Yesterday, the Government of PR asked for a stay of proceedings pursuant to PROMESA in Ambac vs. the PR Highway & Transportation Authority. This is the first test of PROMESA. If PR wins, this could severely restrain cases from challenging unconstitutional laws and actions by the PR Government against bondholders, both local and stateside.

 

Upon the enactment of PROMESA, section 405 establishes a stay of proceedings of cases against Puerto Rico filed after December 18, 2015. At this time, there are 6 cases in the Federal District Court for the District of Puerto Rico against the government of the island related to default on several bonds and one in the Federal District Court Southern District of New York. These cases are:

 

Assured Guarantee, Corp. v. García Padilla, 16-1037. The complaint seeks declaratory judgment that the Governor’s executive orders for the clawback at the beginning of 2016 of funds to pay several of the bonds insured by plaintiff were contrary to the U.S. Constitution and to prevent any future action of this nature. There is no prayer for money payment;

 

Financial Guarantee Insurance Company v. García Padilla, 16-1095. The complaint by a bond insurer is similar to the previous, but goes further seeking to declare that the PR Constitution Debt Priority provision, the law of Office and Management and the Executive Orders on the clawback are preempted by the Bankruptcy Code and the latter unconstitutional pursuant to the US Constitution. There is no prayer for money payment. These two cases are consolidated;

 

Brigade Leveraged Capital Structures Fund, Ltd. v. García Padilla, 16-1610. Plaintiff, a group of GDB bondholders, claim that the PR Moratorium Act, the new GDB liquidation procedure and the Governor’s Executive Orders are unconstitutional and also preempted by the Bankruptcy Code. Also, Brigade filed a motion seeking a recognition that its case was not stayed under PROMESA and in the alternative, that the stay be lifted. More on this later. There is no prayer for money payment;

 

Ambac Assurance Corporation v. Puerto Rico Highway and Transportation Authority, 16-1893. This case has the potential of stopping cold any cases challenging PR’s unconstitutional acts and omissions in reference to bonds and other Government obligations. In the amended complaint, Ambac, a bond insurer, seeks information on the agency’s financial situation, an injunction against proceeds that go to the agency from being used for something else, the naming of a receiver to administer the agency and an injunction against the agency “from committing any further breaches of fiduciary or contractual duties owed to Plaintiff.” There is no specific prayer for money payment. In this case, the Government of PR has asked for a stay of proceedings pursuant to PROMESA. Judge Pedro Delgado has ordered all other proceedings stayed and Ambac has to file its opposition by July 11, replies and sur-replies five days later. Judge Delgado will probably rule quickly;

 

National Public Finance Guarantee Corporation v. García Padilla, 16-2101. The complaint seeks to declare the Moratorium law unconstitutional. National filed for summary judgment after the Supreme Court affirmed the invalidation of the PR Recovery Act in Franklin California v. Commonwealth. Judge Besosa (the presiding Judge in the Franklin case and who declared the Recovery Act preempted) ordered defendants to answer the motion by July 11, reply by July 18 and no further motions are allowed. My impression is that the Judge will rule by August, probably in favor of plaintiff. There is no prayer for money payment;

 

Trigo v. García Padilla,16-2257. Plaintiffs, a group of PR bondholders, filed a complaint on July 1, claiming that the Moratorium law and the new GDB liquidation process violates the PR and US Constitutions. There is no prayer for money payment;

 

Jacana Holdings v. Commonwealth of Puerto Rico, 16-4702. This complaint filed in NY’s southern district, claims that the Moratorium law cannot change NY law since the bonds plaintiffs hold are from the 2014 issue and are ruled by that jurisdictions statutes. It also claims that the Moratorium law violates parts of the US Constitution. There is no prayer for money payment.

 

As we can see, these cases seek various equitable relief but no specific monetary payment for PR’s default. The question is, then, are these cases stayed by PROMESA?

 

Section 405(b) of PROMESA calls for a stay of :

 

“(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the Government of Puerto Rico that was or could have been commenced before the enactment of this Act, or to recover a Liability Claim against the Government of Puerto Rico that arose before the enactment of this Act;

(2) the enforcement, against the Government of Puerto Rico or against property of the Government of Puerto Rico, of a judgment obtained before the enactment of this Act;

(3) any act to obtain possession of property of the Government of Puerto Rico or of property from the Government of Puerto Rico or to exercise control over property of the Government of Puerto Rico;

(4) any act to create, perfect, or enforce any lien against property of the Government of Puerto Rico;

(5) any act to create, perfect, or enforce against property of the Government of Puerto Rico any lien to the extent that such lien secures a Liability Claim that arose before the enactment of this Act;

(6) any act to collect, assess, or recover a Liability Claim against the Government of Puerto Rico that arose before the enactment of this Act; and

(7) the setoff of any debt owing to the Government of Puerto Rico that arose before the enactment of this Act against any Liability Claim against the Government of Puerto Rico.”

 

Section 405(a)(2) of PROMESA defines a liability claim as:

 

“The term ‘‘Liability Claim’’ means, as it relates to a Liability—

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.”

 

Hence, any complaint that seeks payment of moneys is stayed until February 15, 2016 but could be extended for no more than 75 more days, see section 405(d). Of the aforementioned cases, the only one to which the stay could apply is to 16-1893, because Ambac seeks “from committing any further breaches of fiduciary or contractual duties owed to Plaintiff” and a receiver for the Highway Authority. This can very well be considered in violation of section 405(a)(2)(B). None of the other cases seeks any relief that could be considered in violation section 405(b). Even if the stay applied to all the cases, however, our inquiry would not end there.

 

The stay may be lifted pursuant to section 405(e) and (f). The jurisdiction for the lifting of the stay (although it should say venue, no jurisdiction) is in the Federal District Court for the District of PR. The stay must be lifted after a “notice and hearing” and for “cause shown.” Those familiar with Bankruptcy court recognize the familiar wording. This means that all parties must be notified and movant must show cause, as per 11 U.S.C. § 362. The examination of Federal Bankruptcy Rule 4001, although this is not a bankruptcy proceeding will also help. The stay will expire if after 45-days after the request for the lifting unless the Court, after a notice and hearing, decides to maintain the stay. In other words, the Court must hold the hearing and decide within 45-days or the stay is lifted. See section 405(f). In addition, the stay may be lifted with or without a hearing if movant shows that it will suffer irreparable damage due to the stay, see section 405(g).

 

Moreover, the fact that there is a stay does not mean PR is excused from paying its debts. Section 405(l) states:

 

“Nothing in this section shall be construed to prohibit the Government of Puerto Rico from making any payment on any Liability when such payment becomes due during the term of the stay, and to the extent the Oversight Board, in its sole discretion, determines it is feasible, the Government of Puerto Rico shall make interest payments on outstanding indebtedness when such payments become due during the length of the stay.”

 

Hence, the July 1, 2016, PR’s default on GO’s was intentional and not protected by PROMESA.

 

In synthesis, the stay provision in PROMESA will probably not stop the complaints already filed or those to be filed as long as they do not seek payment of bonds. If a declaration of laws and actions by PR being contrary to the Constitution is claimed, it will probably not be stayed since there would not be any claim for payment due to default. A good example is a case against the Moratorium Law, which would still be in effect after the PROMESA stay expires. Even if a complaint for payment of moneys is filed, this will not prevent a plaintiff from seeking the lifting of the stay by showing cause as it is done in hundreds of bankruptcy cases each year. Hence, if the Court in the Ambac case were inclined to decide that the stay applies to the lawsuit, it could then, after notice and a hearing and for cause shown, lift said stay and continue the litigation. The devil is indeed in the details.