Holders of defaulted debt issued by Puerto Rico’s instrumentalities again failed to persuade District Judge Francisco A. Besosa that they should be allowed to sue the island commonwealth. The opinion seems designed to encourage negotiations in light of the incipient municipal debt adjustment under the newly adopted Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA.
In his newest opinion on Nov. 15, San Juan’s Judge Besosa called a halt to lawsuits challenging the constitutionality of Puerto Rico’s debt-payment moratorium. Having previously declined to modify PROMESA’s automatic stay on other grounds, this time he rejected different theories advanced by bondholders for gaining access to their liquid collateral.
In April, Puerto Rico adopted the so-called Moratorium Act, authorizing the declaration of a state of emergency and the suspension of payments on some public debt until Jan. 31, 2017.
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 to compromise the debt of its units. In response, the President signed PROMESA into law on June 30.
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.
In his new opinion, Judge Besosa dealt with motions by bondholders for modification of PROMESA’s automatic stay that would allow suing for a declaration that the Moratorium Act violates the Takings and Contract Clauses of the U.S. Constitution. Bondholders also wanted a court to rule that the Moratorium Act violated the Supremacy Clause by virtue of Section 903 of the Bankruptcy Code.
In addition, bondholders demanded adequate protection for the loss of access to their liquid collateral, since Puerto Rico has cut off debt service for the time being.
Much of the new opinion covers the same ground as the prior ruling on Nov. 2, where Judge Besosa likened PROMESA’s automatic stay to Section 362. In the new opinion, he decided there was no “cause” to modify PROMESA’s automatic stay by allowing constitutional challenges to the Moratorium Act. For ABI’s discussion of the prior opinion, click here.
Raising constitutional claims, Judge Besosa said, does not entitle bondholders to “circumvent” the automatic stay. They still must show how harm from violation of their constitutional rights outweighs detriment to the commonwealth were the stay to be modified.
Loss of income from collateral represents “monetary damage” that is quantifiable and can ultimately be remedied in “future” restructuring proceedings under PROMESA, Judge Besosa said.
On the other hand, Judge Besosa said, Puerto Rico would sustain “serious prejudice” from a “massive ‘wave of litigation’” that would ensue if he were to permit more than a dozen lawsuits pursuing relief “outside the PROMESA process.” The judge did not want to undermine “the comprehensive, consolidated restructuring approach that [PROMESA] was ultimately designed to facilitate.”
Judge Besosa also invoked the doctrine of “constitutional avoidance” to deny modification of the automatic stay. The constitutional questions regarding the Moratorium Act, he said, may become moot through a PROMESA restructuring.
On the question of adequate protection resulting from lack of access to liquid collateral, Judge Besosa ruled that any lost income will be recouped eventually, under the same theory employed in his Nov. 2 opinion.