National Public Finance Guarantee Corporation v. Garcia Padilla et al

Filing 50

MEMORANDUM AND ORDER re 28 Motion to Stay: GRANTED. This case is STAYED pursuant to section 405(b)(1) of PROMESA. The stay shall continue until February 15, 2017, or as otherwise provided in section 405(d) of PROMESA, unless plaintiffs show caus e for relief from the stay pursuant to section 405(e) of PROMESA. The Court will schedule a hearing pursuant to section 405(e) to determine whether there is cause to lift the stay. Signed by Judge Francisco A. Besosa on 08/22/2016. (brc)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
BRIGADE
LEVERAGED
CAPITAL
STRUCTURES FUND LTD., et al.,
Plaintiffs,
v.
ALEJANDRO
als.,

Civil No. 16-1610 (FAB)

GARCIA-PADILLA,

et

Defendants.
NATIONAL
PUBLIC
FINANCE
GUARANTEE CORPORATION,
Plaintiff,
v.
ALEJANDRO
al.,

Civil No. 16-2101 (FAB)

GARCIA-PADILLA,

et

Defendants.
DIONISIO TRIGO-GONZALEZ, et al.,
Plaintiffs,
v.
ALEJANDRO
al.,

Civil No. 16-2257 (FAB)

GARCIA-PADILLA,

et

Defendants.

MEMORANDUM AND ORDER
Before the Court are the parties’ arguments as to whether the
automatic stay provision of the Puerto Rico Oversight, Management,
and Economic Stability Act (“PROMESA”) applies to these three
actions.

For the following reasons, the Court holds that it does

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

2

and STAYS these cases pursuant to section 405(b)(1) of PROMESA.
The Court will hold a hearing to determine whether there is cause
to grant plaintiffs relief from the stay pursuant to section 405(e)
of PROMESA.
I.
A.

BACKGROUND

The Moratorium Act
On

April

6,

2016,

Puerto

Rico

enacted

the

Puerto

Rico

Emergency Moratorium and Financial Rehabilitation Act (“Moratorium
Act”)

to

address

situation.

the

Puerto

Rico

Government’s

dire

fiscal

The Moratorium Act aims to give the Puerto Rico

Government the “tools” it needs “to continue providing essential
services to the people” of Puerto Rico in light of the Government’s
lack

of

“sufficient

resources

to

obligations as originally scheduled.”
Motives, § A.

comply

with

debt

service

Moratorium Act, Stmt. of

On May 5, 2016, Puerto Rico enacted Law 40 of 2016,

which amended certain provisions of the Moratorium Act.

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)
B.

3

The Present Litigation
In May and June 2016, plaintiffs in these three cases brought

suit

against

various

Commonwealth

of

Puerto

Rico

defendants1

challenging the constitutionality of the Moratorium Act.
1.

Civil No. 16-1610
Plaintiffs

in

Civil

No.

16-1610

allege

that

they

collectively own more than $750 million of bonds issued by the
Government Development Bank for Puerto Rico (“GDB”).
No. 16-1610, Docket No. 52 at p. 4.)

(Civil

They allege that certain

provisions of the Moratorium Act “strip” them of the “contractual
and property rights embodied in their existing GDB bonds.”

Id. at

p. 13.
Plaintiffs seek a declaration that sections 105, 201(b),
201(c), 203(b)(i), 203(f), 301, 302, and 401 of the Moratorium Act
(1) violate the contract and takings clauses of the United States
and Puerto Rico constitutions, (2) violate the Commerce Clause of

1

All plaintiffs bring suit against Alejandro Garcia-Padilla (in his
official capacity as Governor of Puerto Rico) and Juan Zaragoza-Gomez (in
his official capacity as Secretary of the Puerto Rico Treasury
Department). Additionally, plaintiffs in Civil No. 16-1610 bring suit
against John Doe (in his or her official capacity as receiver for the
Government Development Bank for Puerto Rico (“GDB”)). (Civil No. 161610, Docket No. 52.) Plaintiff in Civil No. 16-2101 brings suit against
Luis Cruz-Batista (in his official capacity as Director of the Puerto
Rico Office of Management and Budget).
(Civil No. 16-2101, Docket
No. 1.) Plaintiffs in Civil No. 16-2257 bring suit against the GDB, the
Puerto Rico Public Finance Corporation (“PRPFC”), Melba Acosta-Febo (in
her official capacity as President of the GDB and the PRPFC), the Puerto
Rico Fiscal Agency and Financial Advisory Authority (“PRFAFAA”), and
Victor Suarez-Melendez (in his official capacity as Executive Director
of the PRFAFAA). (Civil No. 16-2257, Docket No. 1.)

