On June 30, 2016, President Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) into law. A copy of the Act can be found here. The most significant portions of PROMESA are found in titles I and II, which establish an Oversight Board with budgetary and fiscal control over Puerto Rico, and title III, which creates of a debt adjustment procedure for Puerto Rico and other territories of the United States. From a bankruptcy perspective, title III gives rise to a fascinating new procedure that, while it does not make U.S. territories eligible to commence cases under chapter 9 of the Bankruptcy Code, patterns itself after a chapter 9 case by adopting and incorporating substantial portions of chapters 1, 3, 5, 9, and 11 of the Bankruptcy Code to create an wholly new debt adjustment process for Puerto Rico and other U.S. territories.
Beyond all the social, political, and economic furor surrounding PROMESA, however, tucked at the end of the Act is a standalone provision that promises an immediate impact not merely on bondholders and other creditors seeking to enforce payment and remedies but on any person or entity seeking to enforce rights generally against the Government of Puerto Rico or any “territorial instrumentality,” a phrase only a Congressional staffer or bankruptcy professor could love. Section 405, which took effect immediately upon enactment of PROMESA and remains in effect through at least February 15, 2017, operates as a stay identical to the automatic stay imposed under § 362(a)(1)-(7) of the Bankruptcy code.
Portions of the “PROMESA stay” are applicable only to a “Liability Claim,” defined broadly as a right to payment on account of any financing indebtedness for borrowed money (e.g., bond, loan, letter of credit). However, like the automatic stay imposed by Bankruptcy Code § 362(a) to protect a debtor in bankruptcy, § 405 of PROMESA also imposes a stay of such familiar acts as:
- the commencement or continuation of any action or proceeding against the Government of Puerto Rico that was or could have been commenced prior to the enactment of PROMESA;
- the enforcement of any judgment against the Government of Puerto Rico or its property;
- any act to obtain possession of property of, or exercise control over, the Government of Puerto Rico or its property; and
- any act to create, perfect, or enforce any lien against property of the Government of Puerto Rico.
Exceptions to the PROMESA stay are limited: only actions pending on or before December 18, 2015 and actions pertaining to a governmental unit’s police and regulatory powers are excluded from the injunctive effect of the stay. Other exceptions to the automatic stay were not incorporated into § 405. Thus, for example, there is no automatic exception from the PROMESA stay for the exercise by a commodity broker or forward contract merchant under any arrangement relating to a commodity contract, forward contract, or securities contract (Cf. 11 U.S.C. § 362(b)(6)), nor any exception for acts by a lessor of nonresidential real property to retake possession following the following the natural expiration of the lease (Cf. 11 U.S.C. § 362(b)(10)).
Perhaps in recognition of the split among circuit courts as to whether violations of the automatic stay in bankruptcy cases are void ab initio or merely voidable, acts in violation of the PROMESA stay are void by statute. Moreover, whereas damages may be recovered only for a willful violation of the automatic stay under § 362 of the Bankruptcy Code, PROMESA requires no such showing of willfulness for a person found to violate the stay to be held liable for damages, costs, and attorneys’ fees.
Relief from the PROMESA stay may be granted—as in the bankruptcy context—“for cause.” PROMESA does not define “cause” in this context, but the obvious derivation of § 405 from the provisions of Bankruptcy Code § 362 strongly suggests that courts would look to caselaw applying Bankruptcy Code § 362(d)(1) for guidance in deciding whether cause exists to grant relief from the PROMESA stay. Stay relief similar to that afforded under § 362(d)(2)—i.e., where there is a lack of equity in property that is not otherwise necessary to an effective reorganization—is not available under PROMESA.
The timing of a hearing on a request for relief from the PROMESA stay also closely tracks the language of Bankruptcy Code § 362, except that the PROMESA statute allows the district court 45 days in which to order continuation of the stay as the result of a hearing or otherwise, whereas the corresponding provision of the Bankruptcy Code terminates the stay after only 30 days.
Original and exclusive jurisdiction of any such civil action arising under or relating to PROMESA § 405 is vested solely in the federal district courts of Puerto Rico. Despite the strong similarities to the bankruptcy stay, the general order referring certain matters to the bankruptcy courts does not extend to civil proceedings arising outside of the Bankruptcy Code. Therefore, despite the similarity to lift stay proceedings in bankruptcy, litigants should not expect to see requests for relief from the PROMESA stay referred to bankruptcy judges for adjudication.
With PROMESA having just been signed into law, it is too early to tell precisely how § 405 will be received and applied by the federal judges in the District of Puerto Rico. Nevertheless, it is clear that PROMESA is not just for bondholders, and the new Act’s reach extends far beyond the realm of defaulting municipal bonds and quasi-chapter 9 debt adjustment proceedings. Any pending or contemplated litigation against an instrumentality of the Government of Puerto Rico, or any act to assert control over the Government, or a property interest of the Government, may already be stayed by PROMESA § 405. As when contemplating action against a debtor in bankruptcy, the well-advised litigant will carefully consider the implications of the PROMESA stay before moving ahead.