PR Debt Crisis

GO BONDHOLDERS SUE PUERTO RICO BASED ON PROMESA

 

 

Ever since President Obama signed PROMESA into law, Governor García Padilla crowed that now bondholders could not sue PR. Not only was he wrong, he was proven wrong today when a group of GO bondholders sued him for violating PROMESA.

 

The Group, that includes Lex Claims, LLC, Jacana Holdings (who also sued in NY Supreme Court), MPR Investors, Rolgs, RRW and SL Puerto Rico Fund, not Stone Lion and Aurelius as originally reported by Reuters. They claim, quite correctly in my view, that PROMESA prohibits the default of GO’s Governor García Padilla has done. Plaintiffs invoke section 204(c)(3) of PROMESA which states:

 

“During the period after a territory becomes a covered territory and prior to the appointment of all members and the Chair of the Oversight Board, such covered territory shall not enact new laws that either permit the transfer of any funds or assets outside the ordinary course of business or that are inconsistent with the constitution or laws of the territory as of the date of enactment of this Act, provided that any executive or legislative action authorizing the movement of funds or assets during this time period may be subject to review and rescission by the Oversight Board upon appointment of the Oversight Board’s full membership.”

 

The complaint avers, quite correctly, that the PR Constitution guarantees the payment of GO’s as a priority, see Article VI, sections 2 and 8. Moreover, PR law prioritizes the payment of this Constitutional debt. Although Governor García Padilla justified his default on the GO debt on the power granted to him by the Moratorium law enacted by the PR legislature, the complaint points out that it is preempted not only by 11 U.S.C. § 903 but also by section 303 of PROMESA.

 

Plaintiffs also aver that not only is the default on GO’s a violation of the PR Constitution and hence PROMESA, but that the 2016-17 budget is a violation of both laws since it does not budget for the payment of the Constitutional debt. It cites Article VI, section 6 of the Puerto Rico Constitution, which states:

 

“If at the end of any fiscal year the appropriations necessary for the ordinary operating expenses of the Government and for the payment of interest on and`amortization of the public debt for the ensuing fiscal year shall not have been made, the several sums appropriated in the last appropriation acts for the objects and purposes therein specified, so far as the same may be applicable, shall continue in effect item by item, and the Governor shall authorize the payments necessary for such purposes until corresponding appropriations are made.”

 

Since the 2015-16 budget did include appropriations for GO’s, the Constitution requires that these appropriations be used for payment of the GO debt and plaintiffs in this case so demand. Again, the claim is that violating the Constitution’s provisions on payments also violates PROMESA.

 

Plaintiffs also aver that this complaint is not stayed by PROMESA. As I have discussed before, the stay in PROMESA applies to cases filed after December 18, 2015 and seek:

 

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the Government of Puerto Rico that was or could have been commenced before the enactment of this Act, or to recover a Liability Claim against the Government of Puerto Rico that arose before the enactment of this Act;

(2) the enforcement, against the Government of Puerto Rico or against property of the Government of Puerto Rico, of a judgment obtained before the enactment of this Act;

(3) any act to obtain possession of property of the Government of Puerto Rico or of property from the Government of Puerto Rico or to exercise control over property of the Government of Puerto Rico;

(4) any act to create, perfect, or enforce any lien against property of the Government of Puerto Rico;

(5) any act to create, perfect, or enforce against property of the Government of Puerto Rico any lien to the extent that such lien secures a Liability Claim that arose before the enactment of this Act;

(6) any act to collect, assess, or recover a Liability Claim against the Government of Puerto Rico that arose before the enactment of this Act; and

(7) the setoff of any debt owing to the Government of Puerto Rico that arose before the enactment of this Act against any Liability Claim against the Government of Puerto Rico.”

 

The complaint states that it does not seek payment of the defaulted amounts and hence the stay is inapplicable. That argument has also been made in Brigade Leveraged Capital Structures Fund, Ltd. v. García Padilla, 16-1610; National Public Finance Guarantee Corporation v. García Padilla, 16-2101 and Trigo v. García Padilla,16-2257. I expect Judge Besosa to rule on this and other issues in these cases by August. Only in Ambac Assurance Corporation v. Puerto Rico Highway and Transportation Authority, 16-1893 has the plaintiff acquiesced to the stay since it is seeking a receiver for the defendant. No such receiver is sought by the GO plaintiffs and it is my opinion that the Court will rule that the stay is not applicable to the case.

