Moratorium Law

The Assured-Ambac Decision, the Stay, and the Oversight Board

On October 4, 2016, Judge Besosa issued an important ruling in two almost forgotten bond cases (Assured/Ambac). In these cases, the Government had not claimed, as it could, that they were covered by the PROMESA stay. Apparently, it relied on its claims that the cases were barred by the 11th Amendment and that plaintiffs had no claims pursuant to the US Constitution and section 903 of the Bankruptcy Code. Judge Besosa denied the 11th Amendment defense, which prohibits suing a state (including PR) in federal court for collection of monies. Since these cases request prospective injunctive relief, that is the exception to the 11th Amendment and Ex Parte Young. As to the rest of the claims, Judge Besosa at pages 21-22 stated:


“While Circular Letter 1300-15-16 created by the Working Group may change the payment priority structure established in the OMB Act by removing express mention of contractual and credit safeguarding obligations from the language of the second priority, see Civ. No. 16-1095, Docket No. 31-3 at pp. 7-8, it does not create a composition. Decreasing the priority of payment does not reduce or abate the obligation. The full amount is still due to the bondholder. Changing the payment priority structure, however, while not preempted by Section 903, may still constitute a violation of the Equal Protection, Due Process, Takings, and Contracts Clauses as asserted by plaintiffs.”


In other words, section 903 of the Bankruptcy Code does not preempt the Moratorium law but it may be unconstitutional pursuant to the U.S. Constitution. Several of the cases that have been filed post PROMESA claim that the Moratorium Act violates section 303, which is nothing more than a verbatim copy of section 903. Therefore, it could be that the Judge may determine that the Moratorium Act is unconstitutional but not preempted.


Also, the parties in the 4 cases in which there was a hearing for the lifting of the stay filed their post-hearing memorandums on October 7. They had two main arguments which sedge into this. Brigade and National strongly argued that the Moratoriums Act frustrated the stay’s purpose of consensual restructuring by creating uncertainty as to the legal priorities of the bonds. On the other hand, U.S. Bank Trust and National insisted that there was cause of the lifting of the stay since the 5th Amendment required that they receive adequate protection, which meant the enforcement of their liens. As I stated during my telephone conference on the cases, I believe the Judge will lift the stay on at least one, but probably two of the cases and rule on the constitutionality of the Moratorium Act, which is also an issue on the Assured/Ambac cases.


Also, the Financial Oversight Board’s request for a 14-day extension (in reality a plea that the Judge not decide the issues yet) to determine whether it will intervene and what position it would take. Since I believe it is unlikely Judge Besosa will rule on these issues before the end of October, he will probably grant the Board the extension and order any objections to it be filed shortly thereafter.


Finally, in the Assured/Ambac decision, there is something most reporters have missed. Judge Besosa quickly made clear at page 4 that “[i]n cases of an unbalanced budget, the Commonwealth Constitution establishes a priority system detailing in what order appropriations will be paid. P.R. Const Art. VI § 8. First priority is assigned to ‘interest on the public debt and amortization thereof.’” The PR Government has maintained that due to its “police power”, the first priority of payment is essential services and not the debt. This could be the harbinger of Judge Besosa’s position on these issues. We will soon find out.





As we know, there are several bond insurers and other bondholders who have sued PR in Federal Court challenging the constitutionality of the island’s Moratorium law and several of Governor García Padilla’s executive orders, which are being presided by Judge Francisco Besosa. These cases are:


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. There is no prayer for money payment;


National Public Finance Guarantee Corporation v. García Padilla, 16-2101. The complaint seeks to declare the Moratorium law unconstitutional. National filed for summary judgment the after the Supreme Court affirmed the invalidation of the PR Recovery Act in Franklin California v. Commonwealth. There is no prayer for money payment;


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


Lex Claims LLC v. García Padilla, 16-2374. Plaintiffs are a group of GO bondholders that claim, among other things, that PR violated section 204(c)(3) of PROMESA and although claim that the PROMESA stay does not apply to them, they also see the lifting of the stay. There is no prayer for money payment;


Assured Guarantee Corp. v. García Padilla, 16-2384. Plaintiffs filed a request under section 405 of PROMESA for the lifting of the stay. Its tendered complaint has a cause of action for damages pursuant to section 407(a) of PROMESA, which is probably why they sought the lifting of the stay before filing.


