District Judge Francisco A. Besosa of San Juan handed down another opinion defining the contours of the automatic stay that Congress included in the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA.
Judge Besosa’s opinion on Nov. 2 explores the differences between the automatic stays in PROMESA and Bankruptcy Code Section 362.
Congress adopted PROMESA after 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.
PROMESA affords the island some ability to deal with what Judge Besosa called a “dire fiscal emergency.” Section 405(m)(4) of PROMESA includes an automatic stay that lasts until Feb. 17, 2017, or the commencement of a debt adjustment proceeding, whichever is sooner. It enjoins any proceedings against the Puerto Rico government “to recover a Liability Claim,” defined to mean “financial indebtedness for borrowed money, including rights, entitlements, or obligations whether” they arise from “contract, statute or any other source of law.”
Several bondholders and a bond insurer sought modification of the automatic stay “for cause,” one of the grounds in PROMESA for modifying the stay.
Given the “appreciable similarities” between Section 362 and PROMESA’s Section 405, Judge Besosa said that lifting the stay for “cause” is “largely discretionary” and entails “an equitable, case-by-case balancing of the equities.” He said the court must “assess the hardships realistically borne by the plaintiffs if their requested relief is denied and determine whether those outweigh the harm likely to be visited upon the Commonwealth.”
The bondholders seeking to modify the stay argued there was a lack of “adequate protection” because Puerto Rico was diverting revenue that made up part of their collateral.
Puerto Rico argued that a lack of adequate protection is not a reason for modifying the stay because PROMESA, unlike Section 362, does not list lack of adequate protection as grounds for lifting the stay.
Judge Besosa rejected Puerto Rico’s contention, saying that Congress was not required to list adequate protection as a statutory basis for modifying the stay “because the concept of ‘adequate protection’ has constitutional roots, not just statutory ones.”
He went on to say that “cause” under PROMESA “need not precisely mirror that adopted in the bankruptcy context” because Congress’ motives in adopting the Act “have no counterpart in Section 362 of the Bankruptcy Code.”
On the merits, Judge Besosa denied the bondholders’ motions, saying that their revenue collateral is being “constantly replaced.” Even though they “will not receive pledged revenues during the stay period,” he said they do not need adequate protection because they only face “a delay in recouping such funds, not a permanent loss of them.”
Judge Besosa dismissed the bond insurer’s motion, saying it lacked Article III standing because the underlying bonds will be paid while the automatic stay is outstanding. Since the “bondholders will not miss a single payment,” he held that the bond insurer “will not suffer any ‘injury in fact’” during the pendency of the stay, resulting in the lack of Article III standing, which requires the existence of a case or controversy.
In late August, Judge Besosa held that a lawsuit challenging the constitutionality of PROMESA was enjoined by the automatic stay. To read ABI’s discussion of the August decision, click here.