Financial Control Board

Lex Claims Oral Argument April 4, 2017

On April 4, 2017, Judges Howard, Lynch and Barron heard oral arguments in the Lex Claims case, where Judge Besosa had decided the PROMESA stay did not apply to some of the claims, including the validity of COFINA and its alleged lien. 

As usual, right from the start of the Supervisory Board’s argument, the Judges started asking pointed questions. Judge Barron started asking technical questions that boiled down to whether the stay applied to a declaration that Governor Garcia Padilla’s executive order were invalid or preempted. Judge Howard asked if some or all of the causes of action arose after PROMESA was approved. The Board’s lawyers denied this but clearly the Judges are not convinced. Judge Lynch seemed concerned about other cases arising but was assured there are none.

 

Judge Howard asked about mediation and was assured it would start next week. When Senior COFINA lawyers started their argument, Judge Barron asked why the declaration of the Executive order was preempted. COFINA had to admit that such declaration is not an issue of control.

 

Ambac came next for appellants and likened the Lex complaint to a bank in state court attempting to determine where income should go for a bankruptcy debtor but this did not bar Judge Barron from asking the same question as to declaratory judgment. We can see a pattern there.

 

Once Lex Claims came to argue, it invoked section 303(3) of PROMESA claiming this was not precluded by the stay. Judge Lynch, who seems intent on preserving the stay, asked if there was explicit language that pointed that way. Lex conceded there was none but that the overall interpretation of PROMESA showed that. Lynch did not seem convinced. Lex continued arguing that they did not seek control, but Judge Barron challenged this view. Judge Lynch went to the offensive and asked if you filed your complaint, why should we relieve you of it in clear reference to the second amended complaint. Lex answered that it could amend the complaint.

 

From this we may surmise that as the Circuit Court’s stay order stated, the Judges will decide the stay will apply to all of the Lex Claims’ complaint, although Judge Barron could file a partly dissenting opinion or convince them it does not apply to the declaratory judgment sought by appellee. Since I assume the panel will be as swift as it was in the Peaje case, a decision could come down by next week or earlier. If it comes down by next Tuesday, April 11, there would only be 19 days left of the stay.

 

This brings us to another issue. Since it is clear negotiations will start later than April 10, the PROMESA stay which was enacted to afford PR an opportunity to attempt to restructure its debt consensually has been instead used by the Government and the Board to pick and choose winners among bondholders. This may have serious repercussions in the coming Title III as I will discuss in an upcoming posting.

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BOARD ATTEMPTS TO APPEAL JUDGE BESOSA’S DECISION IN LEX CLAIMS

 

 

Friday March 3, 2017, the Financial Supervisory Board filed a notice of appeal in the Lex Claims case challenging Judge Besosa’s determination of denying its request for stay https://drive.google.com/file/d/0ByCo6S6fmcDlSDFKSTB1U3ljd28/view This move by the Board is puzzling since the aforementioned order cannot be considered an appealable final decision pursuant to 28 U.S.C. § 1291. As the First Circuit said in the recent decision on Peaje Investment LLC v. García Padilla, at page

 

In the analogous bankruptcy context, we have held that the denial of relief from a stay is not necessarily a final decision sufficient to confer appellate jurisdiction. See In re Atlas IT Exp. Corp., 761 F.3d 177, 185 (1st Cir. 2014). But such a decision is final where it “conclusively decide[s] the fully-developed, unreviewable elsewhere issue that triggered the stay-relief fight.” Id. It rejected the Movants’ substantive arguments, holding that their interests in the collateral were adequately protected. After that ruling, there was nothing left for the district court to do.

Here, different that in Peaje, Judge Besosa has much to do. He has to determine motions to dismiss the substantive claims in the complaint and if he does not, then he has to determine COFINA’s legal standing and whatever implications it may have. It behooves the mind to think the appealed determination is a final order and if it is not, the First Court of Appeals would have no jurisdiction to entertain this appeal. In addition, generally, orders denying a stay of litigation is not a final order, see, Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 275 (1988).

Also, 28 U.S.C. 1292(b) does not grant the Appellate Court jurisdiction. It states:

When a district judge, in making in a civil action an order not otherwise appealable under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order. The Court of Appeals which would have jurisdiction of an appeal of such action may thereupon, in its discretion, permit an appeal to be taken from such order, if application is made to it within ten days after the entry of the order: Provided, however, That application for an appeal hereunder shall not stay proceedings in the district court unless the district judge or the Court of Appeals or a judge thereof shall so order.

No such determination has been made by Judge Besosa and the Board has not ask him to do so. Therefore, it is unlikely the First Circuit would grant such an interlocutory appeal review. In addition, the mere filing of the notice of appeal does not stay proceedings and set deadlines such as the March 20, 2017 date for the Board and others to file their “pleadings setting out their claims or defenses for which intervention is sought.”

The real questions is why would the Board resort to filing of a notice of appeal if it is unlikely that it has jurisdiction? In the Peaje litigation, Judge Besosa’s decision was issued November 2, 2016 and the First Circuit decided the appeal by January 11, 2017. If the First Circuit takes the same time to decide the issue, the decision would come down by April 11, 2017, only 19 days before the stay expires on May 1.

The only thing I can imagine is that the Board simply does not want Judge Besosa to decide the issue before the stay expires is that he will not issue an opinion and order if the First Circuit entertains the appeal and by the time there is a decision. Even if the Board loses, its is unlikely that Judge Besosa would decide before the stay expires and on May 2, 2017, the whole Government of PR would be in Title III and all litigation would be stayed. The Board can parade this scenario in front of both COFINA and the GO’s during the Title VI negotiations and try to convince them to come to an agreement. Let’s see what happens.

 

 

 

JUDGE BESOSA DENIES WITHOUT PREJUDICE BOARD’S MOTION TO INTERVENE

 

In a seemingly surprising order, Judge Besosa denied the Control Board’s motion to intervene in the Peaje litigation. The Judge denied the intervention for two technical reasons (1) the Board’s motion did not include a “pleading that sets forth the claim of defense for which intervention is sought” as required by Rule 24(c) of the Federal Rules of Civil Procedure and (2) denied the request for an order for PR to provide certain documents since there was not evidence the Government had failed to comply with the documents the Board requested.

 

As to Rule 24(c), Judge Besosa is quite correct. Most Circuit Court’s of Appeal do not allow the dismissal of said motions to intervene for failure to comply with this Rule but the First Circuit does. Moreover, a pleading is much more than a simple motion. Rule 7 of the Federal Rules of Civil Procedure states that the only pleadings allowed are a complaint, answer to the complaint, answer to the counterclaim, answer to a crossclaim, third-party complaint and answer to third-party complaint. Since the Board failed to present any pleading, Judge Besosa correctly denied the request.

 

The second point Judge Besosa made was that the Board could make requests to the Court in furtherance of the goals established in PROMESA but that there was no evidence that the Puerto Rico Government had failed to provide any of the documents that had been requested. Judge Besosa was clear that if that was the case, the Board could seek the Court’s assistance.

 

The Board today filed a motion for reconsideration of the Judge’s order not to grant the intervention on the grounds that his legal reasoning is mistaken. I am not a fan of motions for reconsideration since Judges rarely reconsider. In my view, it is better to just do what they want instead of telling them they are wrong, but the issue is under the consideration of the Judge.

 

What does this all mean? Judge Besosa made clear to everyone that he is the ultimate authority in his Courtroom. Tomorrow, the hearing on the lifting of the stay in the consolidated cases, Peaje, Assured and Altair, will be held, and the Board’s position, for the time being, will not be considered by the Court.