The Assured-Ambac decision, the Stay and the Oversight Board

On October 4, 2016, Judge Besosa issued an important ruling in two almost forgotten bond cases (Assured/Ambac). In these cases, the Government had not claimed, as it could, that they were covered by the PROMESA stay. Apparently, it relied on its claims that the cases were barred by the 11th Amendment and that plaintiffs had no claims pursuant to the US Constitution and section 903 of the Bankruptcy Code.  Judge Besosa denied the 11th Amendment defense, which prohibits suing a state (including PR) in federal court for collection of monies. Since these cases request prospective injunctive relief, that is the exception to the 11th Amendment and Ex Parte Young. As to the rest of the claims, Judge Besosa at pages 21-22 stated:

“While Circular Letter 1300-15-16 created by the Working Group may change the payment priority structure established in the OMB Act by removing express mention of contractual and credit safeguarding obligations from the language of the second priority, see Civ. No. 16-1095, Docket No. 31-3 at pp. 7-8, it does not create a composition. Decreasing the priority of payment does not reduce or abate the obligation. The full amount is still due to the bondholder. Changing the payment priority structure, however, while not preempted by Section 903, may still constitute a violation of the Equal Protection, Due Process, Takings, and Contracts Clauses as asserted by plaintiffs.”

In other words, section 903 of the Bankruptcy Code does not preempt the Moratorium law but it may be unconstitutional pursuant to the U.S. Constitution. Several of the cases that have been filed post PROMESA claim that the Moratorium Act violates section 303, which is nothing more than a verbatim copy of section 903. Therefore, it could be that the Judge may determine that the Moratorium Act is unconstitutional but not preempted.

Also, the parties in the 4 cases in which there was a hearing for the lifting of the stay filed their post-hearing memorandums on October 7. They had two main arguments which sedge into this. Brigade and National strongly argued that the Moratoriums Act frustrated the stay’s purpose of consensual restructuring by creating uncertainty as to the legal priorities of the bonds. On the other hand, U.S. Bank Trust and National insisted that there was cause of the lifting of the stay since the 5th Amendment required that they receive adequate protection, which meant the enforcement of their liens. As I stated during my telephone conference on the cases, I believe the Judge will lift the stay on at least one, but probably two of the cases and rule on the constitutionality of the Moratorium Act, which is also an issue on the Assured/Ambac cases.

Also, the Financial Oversight Board’s request for a 14-day extension (in reality a plea that the Judge not decide the issues yet) to determine whether it will intervene and what position it would take. Since I believe it is unlikely Judge Besosa will rule on these issues before the end of October, he will probably grant the Board the extension and order any objections to it be filed shortly thereafter.

Finally, in the Assured/Ambac decision, there is something most reporters have missed. Judge Besosa quickly made clear at page 4 that “[i]n cases of an unbalanced budget, the Commonwealth Constitution establishes a priority system detailing in what order appropriations will be paid. P.R. Const Art. VI § 8. First priority is assigned to ‘interest on the public debt and amortization thereof.’” The PR Government has maintained that due to its “police power”, the first priority of payment is essential services and not the debt. This could be the harbinger of Judge Besosa’s position on these issues. We will soon find out.