Judge Besosa rules in favor of Promesa stay on litigation

A painting in the likeness of Judge Francisco Besosa is seen in this screenshot of www.prd.uscourts.gov

A painting in the likeness of Judge Francisco Besosa is seen in this screenshot of www.prd.uscourts.gov.

SAN JUAN – U.S. Federal Judge Francisco Besosa declined Wednesday night to lift the automatic stay imposed by Promesa in three consolidated cases, yielding a major victory to the commonwealth in its efforts to get breathing space to restructure its debt.

Besosa, however, told the government that the stay is temporary and that it shouldn’t waste the time provided by the court’s decision.

“After years of efforts to procure tools for Puerto Rico’s economic recovery, as well as responsibly addressing our fiscal crisis and the public debt left to us by other governments, I am very pleased that the federal court has validated our claims in order to maintain public services,” Gov. Alejandro García Padilla said in a written statement Wednesday evening following the ruling.

“It’s now the fiscal plan presented by my administration’s turn so we can put forth an orderly debt restructuring, within the framework established by Promesa, and quickly achieve economic recovery in Puerto Rico. During this process, we will continue to be guided by the principles of public policy we outlined to avoid austerity measures that continue to affect our economy, to be able to protect the jobs of our public servants, our retirees, the University of Puerto Rico, and our most vulnerable populations.”

Besosa said the plaintiff, Assured Guaranty Corp., a monoline insurer that sought to annul the governor’s executive order diverting toll revenue pledged to support payment of bonds issued by the Puerto Rico Highways and Transportation Authority (HTA), lacks standing to seek relief from Promesa’s stay because it failed to show “injury in fact” or damages.

He then ruled that plaintiffs in Peaje Investments LLC and the plaintiffs in the Altair Global Opportunities Fund, which includes some 30 hedge funds, don’t lack adequate protection and therefore cannot carry the initial burden of showing “cause” to vacate the stay, which expires in February.

Peaje Investments, which is the the holder of more than $63 million in 1968 bonds from the HTA, had argued that the HTA had pledged toll revenues; gasoline, crude oil and diesel taxes; annual motor vehicle license fees; and investment earnings toward the payment of the bonds. However, it says Puerto Rico diverted these first to pay general obligation bonds and then to support its General Fund. The Altair plaintiffs are holders of secured bonds issued by the Employees Retirement System (ERS) who sued the government recently to have employees’ contributions put in a separate account for their benefit.  

The ruling paralyzed a hearing slated to start Thursday.

The plaintiffs in these consolidated actions didn’t dispute that Promesa’s automatic stay applied to their claims, but sought relief from the stay “for cause shown” pursuant to Section 405 of Promesa.  The Commonwealth opposed granting that relief.

The automatic stay imposed by Section 405 of Promesa isn’t absolute in nature, the judge said. Although Congress said the stay is needed to “provide the Government of Puerto Rico with the resources and the tools it needs to address an immediate existing and imminent crisis,” it also seemed to anticipate that certain circumstances might justify relief from the stay’s effects.

“The text of Promesa, however, does not indicate what, exactly, a party in interest must do to successfully establish ’cause’ for relief from the automatic stay. Rather, it leaves the task of defining the boundaries of that specific term to the discretion of the Court,” Besosa said.

Promesa also doesn’t explicitly identify “lack of adequate protection” as a ground for obtaining relief from the stay. “At first blush, that omission would seem to suggest that Congress simply did not intend for inadequate protection to justify a secured creditor’s circumvention of PROMESA’s automatic stay. Indeed, the defendants make this exact argument and entreat the Court, in interpreting the statute, to view the absence of ‘lack of adequate protection’ as a purposeful exclusion of significant consequence. The Court, however, declines to oblige the defendants on this request. Rather, it finds that Congress was not required to have included ‘lack of adequate protection’ in the statutory text in order for that particular, long-standing means of showing ’cause’ to be available to creditors in Promesa proceedings to vacate to stay,” Besosa ruled.

Before evaluating whether adequate cause to lift the stay existed in these cases, Besosa ruled that there isn’t a one-on-one relationship between the stay in Promesa and the stay in the bankruptcy code. In other words, the concept of “cause” embraced by the court for the purposes of the Promesa stay need not mirror that adopted in the bankruptcy context. To lift the the stay, the court said its decision should advance the “larger, overarching purposes” for which Promesa was enacted, which is to bring economic stability to Puerto Rico.

Besosa then ruled that Assured didn’t have standing to seek relief from the Promesa stay because it shows no “injury in fact.”

The Assured plaintiffs aren’t bondholders and therefore aren’t directly owed money by the HTA, the judge said. “Rather, they are monoline insurers that guarantee scheduled payments of interest and principal to PRHTA bondholders if and when that issuer defaults on its payment obligations. It follows, then, that the Assured plaintiffs will suffer financial harm only in the event of nonpayment by PRHTA…. The facts indicate, however, that an event of nonpayment by PRHTA will not transpire during the pendency of the Promesa stay.” 

Assured, he said, admits there are sufficient funds on deposit to satisfy the next installment of principal and interest due on the HTA bonds in January and that the executive orders issued by the governor didn’t prevent the fiscal agent from paying those funds to the HTA bondholders.

The judge also ruled that Peaje Investments and the Altair plaintiffs don’t lack adequate protection and therefore fail to show cause to lift the stay. While Besosa said a secured creditor’s lack of adequate protection in its collateral can establish the requisite cause to lift the stay, the plaintiffs failed to meet that requirement.

In arguing this lack of adequate protection, Besosa said Peaje discounts provisions of both the Puerto Rico Emergency Moratorium & Financial Rehabilitation Act and Promesa that effectively preserve its contractual security interest in HTA’s pledged revenues.

Because HTA’S  pledged revenues are constantly replenished by an ongoing stream of toll payments, Peaje Investments continues to hold a security interest in a stable, recurring source of income that will eventually provide funds for the repayment of the its bonds.

“Though it will not receive the pledged revenues during the stay period, this enduring security interest means that it faces only a delay in recouping such funds, not a permanent loss of them,” the court ruled.

A similar analysis applies to the Altair plaintiffs’ claim of inadequate protection, the judge said. Those plaintiffs hold a security interest and lien in certain pledged property, including all future employer contributions. “This lien continues indefinitely until ERS’s outstanding debt obligations have been satisfied in full,” the court said.

While the Altair plaintiffs won’t receive the benefit of the pledged property during the pendency of the stay, they will only be delayed in recovering the funds needed to repay their ERS bonds, the judge said.