Court: District Court, D. Puerto Rico; February 17, 2017; Federal District Court
This legal opinion addresses a lawsuit stemming from the Commonwealth of Puerto Rico's default on general obligation bonds (GO bonds), filed by the GO Bondholders against several defendants, including the Commonwealth and its officials, as well as the Puerto Rico Sales Tax Financing Corporation (COFINA) and the Bank of New York Mellon Corporation. The GO Bondholders seek declaratory and injunctive relief under the Puerto Rico Oversight Management and Economic Stability Act (PROMESA). The Court is considering six motions:
1. A motion to stay the action by the Commonwealth and COFINA defendants.
2. A motion to intervene by the Financial Oversight and Management Board for Puerto Rico.
3. A motion to intervene and stay the action by Ambac Assurance Corporation.
4. A motion to intervene by the COFINA Senior Bondholders.
5. A motion to intervene by Puerto Rico-based funds.
6. A motion to intervene by the Major COFINA Bondholders.
The GO Bondholders oppose all motions, and replies have been filed by the movants, except the Oversight Board. The Court denies the motion to stay and the Senior COFINA Bondholders’ motion to intervene, while granting the motions to intervene from the Oversight Board, Ambac, Puerto Rico Funds, and the Major COFINA Bondholders.
The GO Bondholders assert that their bonds are "constitutional debt" as per Article VI, Section 8 of the Puerto Rico Constitution, which prioritizes debt service payments. They contend that available resources, specifically the revenues from the Sales and Use Tax (IVU), should be allocated to satisfy GO bond obligations before COFINA bonds. PROMESA, enacted to address Puerto Rico's fiscal crisis, provides a framework for debt restructuring and establishes a seven-member Oversight Board to promote fiscal responsibility and access to capital markets.
The Oversight Board, established within the Government of Puerto Rico, possesses extensive authority over the Commonwealth and designated “covered” instrumentalities, including the power to develop, review, and approve fiscal plans and budgets, enforce compliance, seek judicial enforcement of its authority under PROMESA, and intervene in litigation against the Commonwealth. All Board members were appointed on August 31, 2016. PROMESA includes an automatic stay on all debt-related litigation against the Commonwealth, aimed at stabilizing the region amidst a financial crisis, allowing the government to negotiate with creditors without the distraction of multiple lawsuits. This stay is temporary, lasting until either February 15, 2017, with possible extensions, or until the Oversight Board files for debt-adjustment proceedings. The Court can grant relief from the stay under specific conditions.
Additionally, the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (Moratorium Act), enacted on April 6, 2016, acknowledges the financial crisis and aims to provide the Commonwealth with necessary tools to maintain essential services despite debt obligations. The Governor is empowered to declare a state of emergency, suspend payments on covered obligations until January 31, 2017, and expropriate property or modify obligations to ensure funding for essential services.
Following the enactment of PROMESA, former Puerto Rican Governor Alejandro Garcia-Padilla issued Executive Order 2016-30, which suspended the Commonwealth's obligation to make payments on bonds, except for those to the Government Development Bank (GDB). This order effectively halted payments on General Obligation (GO) bonds, leading to a default on $817 million in GO bond payments on July 1, 2016. In response, GO Bondholders filed a complaint on July 20, 2016, asserting claims under PROMESA against Executive Order 30 and the Commonwealth’s failure to allocate funds for future GO bond obligations.
The GO Bondholders’ initial complaints were amended twice, alleging violations of sections 204(c)(3) and 207 of PROMESA. The Commonwealth defendants sought a stay under section 405 of PROMESA, which the Court denied, as well as a motion for reconsideration that was also rejected. The GO Bondholders subsequently filed a second amended complaint, introducing twelve additional counts and naming new defendants, including the COFINA defendants.
Of these counts, the first, second, third, and twelfth were identified as PROMESA counts, with the rest subject to the debt-litigation stay under section 405. The second count claimed that Executive Order 30 is preempted by section 303(3) of PROMESA, which prohibits unlawful executive orders that alter debt holder rights or divert funds. Despite the default on GO bond payments, the Commonwealth continued to allocate funds to COFINA, which the GO Bondholders argue impaired their payment rights.
They seek a Court declaration deeming Executive Order 30 unlawful and request injunctive relief. The third count challenges the legality of the Moratorium Act under section 303(1) of PROMESA, arguing it prohibits payments on GO bonds without creditor consent, thereby violating their rights. The GO Bondholders request a declaration that the Moratorium Act cannot bind them without their consent and seek injunctive relief.
