On November 15, 2016,  Judge Besosa decided the issue of lifting the stay in the consolidated Brigade cases and denied the petitions. The 55-page, carefully crafted opinion summarizes the parties’ positions and as it did in the Peajes decision, discussed here, made a bankruptcy style analysis of the procedure to lift the stay in PROMESA. He decided that the balance of equities inclined in favor of the Commonwealth (bankruptcy courts and hence this analysis is based on equity). Although three of the plaintiffs claimed constitutional violations, the Judge determined that the stay case law did not consider this cause for lifting of the stay since they must also demonstrate harm from the continuation of the stay, see page 36 of the opinion. He continues saying:

Thus, between the four sets of plaintiffs in these cases, the true harm in upholding the automatic stay appears to be, as National suggested at the evidentiary hearing, allowing the Commonwealth to continue “taking other people’s money away under color of the Moratorium Act.”. . .

The Court with the Commonwealth defendants, GDB, PRPFC and UPR that this monetary damage incurred by plaintiffs during the stay could be quantified and therefore would not be “permanent” or “irreparable.” (page 37-38 )

The Court also mentions that the issue of damages could also be handled pursuant to section 407 of PROMESA. Essentially, this only postpones the day of reckoning when PR will have to pay for this illegal diversion of funds.

Additionally, Judge Besosa disagrees that the Commonwealth would suffer “crushing levels of additional work defending these particular cases” (page 40, emphasis on the original) but he is sensitive to opening the floodgates of future cases for the lifting of the stay since granting the relief would embolden others to try. The distraction and expense of these future cases inclines the balance in the Commonwealth’s favor according to the opinion. Moreover, Judge Besosa argues that lifting the stay would undermine the purpose of PROMESA and allow these plaintiffs to jump ahead of other creditors. He also determined that the doctrine of Constitutional avoidance (decide cases for other reasons instead of Constitutionality of statutes)

But not all is lost for bondholders. As he has done in three other opinions, Judge Besosa made findings that in the near future will be very positive for plaintiffs. At page 45, note 12, the Court states:

This is not, of course, to say that the Court gives credence to each of the Commonwealth’s stated harms in its balancing calculus. It is not, for example, persuaded by the defendants’ postulation of an apocalyptic “death spiral” following invalidation of the Moratorium Act. Heeding the expert opinion of Dr. Carlos Colon de Armas that “the Government of Puerto Rico has the revenues to cover essential services and pay its debt commitments,” the Court finds the Commonwealth’s hypothesized catastrophe to be a melodramatic exaggeration divorced from reality. See 9/23 Tr. At 28:11-13. Nevertheless, the Court’s holding regarding the lack of “cause” in these cases is driven by a simple, reasoned determination: that the fixable financial harm confronted by the plaintiffs if the stay remains in effect does not, on balance, outstrip the harm to the Commonwealth and the PROMESA process that a decision vacating the stay would engender. That the defendants advance certain implausible arguments regarding the precise extent of that harm does not change this basic, dispositive conclusion.

The Court discussed the claim of US Bank Trust and states “[h]ere, the evidence unequivocally establishes that the Commonwealth and UPR have engaged in the diversion of pledged revenues that serve as hard collateral for the repayment of UPR bondholders. . .

The Court finds that the existence of this continuing lien on a perpetual source of revenue satisfies the “flexible” standard applicable to determinations of adequate protection. It therefore holds that the Commonwealth has carried its burden of showing that the UPR bondholders will, in due time, receive the “indubitable equivalent” of their current interest in UPR’s pledged revenues. ” (pages 51-52)

What does this mean? It means that US Bank Trust is a secured creditor and its claim cannot be restructured in Bankruptcy. If its claim cannot be restructured in Bankruptcy, what type of voluntary restructuring will it accept in Title VI? Not good for PR in the long run.

Finally, the Judge again warns PR to take advantage of the PROMESA stay and to earnestly “revitalize” the negotiation process. He reminds the Commonwealth defendants that in order to access Title III, it has to negotiate in good faith with its creditors.