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

4

the United States Constitution, (3) are preempted by the Bankruptcy
Clause of the United States Constitution and by section 903(1) of
the Bankruptcy Code, 11 U.S.C. § 903(1), and (4) violate the United
States Constitution by staying federal court proceedings.
No. 16-1610, Docket No. 52 at pp. 31-32.)

(Civil

They also seek an

injunction prohibiting the Commonwealth defendants from enforcing
these provisions, costs, attorneys’ fees, experts’ fees, expenses
of suit, and “compensation or other legal or equitable relief as
the Court may deem just and proper.”
2.

Id.

Civil No. 16-2101
Plaintiff in Civil No. 16-2101 alleges that it insures

approximately $3.84 billion of bonds issued by the Commonwealth of
Puerto Rico and its related entities.
No. 1 at p. 1.)

(Civil No. 16-2101, Docket

It further alleges that it “has a variety of

property and contractual rights relating to the debt that it
insures” and that the “Moratorium Act has taken these property
interests and substantially impaired these contractual rights.”
Id. at pp. 15-16.
Plaintiff seeks a declaration (1) that sections 201 and
202 of the Moratorium Act violate the Contract Clause and Takings
Clause of the United States Constitution, (2) that sections 201(a),
(b), (d), and (e) of the Moratorium Act are preempted by the
Bankruptcy Clause of the United States Constitution and by section
903(1) of the Bankruptcy Code, 11 U.S.C. § 903(1), and (3) that

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

5

section 201(b) of the Moratorium Act violates the United States
Constitution

by

staying

federal

court

proceedings.

No. 16-2101, Docket No. 1. at pp. 31-32.)

(Civil

It also seeks an

injunction prohibiting the Commonwealth defendants from enforcing
these provisions, costs, reasonable attorneys’ fees, and “any other
relief [that the] Court deems just and proper.”
3.

Id.

Civil No. 16-2257
Plaintiffs

in

Civil

No.

16-2257

allege

that

they

collectively own more than $100 million of bonds issued by the GDB
and the Puerto Rico Public Finance Corporation (“PRPFC”).
No. 16-2257,

Docket

No.

1

at

p. 4.)

They allege

(Civil

that the

Moratorium Act “serves to substantially impair the obligations of
[the] GDB and [the PRPFC] under the bonds” that plaintiffs own and
that executive orders pursuant to the Moratorium Act deprive
plaintiffs “of their proprietary right to existing and future
funding for the contractually scheduled payment of interest and
repayment

of

compensation.”

principal

upon

their

bonds

.

.

.

without

just

Id. at p. 3.

Plaintiffs seek a declaration that sections 105, 201,
203, 301, 302, and 401 of the Moratorium Act (1) violate the
contract and takings clauses of the United States and Puerto Rico
constitutions, (2) are preempted by the Bankruptcy Clause of the
United States Constitution and by section 903(1) of the Bankruptcy
Code, 11 U.S.C. § 903(1), and (3) violate the United States

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)
Constitution

by

staying

federal

court

6
proceedings.

No. 16-2257, Docket No. 1 at pp. 14-15.)

(Civil

They also seek an

injunction prohibiting the Commonwealth defendants from enforcing
these provisions and “other legal and/or equitable relief as the
Court deems just and proper.”
C.

Id.

PROMESA
On June 30, 2016, the United States enacted PROMESA to address

the fiscal emergency in Puerto Rico.

PROMESA establishes a seven-

member Financial Oversight and Management Board (“Oversight Board”)
for Puerto Rico.

PROMESA §§ 101(b)(1), (e)(1)(A), 48 U.S.C.A.

§ 2121(b)(1), (e)(1)(A). “The purpose of the Oversight Board is to
provide a method for [Puerto Rico] to achieve fiscal responsibility
and access to the capital markets.”

Id. § 101(a).