The twelfth count claims that the Commonwealth and COFINA defendants violated 42 U.S.C. § 1983 by depriving GO Bondholders of rights secured under PROMESA. The Court will first evaluate the applicability of the debt-litigation stay under section 405 of PROMESA and then consider the motions to intervene. Section 405(b) of PROMESA mandates a stay on lawsuits related to a Liability if they meet criteria outlined in subsections (b)(1) to (b)(7). The defendants argue that the PROMESA Counts are stayed under several subsections. Section 405 is similar to the automatic stay provision in the U.S. Bankruptcy Code, prompting the Court to reference bankruptcy interpretations for guidance. While the automatic stay is broad, it does not encompass all actions, particularly those arising post-petition.
Section 405(b)(1) specifically stays actions against the Government of Puerto Rico that could have been initiated before PROMESA's enactment and claims for liabilities that arose prior to that enactment. The Court previously determined that the first count of the amended complaint does not fall under this stay, as the claims arose post-enactment of PROMESA. The Commonwealth and COFINA defendants contend that since the GO Bondholders have multiple causes of action that they acknowledge are stayed, the entire action should be stayed as section 405(b)(1) applies to "actions or proceedings," not individual causes. The Court, however, does not find this argument convincing.
Courts interpreting section 362 of the Bankruptcy Code maintain that each claim in litigation must be assessed individually to determine if it is subject to an automatic stay. This principle applies in cases involving multiple claims and parties, necessitating an independent analysis of each claim's status regarding the bankruptcy stay. Under section 405(b)(1) of PROMESA, the presence of stayed counts in a complaint does not imply that all counts are stayed. Defendants argue that certain counts are stayed because they could have been filed before PROMESA's enactment and do not arise under PROMESA. However, the court finds this argument unconvincing, clarifying that these counts are grounded in the enforcement of PROMESA provisions, and thus could not have been raised prior to its enactment.
Section 405(b)(6) of PROMESA stays any action to collect liabilities arising before PROMESA's enactment. Defendants claim that the injunctive relief sought by the GO Bondholders constitutes acts to collect, which would be stayed. The court refutes this, noting that while section 362(a)(6) broadly addresses creditor actions to collect prepetition debts, it does not extend to non-coercive actions aimed at ensuring future payment from a debtor or their estate. This interpretation aligns with cases that clarify the distinction between collection activities and protective measures that do not exert control over the debtor's property.
A "mere request for payment" does not violate the automatic stay unless it is coercive or harassing, as established in In re Knowles. The filing of a proof of claim is not considered an act against the debtor's property. Under 11 U.S.C. § 362(a)(6), prohibited activities involve attempts to seize the debtor's property or compel the debtor to act. Defendants cite cases where creditors engaged in coercive or harassing actions, such as sending notices of delinquency or applying automatic deductions from wages, which violated the stay. However, the GO Bondholders have explicitly disclaimed any intention to collect, distinguishing their actions from those in the cited cases. The court found no basis for considering the GO Bondholders' actions as coercive or harassing and clarified that their claims seek only declaratory and injunctive relief, not recovery of pre-petition liabilities against the Government of Puerto Rico.
Regarding the additional claims under PROMESA, the court maintained that these do not change the nature of the relief sought. Defendants argued that section 405(b)(6) could extend to the GO Bondholders' claims against COFINA defendants and BNYM Trustee, referencing cases where actions to recover post-petition transfers were stayed. However, those cited cases involved attempts to reclaim funds from third parties to satisfy pre-petition debts, which is not applicable to the GO Bondholders' situation.
The cases referenced do not seek solely declaratory and injunctive relief, and the GO Bondholders' claims under PROMESA do not aim to confiscate property or obtain payments from the Commonwealth. Therefore, these claims are not subject to the stay imposed by section 405(b)(6). Section 405(b)(3) stays actions to obtain possession of or control over property belonging to the Government of Puerto Rico. Control is defined as exercising influence or power over property, potentially leading to constructive possession. Defendants assert that the GO Bondholders' claims amount to exercising control over the Commonwealth's property through requests for injunctive relief, which would include requirements for fund segregation, prohibitions on budget transfers, and mandates for the transfer of IVU revenues to the Commonwealth. However, the Court finds that the requested injunctive relief would not grant the GO Bondholders possession or control over the Commonwealth's assets. Instead, it would prevent the Commonwealth from misusing its assets in violation of PROMESA. Consequently, the PROMESA claims are not stayed by section 405(b)(3). The cited cases illustrate that control involves direct interference with a debtor’s assets, which is not the case here. The purpose of the automatic stay is to prevent creditors from undermining the bankruptcy estate, and not every action opposing the debtor's rights constitutes a violation of the stay.
