The Supreme Court ruled in June that Puerto Rico’s instrumentalities are ineligible for municipal debt adjustment under chapter 9 of the Bankruptcy Code and that the island commonwealth cannot adopt local laws dealing with the insolvencies of its units, such as municipal power and water companies.
At the end of June, Congress adopted the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, to afford the island some ability to deal with its crushing debt burden. District Judge Francisco A. Besosa of San Juan authored the first decision on PROMESA’s automatic stay.
Bondholders and bond insurers filed lawsuits attacking the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act that the island enacted in April to ensure its ability to continue providing essential services. They allege that the moratorium act substantially impairs their rights and thus violated the Contract, Takings, and Commerce Clauses of the federal Constitution. They also contend that the act is preempted by Section 903 of the Bankruptcy Code and violated the Constitution by barring judicial review of suits seeking to uphold constitutional rights.
In his opinion on Aug. 22, Judge Besosa held that PROMESA stays the suit. He will nonetheless hold a hearing to decide whether there are grounds to modify the stay for “cause.”
PROMESA creates an Oversight Board with power to initiate a debt adjustment proceeding under title III of PROMESA. Until Feb. 17, 2017, or the commencement of a debt adjustment proceeding, whichever is sooner, Section 405 of PROMESA imposes an automatic stay of any proceedings against the Puerto Rico government “to recover a Liability Claim.” In turn, Liability is defined as “financial indebtedness for borrowed money, including rights, entitlements, or obligations whether” they arise from “contract, statute or any other source of law.”
The bondholders argued that their lawsuits attacking the constitutionality of the moratorium act were not subject to the automatic stay because they do not relate to a Liability. Judge Besosa disagreed.
The stay applies, he said, because the suit relates to rights and entitlements that are related to bonds issued by the island government.
It was a closer question on the issue related to the Supreme Court’s 1974 decision in Johnson v. Robinson, which, the bondholders argued, invalidates statutes that restrict access to judicial review.
Judge Besosa said that PROMESA is not proscribed by Johnson and its progeny because the automatic stay “does not bar judicial review” of constitutional claims since the court can modify the stay. The judge therefore called for a hearing to decide whether there is “cause” to modify the stay.