The Oversight

Board operates as an entity within the Puerto Rico Government, id.
§ 101(a), and is tasked with several responsibilities and endowed
with several powers.
will

be

fully

PROMESA envisions that the Oversight Board

appointed

by

September

operational sometime thereafter.

15,

2016,

and

fully

Id. §§ 101(e)(2)(G), (h).

Section 405 of PROMESA provides for an automatic stay of
certain

actions

against

PROMESA’s enactment.

the

Government

of

Puerto

Rico

upon

PROMESA § 405, 48 U.S.C.A. § 2194.

The

United States Congress deemed that “an immediate - but temporary stay is essential to stabilize the region for the purposes of
resolving” Puerto Rico’s fiscal crisis. Id. § 405(m)(5). The stay

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

7

“allow[s] the Government of Puerto Rico a limited period of time
during which it can focus its resources on negotiating a voluntary
resolution with its creditors instead of defending numerous, costly
creditor lawsuits.”

Id. § 405(n)(2).

The stay also gives the

Oversight Board time “to determine whether to appear or intervene
on behalf of the Government of Puerto Rico in any litigation.”

Id.

§ 405(m)(5)(A).
The automatic stay remains in effect until the earlier of
(1) February 15, 2017, with a possible extension of sixty or
seventy-five days, or (2) the date on which the Oversight Board
files a petition on behalf of the Government of Puerto Rico or any
of its instrumentalities to commence debt-adjustment proceedings
pursuant to title III of PROMESA.
§ 2194(d).

PROMESA § 405(d), 48 U.S.C.A.

“[A] party in interest,” however, may seek relief from

the stay “for cause shown.”

Id. § 405(e).

II.

DISCUSSION

The Commonwealth defendants move the Court to stay these three
actions pursuant to section 405(b)(1) of PROMESA.

(Civil No. 16-

1610, Docket No. 76; Civil No. 16-2101, Docket No. 28; Civil
No.

16-2257,

Docket

No.

5.)

Plaintiffs

argue

that

section

405(b)(1) does not apply to these actions because plaintiffs’
claims are not “with respect to a Liability” as required by section
405(b) and because section 405 lacks clear and convincing evidence
of congressional intent to bar constitutional claims.

(Civil

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

8

No. 16-1610, Docket Nos. 71, 79, 87; Civil No. 16-2101, Docket
No. 36; Civil No. 16-2257, Docket No. 11.)

In the event that the

stay applies, however, plaintiffs seek relief from the stay.
(Civil No. 16-1610, Docket Nos. 71, 79, 87; Civil No. 16-2101,
Docket No. 36; Civil No. 16-2257, Docket No. 11.)

The Court

consolidated these cases for the purpose of resolving the issue of
whether the PROMESA stay applies.

(Civil No. 16-1610, Docket

No. 83; Civil No. 16-2101, Docket No. 38; Civil No. 16-2257, Docket
No. 12.)
A.

The PROMESA Stay Provision Applies to Plaintiffs’ Claims
Section 405(b)(1) of PROMESA provides as follows:
(b) Except as provided in subsection (c) of this section,
the establishment of an Oversight Board for Puerto Rico
(i.e., the enactment of [PROMESA]) in accordance with
[section 101 of PROMESA] operates with respect to a
Liability as a stay, applicable to all entities (as such
term is defined in [11 U.S.C. § 101]), of (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
[PROMESA], or to recover a Liability Claim against
the Government of Puerto Rico that arose before the
enactment of [PROMESA.]

PROMESA § 405(b)(1), 48 U.S.C.A. § 2194(b)(1).2

Thus, immediately

upon enactment, PROMESA stayed, “with respect to a Liability[,] .

2

Section 405(b) of PROMESA is modeled after the automatic stay provision
of the federal Bankruptcy Code. Compare PROMESA § 405(b), 48 U.S.C.A.
§ 2194(b), with 11 U.S.C. § 362(a). Section 405(b)’s requirement that
the stay apply only “with respect to a Liability,” however, has no
analogue in the federal Bankruptcy Code’s automatic stay provision.

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

9

. . the commencement or continuation . . . of a judicial . . .
action . . . against the Government of Puerto Rico that was or
could have been commenced before the enactment of [PROMESA].”

Id.

There is no dispute that these consolidated cases are judicial
actions against the Government of Puerto Rico3 that were or could
have been commenced before PROMESA’s enactment.

