Remember that recent First Circuit case which held that just compensation judgements cannot be subject to a governmental bankruptcy plan (cert denied, by the way)? There, the court concluded that “[t]he Fifth Amendment provides that if the government takes private property, it must pay just compensation. Because the prior [bankruptcy] plan proposed by the Board [the bankruptcy trustee] rejected any obligation by the Commonwealth [of Puerto Rico] to pay just compensation, the Title III [bankruptcy] court properly found that the debtor was prohibited by law from carrying out the plan as proposed.”
Well, here’s the other shoe dropping. In In re Financial Oversight & Management Board for Puerto Rico v. Cooperativa de Ahorro y Credito Abraham Rosa (Suiza Dairy Corp.), No. 22-109 (Aug. 22, 2023), the same court held that a just compensation judgment may not be subject to reduction or discharge in a subsequent bankruptcy, but that a just compensation settlement is.
Suiza Dairy and other milk producers sued the Commonwealth for, among other things, a taking. It alleged that the Commonwealth’s Milk Industry Regulation Administration‘s (yes, there is such a thing), “regulatory structure, which precluded them from making a reasonable profit in their milk business, constituted a confiscation of property in violation of the Takings Clause.” Slip op. at 9. The U.S. District Court concluded that the dairies were likely to prevail on the merits, and entered a preliminary injunction.
Eventually, the parties decided to settle. The settlement included an action component (the Administration “would ‘promulgate a new regulatory scheme[,]'” slip op. at 10), and a $171 million monetary component (the Administration would pay some cash, and consumers would pay via a new milk surcharge). The settlement described itself as a “final, absolute, binding and unappealable Judgment.” Slip op. at 11.
The district court approved the settlement and incorporated it into a consent decree. It was looking pretty good for the dairies. But it was not to last.
Three-and-a-half years later, the Commonwealth sought the protection of bankruptcy to restructure its debts. Suiza Dairy filed a creditor’s proof of claim which it described as “NON-DISCHARGEABLE REGULATORY ACCRUAL CLAIM FOR U.S. CONSTITUTION[AL] VIOLATIONS INVOLVING [THE] TAKINGS CLAUSE.” Slip op. at 12.
This was unsecured, naturally. And you know what that means. That’s right, the resulting reorganization plan did not affirm the amounts in the settlement agreement, but “treat[ed] Suiza’s claim as part of Class 53, a group of ‘Dairy Producer’ claimants that are entitled to receive, in full consideration of any allowed claim, 50% of the claim.” Id. (footnote omitted).
The Title III (District) court rejected Suiza’s objections. The claims of other property owners with takings claims against the Commonwealth – but who had not settled but who obtained just compensation judgments – were not subject to the bankruptcy plan. The district court concluded the claims should not be treated the same. The takings claims reduced to just compensation judgments could not be reduced or eliminated in bankruptcy, while the takings claims which settled could.
The First Circuit affirmed. “The Plan properly classifies Suiza’s claim as a non-takings claim.” Slip op. at 14. “Suiza relinquished any takings claim it might have had when it voluntarily entered a settlement agreement in 2013.” Slip op. at 14. In other words, the dairy traded its constitutional just compensation right for a contractual right. The former can’t be eliminated or reduced in bankruptcy, while the latter may. Settlement agreements “are voluntary surrenders of the right to have one’s day in court.” Slip op. at 15 (citation omitted).
That this was a settlement of a just compensation claim doesn’t change that. Settling the takings claim “extinguished” it. Slip op. at 16. The court rejected Suiza’s invitation to dig a bit deeper. Suiza argued that doing so would have revealed this was a just compensation settlement that that made it “special.”
Specifically, Suiza claims that, because of the “self-executing character” of the Fifth Amendment, the right to just compensation arises immediately after a taking has occurred and cannot be disturbed or nullified in any way by the government’s actions post-taking.
Slip op. at 17. The court rejected the notion that “self-executing” cases like First English and Knick mean that a just compensation claim can’t be voluntarily surrendered. “These cases say nothing about whether property owners, through agreement with the government, can extinguish their own takings claims by settling.” Slip op. at 18. “After the settlement, any takings claim that Suiza might have had against the Commonwealth was replaced by a contractual claim.” Id. (footnote omitted). Contract claims, unlike just comp claims, “can properly be impaired or discharged in bankruptcy.” Id.
The court also rejected the argument that the Board didn’t object to Suiza’s claim which characterized its claim as a “takings” claim. Check out pages 19-31 for the details of why the court concludes the error, if any, was harmless (mostly grounded in bankruptcy procedure and law, so we’re skipping it here).
Bottom line: as we’ve noted consistently, settling the case is ending the claim. Courts like to enforce these things, even when it means that you get treated like other unsecured creditors if the condemnor seeks to slough off its obligations in bankruptcy.