Puerto Rico Oversight Law Puts Creditor’s Lawsuits on Hold

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By Diane Davis

Aug. 24 — The law recently passed by Congress to deal with Puerto Rico’s fiscal crisis stays lawsuits against the commonwealth challenging the constitutionality of its Moratorium Act, which gives the Puerto Rico Government the “tools” it needs “to continue providing essential services to the people” of Puerto Rico in light of the government's dire fiscal situation ( Brigade Leveraged Capital Structures Fund Ltd. v. Garcia-Padilla, 2016 BL 271807, D.P.R., No. 16-1610 (FAB), 8/22/16 ).

Judge Francisco A. Besosa of the U.S. District Court for the District of Puerto Rico Aug. 22 concluded that the plaintiffs' actions are stayed, but will hold a hearing to determine whether there is cause to grant them relief from the stay as required by the statute.

Congress enacted PROMESA June 30, to address the fiscal emergency in Puerto Rico. Section 405 of PROMESA provides for an automatic stay of certain actions against the Government of Puerto Rico upon PROMESA's enactment. The stay gives the Government of Puerto Rico a limited period of time to focus its resources on negotiating a voluntary resolution with its creditors instead of defending numerous creditor lawsuits.

The automatic stay remains in effect until the earlier of Feb. 15, 2017, with a possible extension of 60 or 75 days, or the date on which the Oversight Board files a petition on behalf of the Government of Puerto Rico or any of its instrumentalities to commence debt-adjustment proceedings under PROMESA. Under Section 405(e), however, a “party in interest” may seek relief from the stay “for cause shown.”

After three separate plaintiffs brought actions against the Commonwealth of Puerto Rico alleging that they were stripped of their contractual and property rights, the Commonwealth asked the court to stay the actions under Section 405(b)(1) of PROMESA.

The plaintiffs argued that their claims are not “with respect to a Liability” because they arise out of the United States and Puerto Rico's constitutions, not out of bonds that they own or insure. According to the plaintiffs, they own or insure bonds issued by the Government of Puerto Rico before June 30, and Puerto Rico's Moratorium Act, which was enacted April 6, “impairs contractual rights related to those bonds and effects a taking without just compensation of property interests related to the bonds.”

Falls Within Scope of PROMESA

The plaintiffs' consolidated actions fall squarely within the scope of cases automatically stayed under Section 405(b)(1) of PROMESA, the court concluded.

Without the plaintiffs' allegations that the Moratorium Act impairs and effects a taking of rights and entitlements related to the bonds that they own or insure, plaintiffs have no standing to bring these claims, the court said. Thus, the plaintiffs' claims are about, concern, relate to, and are “with respect to” “rights” and “entitlements” “related to” bonds issued by the Government of Puerto Rico, the court said.

The PROMESA stay provision doesn't bar judicial review, the court said, because it gives the district court the power to grant parties relief from the stay and to review their claims “for cause shown” or “to prevent irreparable damage.”

PROMESA's stay provision doesn't raise constitutional concerns because it doesn't “foreclose, deny, or restrict judicial review of constitutional claims,” the court said.

Benjamin S. Kaminetzky, Brian M. Resnick, David Toscano, Donald S. Bernstein, Marc J. Tobak of Davis Polk & Wardwell, LLP, New York, N.Y.; Harold D. Vicente-Colon, Vicente & Cuebas, San Juan, PR, Harold D. Vicente-Gonzalez, Vicente & Cuebas, San Juan, PR, represented plaintiffs Brigade Leveraged Capital Structures Fund Ltd.; Jose L. Ramirez-Coll, Salvador Antonetti-Zequeira, Antonetti Montalvo & Ramirez-Coll, San Juan, PR, Michael F. Williams, Peter A. Farrell, Kirkland & Ellis LLP, Washington, D.C., represented defendant Alejandro J. Garcia-Padilla.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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