The parties

disagree as to whether these cases are actions “with respect to a
Liability.”
PROMESA defines “Liability” as follows:
The term “Liability” means a bond, loan, letter of
credit, other borrowing title, obligation of insurance,
or other financial indebtedness for borrowed money,
including rights, entitlements, or obligations whether
such rights, entitlements, or obligations arise from
contract, statute, or any other source of law related to
such a bond, loan, letter of credit, other borrowing
title, obligation of insurance, or other financial
indebtedness in physical or dematerialized form, of which
(A)

the issuer, obligor, or guarantor is the
Government of Puerto Rico; and

(B)

the date of issuance
precedes June 30, 2016.

or

incurrence

PROMESA § 405(a)(1), 48 U.S.C.A. § 2194(a)(1) (emphasis added).
Thus,

PROMESA

automatically

stays

actions

“with

respect

to”

“rights, entitlements, or obligations . . . related to . . . a

3

The “Government of Puerto Rico” means “the Commonwealth of Puerto Rico,
including all its territorial instrumentalities.” PROMESA § 5(11), 48
U.S.C.A. § 2104(11).
Section 405 of PROMESA specifies that the
“Government of Puerto Rico” also includes “the individuals, including
elected and appointed officials, directors, officers of and employees
acting in their official capacity on behalf of the Government of Puerto
Rico.” Id. § 405(i)(1).

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

10

bond” issued by the Government of Puerto Rico before June 30, 2016.
Id. §§ 405(a)(1), (b).
Here, plaintiffs argue that their claims are not “with respect
to a Liability” because they arise out of the United States and
Puerto Rico constitutions, not out of bonds that they own or
insure.

See Civil No. 16-1610, Docket No. 71 at pp. 8-11; Civil

No. 16-2101, Docket No. 36 at pp. 3-5; Civil No. 16-2257, Docket
No. 11 at p. 4.

“With respect to,” however, does not mean “arising

out of”; it means “about or concerning” and “in relation to.”
Merriam-Webster Online Dictionary, http://www.merriam-webster.com/
dictionary/with%20respect%20to.

Thus, the PROMESA stay extends to

actions that are about, concern, and relate to a “Liability.”
Nothing in PROMESA’s statutory text indicates that claims have to
“arise out of a Liability” to be included in the scope of the stay.
Plaintiffs allege in their complaints that they own or insure
bonds issued by the Government of Puerto Rico before June 30, 2016,
and that the Moratorium Act both impairs contractual rights related
to those bonds and effects a taking without just compensation of
property interests related to the bonds. These allegations are not
incidental.

Plaintiffs’

standing

to

challenge

the

constitutionality of the Moratorium Act hinges on whether the
Moratorium Act is causing them a concrete and particularized injury
and whether the relief that they seek (a declaration that the
Moratorium Act is unconstitutional and an injunction prohibiting

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)
defendants

from

enforcing

it)

will

11

redress

the

injury.

See

Weaver’s Cove Energy, LLC v. R.I. Coastal Res. Mgmt. Council, 589
F.3d 458, 467 (1st Cir. 2009) (“A plaintiff wishing to establish
standing must show a concrete and particularized injury in fact, a
causal connection that permits tracing the claimed injury to the
defendant’s actions, and a likelihood that prevailing in the action
will afford some redress for the injury.”

(internal quotation

marks and citation omitted)). Without plaintiffs’ allegations that
the Moratorium Act impairs and effects a taking of rights and
entitlements

related

to

the

bonds

that

they

own

plaintiffs have no standing to bring these claims.

or

insure,

Plaintiffs’

claims therefore are about, concern, relate to, and are “with
respect to” “rights” and “entitlements” “related to” bonds issued
by the Government of Puerto Rico. See PROMESA § 405(a)(1), (b), 48
U.S.C.A. § 2194(a)(1), (b).
Accordingly, the consolidated actions fall squarely within the
scope of cases automatically stayed pursuant to section 405(b)(1)
of PROMESA.
B.

The PROMESA Stay Provision Does Not Completely Bar Judicial
Review
Plaintiffs argue that PROMESA’s stay provision lacks the

“‘clear and convincing’ evidence of congressional intent required”
by the United States Supreme Court in Johnson v. Robison, 415 U.S.
361, 373–74 (1974), to interpret a statute as “restrict[ing] access
to judicial review.”