Sections 405(b)(4) and 405(b)(5) of PROMESA impose a stay on actions to create, perfect, or enforce liens against the property of the Government of Puerto Rico. Defendants assert that the PROMESA counts are stayed because the injunctive relief sought is an act to create or enforce a lien. This argument is rejected on the grounds that if the GO Bondholders have a first lien on Commonwealth resources, it already exists and is perfected under the Puerto Rico Constitution. If they are incorrect, the PROMESA counts would not create or perfect a lien, leaving the GO Bondholders without the relief they seek. Moreover, asserting these counts does not impact the Commonwealth's property interests and does not constitute an act to enforce a lien. Defendants' citation of In re Reserves Dev. Corp. is deemed irrelevant, as that case does not address what constitutes an act to enforce a lien. The Court concludes that the requested injunctive relief does not seek payment from the Commonwealth and therefore does not amount to enforcement of a lien.
Defendants further argue that the Court should exercise its inherent authority to stay the case entirely to prevent piecemeal litigation, aligning with PROMESA's goal of allowing orderly debt restructuring. However, the Court disagrees, noting that Congress did not include language to stay all claims against the Commonwealth in PROMESA, indicating an intention to stay only specific types of claims. Consequently, since the PROMESA counts are not stayed by its provisions, the Court declines to impose a stay under its inherent authority.
The Court is addressing five motions to intervene regarding the PROMESA counts, which are not stayed. The intervenors include the Oversight Board, Ambac (a financial guarantor for the Commonwealth's debt), and various COFINA bondholders. Under Federal Rule of Civil Procedure 24, intervention can occur either by right or permissively. To intervene by right, a party must demonstrate that its motion is timely, it has a relevant interest in the action, the action's outcome could impair its interest, and no existing party adequately represents that interest. Failure to meet any of these criteria negates the ability to intervene by right.
Even if intervention by right is not applicable, a party may seek permissive intervention if there are common questions of law or fact between its claims and the main action. The Court has broad discretion in granting or denying such motions.
The Oversight Board is granted intervention by right under PROMESA, which explicitly allows the Board to intervene in litigation against the territory. However, the Board did not provide a pleading with its motion, which is a procedural requirement. The only opposition to the Board's intervention comes from this procedural oversight, as noted by the GO Bondholders.
Rule 24(c) requires a pleading outlining the claim or defense for intervention, but noncompliance does not automatically prevent intervention if there is no prejudice to other parties. The First Circuit has established that denying intervention solely due to a missing pleading, without demonstrated prejudice, is an abuse of discretion. In this instance, the Oversight Board's failure to include a pleading did not prejudice the GO Bondholders, who did not assert any such prejudice. Consequently, following precedent, the Court will excuse this failure, granting the Oversight Board's motion to intervene.
Ambac seeks intervention, citing a direct interest as it insures over $800 million in COFINA bonds and may face financial obligations if COFINA defaults. Ambac argues that the outcome of the case could adversely affect its interests, particularly if the GO Bondholders succeed, potentially hindering COFINA's ability to meet debt obligations. The GO Bondholders acknowledge Ambac's interest but argue that the Ambac Insurance Policy limits its legal standing to intervene. They claim that Ambac's subrogation rights arise only upon making payments on insured bonds, which they believe restricts Ambac's ability to participate in the litigation. The Court finds this argument unconvincing, as the policy does not inherently restrict Ambac’s right to intervene under Rule 24 or the interests it aims to protect.
Additionally, the GO Bondholders assert that any rights Ambac might have are contractually assigned to BNYM Trustee, preventing its intervention. They reference a provision in the COFINA bonds that limits the bondholders’ ability to enforce the Resolution’s terms unless specific conditions are met. Thus, while the GO Bondholders argue against Ambac's intervention, the Court remains inclined to permit Ambac’s participation in the case.
Ambac is not contractually barred from intervening in the case due to two main reasons. First, the language in the COFINA bonds that limits bondholders' rights to "appear in or defend" only pertains to violations of the "provisions of the Resolution," which are not relevant to this case. Second, the provisions cited by the GO Bondholders outline procedures for bondholders to pursue claims under the Resolution and do not prevent Ambac’s intervention. Since Ambac's motion is timely and establishes a legitimate interest that could be affected by the litigation, the Court permits Ambac to intervene under Fed. R. Civ. P. 24(a)(2).
The COFINA Senior Bondholders requested to intervene to enforce the PROMESA stay, but their motion became moot as the Court determined that the PROMESA counts are not stayed, leading to the denial of their intervention request. Similarly, the Puerto Rico Funds and Major COFINA Bondholders also seek to intervene, asserting an interest in the IVU revenues supporting their bonds, arguing that the litigation's outcome threatens their interests by potentially diverting these revenues to benefit the GO Bondholders. They contend that their interests are inadequately represented by existing parties in the case.
