. Garcia Padilla case.

On Friday, Judge Besosa ruled that legal stay did not apply to the Lex Claims litigation, which has been brought by plaintiffs comprised of General Obligation bondholders. In the complaint, plaintiffs argue that Governor Garcia Padilla has broken the law in making several budget appropriations which violate the protections given to their bonds in the newly-passed PROMESA legislation.

While Judge Besosa’s ruling that the stay does not apply is not a ruling on the merits of this case, it is a clear and significant signal that he believes the case has merit – and that he thinks there is, in fact, a chance that the governor has violated the newly-enacted federal law.

The ruling comes no less than two days after President Obama appointed the 7 board members, and presents a new dynamic for the Board to grapple with before it is fully functional and staffed.

Judge Besosa stated in his short opinion:

Section 405(b)(1) of PROMESA stays two types of suits. First, it stays judicial actions “against the Government of Puerto Rico that w[ere] or could have been commenced before the enactment of [PROMESA].” PROMESA § 405(b)(1), 48 U.S.C.A. § 2194(b)(1). Plaintiffs commenced this action by filing a complaint on July 20, 2016, (Docket No. 1), after PROMESA was enacted on June 30, 2016. In their amended complaint, plaintiffs seek a declaration that measures taken by the Commonwealth of Puerto Rico after PROMESA’s enactment violate sections 204(c)(3) and 207 of PROMESA. (Docket No. 25 at pp. 22-28.) They also seek an injunction enjoining the Commonwealth defendants from enforcing these measures until the PROMESA Financial Oversight and Management Board determines their propriety. Id. Plaintiffs could not have commenced this lawsuit before PROMESA’s enactment because their claims are to enforce provisions of PROMESA by challenging conduct that occurred after PROMESA’s enactment. Accordingly, this case does not fall into the first type of suit stayed pursuant to section 405(b)(1) of PROMESA.

The second type of suit stayed by section 405(b)(1) of PROMESA are judicial actions “to recover a Liability Claim against the Government of Puerto Rico that arose before the enactment of [PROMESA].” PROMESA § 405(b)(1), 48 U.S.C.A. § 2194(b)(1). “Liability Claim” means, “as it relates to a Liability,” “right to payment” or “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.” Id. § 405(a)(2). In their amended complaint, plaintiffs expressly state that their lawsuit “does not seek to compel payment on Plaintiffs’ bonds.” (Docket No. 25 at p. 5.) Rather, plaintiffs seek only declaratory and injunctive relief. Id. at pp. 22-28. Although plaintiffs request in their amended complaint an “order awarding . . . costs and attorneys’ fees, as authorized under 42 U.S.C. § 1983,” (Docket No. 25 at p. 28), the right to payment of costs and attorneys’ fees in this action did not arise before PROMESA’s enactment because plaintiffs brought this action after PROMESA’s enactment. Thus, plaintiffs do not seek to recover a right to payment that arose before PROMESA’s enactment. Accordingly, this case does not fall into the second type of suit stayed pursuant to section 405(b)(1) of PROMESA.

Again, while this does not dispose of the complaint’s principal issue, it is a clear sign that Judge Besosa believes that the case is worthwhile and, from my own review of the complaint, I can say that I agree. In fact, I believe Judge Besosa will ultimately rule against the government.

Defendants filed their motion to dismiss on September 2 and plaintiffs will have until September 30 to oppose.