 

In addition, plaintiffs point out that millions of dollars were clawed back by PR and that the only justification for such clawback would be to pay for the Constitutional debt but it has gone instead to debts of lesser priority. Again, this could be considered a violation of PROMESA since it violates the PR Constitution. Also “[a]dding insult to constitutional injury, the budget contemplates an increase of more than $500 in non-debt service spending.” Page 19, paragraph 54. This includes an increase of $150 million from the previous year’s contribution to the retirement funds. I can see the malevolent hand of the US Treasury helping its ally, organized labor.

 

The complaint also seeks, similar to the complaint in the aforementioned Brigade case, the lifting of the stay if the Court believes it is necessary. Clearly an averment made in an abundant of caution. Not a bad idea.

 

The complaint, at pages 25-26, seeks a judgment:

 

“A. Declaring that the Commonwealth’s post-PROMESA measures permitting

transfers outside the ordinary course of business or in violation of Puerto Rico’s Constitution and laws to the detriment of holders of Puerto Rico’s Constitutional Debt are invalid under Section 204(c)(3) of PROMESA.

 

  1. Enjoining enforcement or implementation of certain of those measures until the

Oversight Board has made a determination as to their propriety, with such injunction:

(1) requiring the Defendants, in their official capacities as Commonwealth

officers, to segregate and preserve all funds clawed back, to be clawed back, or available to be clawed back under contractual and legal provisions expressly acknowledging that those funds are subject to turnover for purposes of paying of Constitutional Debt;

(2) prohibiting the Defendants, in their officials capacities as Commonwealth officers, from implementing the outsized transfers to the public employee pension funds contemplated in the Fiscal Year 2017 budget and limiting the Commonwealth to the contribution it made in Fiscal Year 2016; and

(3) prohibiting the Defendants, in their official capacities as Commonwealth officers, from implementing the diversion to the insolvent GDB the approximately $250 million contemplated by the Fiscal Year 2017 budget, or such other amounts (such as

those allocated in pending legislation).

 

In synthesis, it is a well-written complaint with a good chance of being granted the remedies it seeks. There is, however, one concern. Section 204(c)(3) mentions the Board but does not specifically state that those affected by these violations would have a cause of action. Clearly, GO bondholders have standing since they have not been paid but the question really is whether they have a cause of action. This question, I believe, is ruled by Gonzaga Univ. v. Doe , 536 U.S. 273 (2002) and that plaintiffs do have a cause of action if not under PROMESA, definitely pursuant to 42 U.S.C. § 1983. We shall soon find out.

Advertisements

EL IMPAGO DEL 1RO DE JULIO DE 2016

 

 

Ayer el Gobernador Alejandro García Padilla, un día después de que entrara en vigor PROMESA, y en contubernio con el Tesoro Federal y el Presidente Obama, incumplió con el pago de la deuda garantizada por la Constitución de más de $800 millones Esto no fue coincidencia. En muchas ocasiones he mencionado que la pugna del pago de la deuda de PR es solo la punta de lanza de la pugna mayor en USA sobre la santidad de estos bonos que tiene grandes repercusiones en esos bastiones demócratas como Illinois, California y New York.

 

Al impagar esta partida antes considerada sacrosanta y protegida por la Constitución de PR , el Gobernador no solo incumple su juramento de proteger y defender la Constitución, si no que aleja aún más a bonistas futuros de la isla. Lo hizo bajo la teoría de que no se puede demandar a PR durante el “stay” provisto por PROMESA (sección 405). Pero como nos tiene acostumbrado, el Gobernador malentiende el “stay”. Ciertamente no se puede demandar a PR en cobro de dinero durante el “stay”, pero el mismo expira el 15 de febrero de 2017, y es prorrogable hasta un máximo de 75 días adicionales, o sea, mayo de 2017 (sección 405(d)). Además, el “stay” se puede levantar el mismo “after notice and hearing” y “for cause shown” (sección 405(e)).

