Red Alert: The Stay and the Control Board

Though much of my time at Control Board Watch has focused on the control board candidates, longtime readers of my work will know that I enjoy covering various legal developments, from the Recovery Act to the Wal-Mart decision, on my original MuddLaw blog.  Because there are so many lawsuits being filed in relation to PROMESA and the control board, I plan to carry some of that work over into the CBW space, and will start by examining Judge Francisco Besosa’s significant ruling from last week in the Lex Claims v. Garcia Padilla case.

On Friday, Judge Besosa ruled that legal stay did not apply to the Lex Claims litigation, which has been brought by plaintiffs comprised of General Obligation bondholders. In the complaint, plaintiffs argue that Governor Garcia Padilla has broken the law in making several budget appropriations which violate the protections given to their bonds in the newly-passed PROMESA legislation.

While Judge Besosa’s ruling that the stay does not apply is not a ruling on the merits of this case, it is a clear and significant signal that he believes the case has merit – and that he thinks there is, in fact, a chance that the governor has violated the newly-enacted federal law.

The ruling comes no less than two days after President Obama appointed the 7 board members, and presents a new dynamic for the Board to grapple with before it is fully functional and staffed.

Judge Besosa stated in his short opinion:

Section 405(b)(1) of PROMESA stays two types of suits. First, it stays judicial actions “against the Government of Puerto Rico that w[ere] or could have been commenced before the enactment of [PROMESA].” PROMESA § 405(b)(1), 48 U.S.C.A. § 2194(b)(1). Plaintiffs commenced this action by filing a complaint on July 20, 2016, (Docket No. 1), after PROMESA was enacted on June 30, 2016. In their amended complaint, plaintiffs seek a declaration that measures taken by the Commonwealth of Puerto Rico after PROMESA’s enactment violate sections 204(c)(3) and 207 of PROMESA. (Docket No. 25 at pp. 22-28.) They also seek an injunction enjoining the Commonwealth defendants from enforcing these measures until the PROMESA Financial Oversight and Management Board determines their propriety. Id. Plaintiffs could not have commenced this lawsuit before PROMESA’s enactment because their claims are to enforce provisions of PROMESA by challenging conduct that occurred after PROMESA’s enactment. Accordingly, this case does not fall into the first type of suit stayed pursuant to section 405(b)(1) of PROMESA.

The second type of suit stayed by section 405(b)(1) of PROMESA are judicial actions “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). “Liability Claim” means, “as it relates to a Liability,” “right to payment” or “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.” Id. § 405(a)(2). In their amended complaint, plaintiffs expressly state that their lawsuit “does not seek to compel payment on Plaintiffs’ bonds.” (Docket No. 25 at p. 5.) Rather, plaintiffs seek only declaratory and injunctive relief. Id. at pp. 22-28. Although plaintiffs request in their amended complaint an “order awarding . . . costs and attorneys’ fees, as authorized under 42 U.S.C. § 1983,” (Docket No. 25 at p. 28), the right to payment of costs and attorneys’ fees in this action did not arise before PROMESA’s enactment because plaintiffs brought this action after PROMESA’s enactment. Thus, plaintiffs do not seek to recover a right to payment that arose before PROMESA’s enactment. Accordingly, this case does not fall into the second type of suit stayed pursuant to section 405(b)(1) of PROMESA.

Again, while this does not dispose of the complaint’s principal issue, it is a clear sign that Judge Besosa believes that the case is worthwhile and, from my own review of the complaint, I can say that I agree. In fact, I believe Judge Besosa will ultimately rule against the government.

Defendants filed their motion to dismiss on September 2 and plaintiffs will have until September 30 to oppose.


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