The GO Bondholders challenge the motions to intervene by the Puerto Rico Funds and Major COFINA Bondholders, arguing that the COFINA Bondholders have delegated their rights to the BNYM Trustee, who adequately represents their interests. They assert that the COFINA bonds and related Resolution limit the ability of COFINA Bondholders to litigate disputes but do not completely prevent them from defending against unrelated actions. The Court finds that the Puerto Rico Funds and Major COFINA Bondholders have demonstrated a potential inadequacy in their representation, especially since the BNYM Trustee is seeking to dismiss the case, which could leave COFINA Bondholders without representation. Thus, the Court allows their intervention as a right under Fed. R. Civ. P. 24(a)(2).
The Court denies the Commonwealth Defendants' motion to stay and also denies the COFINA Senior Bondholders' intervention motion. It grants the motions to intervene from the Oversight Board, Ambac, the Puerto Rico Funds, and the Major COFINA Bondholders. The motions for a stay from the Oversight Board and Ambac are also denied. The Court clarifies the terminology for the parties involved, designating the Commonwealth defendants and COFINA defendants accurately. The BNYM Trustee's name is officially updated in the case documentation.
PROMESA’s automatic stay is set to expire on May 1, 2017, following a 75-day extension granted by the Oversight Board on February 14, 2017. Governor Ricardo Rossello enacted the Puerto Rico Financial Emergency and Fiscal Responsibility Act of 2017 on January 27, 2017, which repealed previous “emergency periods” linked to the debt moratorium under the prior administration’s Moratorium Act. The complaints filed assert one substantive cause of action, primarily seeking relief from the debt-litigation stay. PROMESA prohibits the Commonwealth from enacting new laws that alter fund transfers outside normal business or conflict with territorial laws until the Oversight Board is fully appointed. Furthermore, Section 207 restricts territorial governments from engaging in debt-related transactions without the Oversight Board's approval. The GO Bondholders seek various forms of injunctive relief, including blocking Executive Order 30 and the Moratorium Act, preventing the diversion of IVU revenues to COFINA, mandating COFINA to transfer revenues to the Commonwealth, and ensuring the preservation of funds for constitutional debt obligations. Additionally, the motions to intervene filed by Ambac, the COFINA Senior Bondholders, and the Oversight Board requesting an automatic stay were denied, as the Court found that the PROMESA counts are not stayed. Senior COFINA Bondholders and Puerto Rico Funds have substantial holdings in COFINA bonds.
Pending motions to intervene in the case have been deemed timely, without causing undue prejudice to existing parties. The Court emphasizes that this case is still in its early stages, favoring the proposed interveners. Notably, the GO Bondholders did not contest the timeliness or the potential prejudice of these motions. Various parties, including the COFINA Senior Bondholders, Ambac, and the Oversight Board, filed their motions prior to the GO Bondholders’ second amended complaint. The GO Bondholders, while acknowledging they are not parties to the Resolution, seek to enforce a no-action clause based on precedents allowing non-parties to do so. However, the Court asserts that generally, non-parties cannot enforce contract provisions unless they are intended beneficiaries. The Court references multiple cases reinforcing this principle, including Rajamin v. Deutsche Bank and others. The GO Bondholders did not counter this argument, though Ambac has indicated that it may face inadequate representation and could suffer direct economic harm if the GO Bondholders succeed. The potential transfer of IVU revenues from COFINA could jeopardize COFINA’s ability to meet its bond obligations, obligating Ambac to cover insurance claims for COFINA Bondholders.
The Court finds that if the GO Bondholders succeed, the Commonwealth’s treasury will benefit from the transfer of IVU revenues from COFINA, potentially disadvantaging Ambac compared to other defendants. Ambac has demonstrated inadequate representation in this litigation. The COFINA bonds held by the Puerto Rico Funds and Major COFINA Bondholders are legitimate interests that could be adversely affected by the case’s outcome. The GO Bondholders acknowledge that a ruling against the Commonwealth regarding IVU revenues would diminish the Puerto Rico Funds and Major COFINA Bondholders' standing as creditors. The Court's assessment of inadequate representation focuses solely on whether the interests of the Puerto Rico Funds and Major COFINA Bondholders are sufficiently represented by the named parties, as they were not parties at the time of their intervention motions. Regardless of their right to intervene under Fed. R. Civ. P. 24(a)(2), the Court allows intervention under Fed. R. Civ. P. 24(b) due to a shared legal question regarding the legality of using IVU revenues to back COFINA bonds.