 

En adición, los bonistas de GO’s pueden acudir al Tribunal en sentencia declaratoria solicitando que se declare que la acción de Gobernador viola la Constitución, viola el 11 U.S.C. § 903 (la usada por los Tribunales para anular la quiebra criolla) sin pedir cobro de dinero o en su defecto, solicitar este remedio al mismo tiempo que solicitan que se levante el “stay”. Más aún, hay que recordar que la sección 405(k) de PROMESA indica que “[t[his section does not discharge an obligation of the Government of Puerto Rico or release, invalidate, or impair any security interest or lien securing such obligation.” Finalmente, la sección 405(l) nos dice:

 

Nothing in this section shall be construed to prohibit the Government of Puerto Rico from making any payment on any Liability when such payment becomes due during the term of the stay, and to the extent the Oversight Board, in its sole discretion, determines it is feasible, the Government of Puerto Rico shall make interest payments on outstanding indebtedness when such payments become due during the length of the stay.

 

En otras palabras, las acciones del Gobernador no necesariamente van a estar protegidas por PROMESA. Veremos, pues, lo que pase.

Puerto Rico Bonds and the Courts

During the presentation to bondholders by Puerto Rico, Mr. James Millstein stated that without restructuring any litigation involving bonds would take at least 5 years. I beg to differ. Bond litigation will commence with the exception of $3.9 billion, which I will discuss later, in the Federal District Court for the District of Puerto Rico or in the Court of First Instance in San Juan. Since I litigate in both, I think I am in a better position to describe what could happen.

 

At the get go, the immense majority of issues in any PR Bond litigation will of interpreting bond documents, including the Constitution of Puerto Rico. I cannot think of many factual issues that would require discovery, except maybe to determine the actual available resources of the Commonwealth. In any event, these can be disposed of as I discuss infra.

 

If different cases are filed in the PR Federal District Court, pursuant to the Rule 42 of the Federal Rules of Civil Procedure, if cases “involve a common question of law or fact, the court may:

(1) Join for hearing or trial any or all matters at issue in the actions;

(2) consolidate the actions; or

(3) issue any other orders to avoid unnecessary cost or delay.” The actual procedure to do it in PR is described in Local Rule 42.

 

Now lets go to certain examples. In Franklin California v. Commonwealth, the PR Recovery Act case, the complaint was filed on June 28, 2014. The District Court issued the injunction declaring the law unconstitutional on February 6, 2015. No discovery was done. Defendants appealed to the First Circuit and the Court, recognizing the importance of the issues, expedited matters and issue its opinion on July 6, 2015. Defendants’ requested certiorari to the Supreme Court, which obliged and the case will be decided on or before June 30, 2016, two years after the case was filed.

 

More recently, Wal-Mart sued the Commonwealth of PR for constitutional violations in December of 2015, discovery ensued, there was a 4-day hearing in February and we are waiting for a decision from Judge Fusté. Fast indeed.

 

But what about state court? First, the same Rule of Consolidation of Cases exists in state court, to wit, Rule 38 of the Puerto Rico Rules of Civil Procedure. Moreover, PR has a set of Rules for the Litigation of Complex Cases, and they provide for the consolidation of all cases of the same nature with one judge. Hence, there will not be multiple judges deciding issues.

 

Two examples show how fast it cases can proceed in PR. In January of 2014, the Teachers Union sued the Commonwealth for Constitutional violations. After discovery and an evidentiary hearing, the PR Supreme Court decided the case in a intrajurisdictional certification in April of 2014. In the Doral v. ELA case, the complaint was filed in July of 2014, the case went three times to the Supreme Court for intrajurisdictional appeal, which was not granted, the Supreme Court ordered the case to move quickly, went twice in interlocutory appeals to the Appellate Court, there was discovery and a four-day hearing, which Doral won. Defendants’ appealed to the Appellate Court, which overruled the Court of First Instance on February 25, 2015 and the Supreme Court of PR denied certiorari on February 27, 2015. As we can see, the Courts in PR can move very quickly indeed.

 

There is, however, a $400 million issue by the Highway Authority in 2013 and a $3.5 billion issue of GO’s that are governed by NY law and to which NY courts will have jurisdiction as per bond documents. The bond documents, however, do not require that the cases be filed in NY and gives the parties the flexibility to file in San Juan. Also, the same situation of simply interpreting legal documents applies to these two bond issues. Moreover, if bondholders have cases in Federal District Court in PR and NY, any party may seek for the Judicial Panel for Multidistrict Litigation to consolidate for discovery, etc., the cases in one Court. If the cases are pending in Federal and State or Commonwealth Court, this cannot occur, however. Nevertheless, I have no doubt that NY Federal or Supreme Court’s would decide the issues in these cases in a very swift manner as their counterparts in PR have done.