See Civil No. 16-1610, Docket No. 71 at

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

12

pp. 11-13; Civil No. 16-2101, Docket No. 36 at pp. 5-6; Civil
No. 16-2257, Docket No. 11 at p. 5.

The statute in Johnson

provided that “no . . . court of the United States shall have power
or jurisdiction to review” certain decisions by the Administrator
of Veterans’ Affairs.

415 U.S. at 367.

In other words, Johnson

involved a statute that totally barred judicial review of certain
claims.

The

Supreme

Court

refused

to

extend

this

bar

to

constitutional claims because, among other reasons, “neither the
text nor the scant legislative history of [the statute] provide[d]
the

‘clear

and

convincing’

evidence

of

congressional

intent

required . . . before a statute will be construed to restrict
access to judicial review.”

Id. at 373–74.

This “heightened

showing” of clear and convincing evidence is required “in part to
avoid the ‘serious constitutional question’ that would arise if a
federal statute were construed to deny any judicial forum for a
colorable constitutional claim.” Webster v. Doe, 486 U.S. 592, 603
(1988).
The

First

Circuit

Court

of

Appeals

applied

the

Johnson

standard in Reardon v. United States, 947 F.2d 1509 (1st Cir.
1991).

The statute in Reardon completely barred “judicial review

of EPA actions prior to the time that the EPA or a third party
undertakes a legal action to enforce an order or to seek recovery
of costs for the cleanup of a hazardous waste site.”

947 F.2d

at 1512 (quoting Reardon v. United States, 731 F. Supp. 558, 564

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

13

n.8 (D. Mass. 1990)) (citing 42 U.S.C. § 9613(h)).

The court

declined to extend this bar to the plaintiffs’ constitutional claim
because, among other reasons, it did not find “clear congressional
intent to preclude the type of constitutional claim [that the
plaintiffs were making].”

Id. at 1515.

Unlike the statutes in Johnson and Reardon, however, the
PROMESA stay provision does not bar judicial review because it
gives this Court the power to grant parties relief from the stay
and to review their claims “for cause shown” or “to prevent
irreparable

damage.”

§§ 2194(e), (g).

PROMESA

§§

405(e),

(g),

48

U.S.C.A.

Thus, PROMESA’s stay provision does not raise

constitutional concerns because it does not foreclose, deny, or
restrict judicial review of constitutional claims.

Accordingly,

Johnson’s “clear and convincing” standard does not apply here.
C.

Plaintiffs May Show Cause for Relief from the PROMESA Stay
Plaintiffs move the Court for relief from the PROMESA stay.

(Civil No. 16-1610, Docket Nos. 71 at pp. 14-19, 79 at p. 3, 87 at
pp. 9-13; Civil No. 16-2101, Docket No. 36 at pp. 7-9; Civil
No. 16-2257, Docket No. 11 at pp. 4-5.)

Section 405(e) of PROMESA

provides that this Court, “[o]n motion of or action filed by a
party in interest and after notice and a hearing, . . . for cause
shown, shall grant relief from the stay provided under subsection
(b)

of

this

§ 2194(e)(2).

section.”

PROMESA

§

405(e)(2),

48

U.S.C.A.

The Court will schedule a hearing on the matter to

Civil Nos. 16-1610, 16-2101, 16-2257 (FAB)

14

determine whether there is cause for granting plaintiffs relief
from PROMESA’s automatic and temporary stay.
III.

CONCLUSION

The Court GRANTS the Commonwealth defendants’ motions to stay
these cases, (Civil No. 16-1610, Docket No. 76; Civil No. 16-2101,
Docket No. 28; Civil No. 16-2257, Docket No. 5).

These cases are

STAYED pursuant to section 405(b)(1) of PROMESA.

The stay shall

continue until February 15, 2017, or as otherwise provided in
section 405(d) of PROMESA, unless plaintiffs show cause for relief
from the stay pursuant to section 405(e) of PROMESA.

The Court

will schedule a hearing pursuant to section 405(e) to determine
whether there is cause to lift the stay.
IT IS SO ORDERED.
San Juan, Puerto Rico, August 22, 2016.
s/ Francisco A. Besosa
FRANCISCO A. BESOSA
UNITED STATES DISTRICT JUDGE