All these cases are presided by Judge Besosa and it is a good idea that all the cases be decided by one judge, since that way the issue of to what cases the stay applies will have one uniform treatment. Already Judge Besosa has consolidated the first three cases as to the application of the PROMESA stay. Likely there will be a decision by August. What many in the press do not realize is that the PROMESA stay does not work like the stay in Bankruptcy (11 U.S.C. § 362). If within 45-days of the filing of the request for the lifting of the stay the parties have to be notified and the Judge has to hold an evidentiary hearing and determine whether to maintain the stay. If this is not done within the 45-day period, the stay is lifted. Hence, the stay is the exception, not the rule in PROMESA. See, section 405(f) of PROMESA.


Moreover, having one judge decide these issues will help the First Circuit to handle any appeals, since pursuant to section 106(d) of PROMESA, they must be handled in an expedited form. This way, all parties will have a fast, clear and efficient way to handle these issues.


There is one case dealing with the stay (except for the complaint filed by Ambac where it has acquiesced to the stay against the PR Highway Transportation Authority), which is not before Judge Besosa, to wit, Peajes Investment LLC v. García Padilla, 16-2365. Plaintiffs are beneficial holders of Capital Appreciation Bonds of the PR Highway Transportation Authority seeking to invalidate the Moratorium law and several Executive Orders of the Governor. There is prayer damages pursuant to section 407 and also for funds to be transferred to the Trustee for payment of bonds. This is probably the reason why this case is not before Judge Besosa. Judge Aida Delgado has the case and ordered defendants to answer the petition within 14 days of being served and it expires on August 5, 2016.












Assured Guarantee Corp. and Assured Guarantee Municipal Corp., which together insure around $1.2 billion of the PR Highway Authority’s (PRHTA) bonds, filed on July 21, 2016, an emergency motion for relief of the PROMESA stay of section 405. They seek the lifting of the stay for Governor García Padilla, pursuant to the PR Moratorium law has allowed the PRHTA to divert pledged toll revenues, taxes from gasoline diesel, crude oil and others, as well as motor vehicle license fees, to pay operating expenses that are subordinate to its bonds and fund “essential services” that include payments of debts to the GDB.


The petition claims, quite correctly in my opinion, that the PR Moratorium law is preempted by 11 U.S.C. § 903. It also claims that Section 303 of PROMESA preempts the Moratorium law and the Governor’s executive orders. In addition, Assured avers that the Moratoriums law and the Governor’s executive orders violate the Constitutional prohibition against impairment of contractual rights, that they constitute a taking without just compensation, is a denial of the right to access federal courts, as well as the PR Constitution and laws. Additionally, Assured avers that Moratoriums law and the Governor’s executive orders violate sections 204(c)(3)(A) and 407 of PROMESA. This is similar to what the complaints by Brigade, Lex Claims LLC, y Peaje Inv. See here, here, and here.


As I predicted in a recent Forum on PROMESA, Assured and other plaintiffs seek the lifting of the PROMESA stay using Bankruptcy Code precedents, specifically cases interpreting 11 U.S.C. § 362. In my own bankruptcy practice, I have performed this procedure half a dozen times and have yet to fail in obtaining the remedy of lifting the stay. In PROMESA, it seems to be easier since section 405(f) of PROMESA states that if after 45-days of the petition for the lifting of the stay, the Court has not ruled for it to remain, the stay is automatically lifted. Hence, no later than September 5, 2016, Assured’s request has to be denied or the stay is lifted. Although the case has been assigned to Judge Jay García Gregory, he has been recusing himself of other PR bond cases and the case may end up assigned to Judge Besosa who already has 3 others challenging the PR Moratorium Law. I believe that Judge Besosa will rule on these motions by August of 2016.


Assured also claims that it does not need to seek the lifting of the stay but if one examines the tendered complaint, one sees that it seeks damages pursuant to section 407 of PROMESA. That request is the reason I believe Assured did not directly file the complaint but instead sought the lifting of the stay. As I said, Judge Besosa will probably have this case assigned to him and will rule on these issues promptly, probably by August of 2016. We will soon find out.