PR has won the stay cases but in my view lost the war. Judge Besosa’s rulings have made clear that three of these plaintiffs have a lien and pledge that cannot be altered in Bankruptcy. The Court has also determined in the US Bank Trust that the Commonwealth has diverted pledged funds and that the proper remedy is monetary damages. In other words, not only will US Bank Trust eventually get paid but also it would likely receive monetary compensation for its damages.

As I stated before, this ruling on US Bank Trust lien is consistent with Judge Besosa’s ruling in the Peaje litigation with respect to its lien and the lien held by Altair. This lien, however, has to be balanced with Judge Besosa’s ruling in the Assured Guarantee, Corp. v. García Padilla, where he said 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.’” This may be of vital importance in the remaining case, Lex Claims v. García Padilla, where plaintiffs are claiming that the funds paid to COFINA are available resources that can be clawed back to pay the GO bonds. COFINA, on the other hand, claims it has a valid lien and that the legislature made it clear that these funds cannot be clawed back to pay the GO bonds.

Whether Judge Besosa, or the PR Supreme Court in a certification proceeding decides the issue, sooner or later, it has to be decided. The COFINA bondholders are hoping that the Board will help reach a consensual agreement or that it will allow the Government to file for Title III PROMESA bankruptcy. They are also betting on the Chapter 9 principle that liens are secured creditors and GO bonds are not. That is all fine and dandy in a Chapter 9, but Title III is not Chapter 9.

Judge Besosa or the PR Supreme Court will have to decide whether COFINA is a valid public corporation and that the stream of income that it receives from the PR sales tax is not available resources pursuant to Article VI, sec. 8 of the Constitution. If they are available resources and can be clawed back, the result in a Title III bankruptcy would be very different from a Chapter 9 of the Bankruptcy Code.

Pursuant to section 201(b)(1)(N) of PROMESA, the Fiscal Plan must “respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act.” As you may see, the constitution is put forth before laws (COFINA is a law), consistent with the idea that in PR, like at the national level, the Constitution is the Supreme Law of the land. When we go to section 314(b)(7) of PROMESA states that the Judge will confirm the Bankruptcy plan if the plan is “consistent with the applicable Fiscal Plan certified by the Oversight Board under title II.” Moreover, the House Natural Resources Committee Report on PROMESA, at page 50, in discussing section 314, stated that “[b]y incorporating consistency with the Fiscal Plan into the requirements of confirmation of a plan of adjustment, the Committee has ensured lawful priorities and liens, as provided for by the territory’s constitution, laws, and agreements, will be respected in any debt restructuring that occurs.’’

Hence, if the Courts decide that COFINA funds are available resources to be used to pay public debt, Title III will not protect its bondholders even if its lien survives, since the Constitution is the supreme law of the land and lawful priorities and liens as provided by the constitution, laws and agreements has to be respected.

Moreover, Lex Claims filed a motion in response to the Board’s request for intervention in its case. In explaining why COFINA is invalid, Lex Claims said at page 16:

A judicial finding that the assignment of SUT revenues to COFINA is invalid would thus free up vast quantities of current and future revenue, which the Commonwealth could use to fund essential services, other current expenditures, capital improvements, and payments on its lawful Constitutional Debt. If plaintiffs are correct that the assignment of SUT revenues to COFINA to facilitate the servicing of COFINA’s debt violates the various limitations in Puerto Rico’s Constitution on ceding tax revenue for the benefit of creditors, COFINA would lack any enforceable interest in the SUT revenues, and the COFINA bondholders’ claim against COFINA would suffer accordingly.

When I read this, I puzzled since if COFINA is unconstitutional, the bonds could be declared invalid and pursuant to Article 1247 of the Puerto Rico Civil Code, 1930 ed, 31 L.P.R.A. § 3496, the parties would have to hand back what they received, i.e., bondholders give back what they have been paid and PR hands back the billions it received. Not a good deal, but then it dawned on me that in Title III setting where secured creditors get paid and Constitutional priorities must be respected, the money owed to bondholders would be akin to a personal injury judgment, to wit, a non-secured credit devoid of any priority and would likely be reduced to near zero by a Bankruptcy Judge. Little comfort for these creditors.

What will Judge Besosa or the PR Supreme Court decide, I don’t know, but at some time next year the issue will be decided and if COFINA funds are “available resources” then GO’s will likely be paid first. Let’s see what happens.