Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Nov. 17 — Four consolidated lawsuits brought by investors, bondholders, insurers, and a bank against the Commonwealth of Puerto Rico for alleged violations of Puerto Rico law will remain on hold and not be allowed to proceed Brigade Leveraged Capital Structures Fund Ltd. v. García-Padilla , 2016 BL 380129, D.P.R., No. 16-2510 (FAB), 11/15/16 ).
Judge Francisco A. Besosa of the U.S. District Court for the District of Puerto Rico Nov. 15 concluded that the plaintiffs didn’t show that there was sufficient “cause” to vacate the automatic stay of PROMESA — legislation signed into law June 30, 2016, to address Puerto Rico’s dire fiscal emergency.
The court also denied the request of the Financial Oversight and Management Board for Puerto Rico (Oversight Board) to intervene in the consolidated cases on procedural grounds. The seven-member Oversight Board was established under PROMESA to provide a method for Puerto Rico to achieve fiscal responsibility and access to capital markets.
Because the Oversight Board failed to take a position on the merits of the case, the court denied intervention for failure to follow the requirements of Federal Rule of Civil Procedure 24(c).
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 that were brought under the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (Moratorium Act).
Although Section 405 was patterned on the automatic stay provision of Section 362 of the Bankruptcy Code, neither PROMESA nor the Code define “cause” and leave it up to the discretion of the courts to determine.
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), a “party in interest” may seek relief from the stay “for cause shown.”
The plaintiffs in all four cases argued that they would suffer “serious constitutional injury” if the automatic stay wasn’t vacated to allow their claims to go forward.
The harm to the plaintiffs in preventing their constitutional claims from going forward didn’t outweigh the likely harm that vacating the stay would cause to the “Commonwealth defendants and the PROMESA process,” the court said.
The court was “sensitive” to the possibility of starting a “massive ‘wave of litigation’ by other creditors,” but determined that monetary damages incurred by the plaintiffs during the stay could be quantified and the damages weren’t “irreparable.”
In its analysis, the court first looked to judicial interpretations of “cause” under Section 362, focusing on the balancing of harms at stake. The court also considered the overarching purposes for which PROMESA was enacted, noting that “PROMESA’s automatic stay was ultimately intended to ‘benefit the lives of 3.5 million American citizens living in Puerto Rico.’”
With the additional “breathing room” given by the automatic stay, the court urged the Commonwealth defendants to continue with the voluntary negotiation process. It is the Commonwealth’s “only realistic pathway forward,” the court said.
Davis Polk & Wardwell, LLP, New York, N.Y.; Vicente & Cuebas, San Juan, PR, represented plaintiffs Brigade Leveraged Capital Structures Fund Ltd., Brigade Distressed Value Master Fund Ltd., Tasman Fund LP, Claren Road Credit Master Fund, Ltd., Claren Road Credit Opportunities Master Fund, Ltd., Fore Multi Strategy Master Fund, Ltd., Sola Ltd, Ultra Master Ltd, Solus Opportunities Fund 5 LP.
Robinson McDonald & Canna LLP, New York, N.Y.; Davis Polk & Wardwell, LLP, New York, N.Y.; Vicente & Cuebas, San Juan, PR; represented plaintiffs Fir Tree Value Master Fund, L.P., Fir Tree Special Opportunities Fund V, LP, Fir Tree Capital Opportunity Master Fund, L.P., Fir Tree Special Opportunities Fund IV, LP.
Antonetti Montalvo & Ramirez-Coll, San Juan, PR; Kirkland & Ellis LLP, Washington, D.C., represented defendants Alejandro J. Garcia-Padilla, in his official capacity as Governor of Puerto Rico, Juan C. Zaragoza-Gomez, in his official capacity as Secretary of the Puerto Rico Department of the Treasury.
To contact the reporter on this story: Diane Davis in Washington, D.C. at DDavis@bna.com
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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