PEAJE DECISION HIGHLIGHTS

 

 

Today, the First Circuit decided the case of Peaje v. García Padilla. It affirmed Judge Besosa’s denial of lifting the stay in Peaje, reversed the decision in Altair and reversed him on the issue of the Board’s intervention. These are the important issues it decided.

 

  1. Burden of proof as to “cause shown” is at all times on movants, different from bankruptcy sec. 362.

 

In light of Congress’s decision not to transplant the Bankruptcy Code’s express alteration of the pre-Code burden regime into PROMESA, we hold that PROMESA, like the pre-Code regime, places the burden on creditors to establish cause, including lack of adequate protection.” Page 15

 

  1. Cause will include the depletion of a lien as it does in bankruptcy

In the bankruptcy context, Congress’s explicit designation of lack of adequate protection as cause to lift a stay was based, at least in part, on constitutional concerns. See H.R. Rep. No. 95-595, at 339 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6295 (explaining that the concept of adequate protection “is derived from the [F]ifth [A]mendment protection of property interests”). Indeed, prior to the enactment of the current bankruptcy stay provision, the Supreme Court had recognized that creditors are constitutionally entitled to protection “to the extent of the value of the[ir] property.” Wright v. Union Cent. Life Ins. Co., 311 U.S. 273, 278 (1940); see also United States v. Sec. Indus. Bank, 459 U.S. 70, 75-78 (1982)(applying principle of constitutional avoidance to provision of Bankruptcy Code where a contrary reading “would result in a complete destruction of the property right of the secured party” in its collateral). The PROMESA stay implicates these same constitutional concerns. Under the Appellees’ reading of the statute, the Commonwealth could expend every penny of the Movants’ collateral, leaving the debt entirely unsecured. Because we doubt the constitutionality of such a result, we hold that lack of adequate protection for creditors constitutes cause to lift the PROMESA stay.” Pages 11-12

 

  1. The decision on Peaje seems to be based more on what the filings did not say than anything else.

 

“Because Peaje failed even to make a legally sufficient claim that it lacked adequate protection, we conclude that the district court did not commit reversible error in denying its lift-stay motion without an evidentiary hearing.” Page 10.

 

“Nowhere in its district court filings did Peaje claim that the current diversion of toll revenues would leave that interest inadequately protected. In light of Peaje’s admitted security interest in future toll revenues, this omission was fatal.” Page 18

 

  1. But with Altair this was not the case.

“The Altair Movants’ allegations as to the insufficiency of future funds to protect their interest in repayment of the debt entitled them to a hearing.” Page 18. But see footnote 5 at page 19 where the Court gives the parties a hint on how they can avoid a hearing and a decision contrary to PR

 

“We note that the Altair Movants’ request for adequate protection here appears to be quite modest. They ask only that the employer contributions collected during the PROMESA stay be placed “in an account established for the benefit of Movants.” In light of ERS’s representation that it is not currently spending the funds, but instead simply holding them in an operating account, this solution seems to be a sensible one. At oral argument, ERS expressed concern that transferring the contributions to an account subject to the Altair Movants’ lien might violate the Moratorium Act. But this concern may not present an obstacle to ERS’s ability to settle or otherwise resolve this federal action. See, e.g., Badgley v. Santacroce, 800 F.2d 33, 38 (2d Cir. 1986) (“When the defendants chose to consent to a judgment . . . the result was a fully enforceable federal judgment that overrides any conflicting state law . . . .”); Brown v. Neeb, 644 F.2d 551, 563 (6th Cir. 1981) (“A federal court’s power under the Supremacy Clause to override conflicting state laws . . . is well established.”). Of course, this is not the only path to a finding that the Altair Movants’ interest is adequately protected. An equity cushion is not the “sine-qua-non for adequate protection,” which is a “flexible concept to be tailored to the facts and circumstances of each case.” In re Smithfield Estates, Inc., 48 B.R. 910, 914 (Bankr. D.R.I. 1985); see also Collier ¶ 362.07[3][f]. Again, we leave the existence of adequate protection to the district court to assess on remand.”

 

  1. As to intervention

 

“Accordingly, denial of a motion to intervene based solely on the movant’s failure to attach a pleading, absent prejudice to any party, constitutes an abuse of discretion.” Page 21

 

  1. If there is no agreement with Altair, Judge Besosa has to expedite a hearing.

 

“The case is remanded for further proceedings consistent with this opinion. In conducting such proceedings, the district court should be mindful of Congress’s explicit direction to “expedite” its disposition of the matter “to the greatest possible extent.” 48 U.S.C. § 2126(d).” Page 23

 

Now let’s see what happens.

 

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