Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 1 of 25 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

Transcription

1 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 1 of 25 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO ) Peaje Investments LLC, ) ) Movant, ) ) Civil No. 16-cv- -against- ) ) Hon. Alejandro Garcia Padilla, Hon. Juan C. ) Zaragoza Gomez, Hon. Luis G. Cruz Batista, ) Hon. Carmen Villar Prado, Puerto Rico ) Highways & Transportation Authority, ) ) Respondents. ) ) REQUEST / MOTION OF PEAJE INVESTMENTS LLC FOR RELIEF FROM THE INTERIM STAY PURSUANT TO SECTION 405(E) OF PROMESA TO PURSUE AN ACTION TO PREVENT FURTHER EXPROPRIATION OF MOVANT S PROPERTY AND FOR DAMAGES UNDER SECTION 407 OF PROMESA AND APPLICABLE LAW Peaje Investments LLC ( Movant ), as beneficial owner of in excess of $63 million in 1968 Bonds (defined below) issued by the Puerto Rico Highways & Transportation Authority ( PRHTA ), presently consisting of approximately $28.8 million in Series AA Bonds, $11.4 million in Series CC Bonds, and $22.8 million in Series CC Capital Appreciation Bonds, by and through its attorneys, hereby files this motion for relief from the interim stay imposed by section 405(b) of the Puerto Rico Oversight, Management, and Economic Stability Act ( PROMESA ). Upon lifting of the stay, Movant will commence and prosecute an action against Respondents for the unlawful diversion of pledged revenues as contained in the draft complaint attached hereto as EXHIBIT A, as it may be amended from time to time (the Complaint ), in the United States District Court for the District of Puerto Rico. 1

2 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 2 of 25 The Complaint challenges, among other things, the unlawful diversion of pledged Toll Revenues (defined below) by the Commonwealth of Puerto Rico (the Commonwealth ), PRHTA, Hon. Alejandro Garcia Padilla, in his official capacity as Governor of the Commonwealth (the Governor ), and certain other agents of the Commonwealth government identified as respondents in the above caption (collectively with the PRHTA and the Governor, Respondents ) and the constitutionality of the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (the Moratorium Act ). The Complaint also seeks damages for the expropriation of the pledged Toll Revenues pursuant to section 407 of PROMESA and applicable law. Although Movant believes that Respondents have also expropriated certain non- Toll Revenues pledged to repayment of the 1968 Bonds (as explained in more detail below), the Complaint at this time only challenges Respondents unlawful diversion of the pledged Toll Revenues. Movant reserves its rights to amend the Complaint to seek relief with respect to the unlawful diversion of the non-toll Revenues and any claims that may arise therefrom and asks the Court to lift the stay so that Movant may bring such additional claims, should Movant choose to do so. A proposed form of order granting this motion (the Order ) is attached hereto as Exhibit B. Under the provisions of PROMESA, this motion and the proceeding it initiates are entirely discrete and involve a single issue: whether the interim stay should be lifted. It does not involve an adjudication of the Complaint or any of the claims for relief set forth therein. Upon lifting of the stay, Movant will seek to have the issues raised by the Complaint heard on an expedited basis to prevent further expropriation of its property interests. Puerto Rico law provides bondholders such as Movant with the right to bring suit upon the 1968 Bonds and to otherwise enforce the binding resolutions governing such bonds. See 9 L.P.R.A

3 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 3 of 25 The standard under PROMESA for granting relief from the stay is for cause shown. See PROMESA 405(e)(2). Cause exists in this matter because Respondents, acting under color of law, are currently diverting funds in which Movant has a lawful property interest without any compensation whatsoever and are expending the same other than as required under the terms of certain bonds that Movant holds and the applicable governmental resolution governing Movant s rights. Movant seeks in the Complaint a determination that Respondents ongoing diversion of the pledged Toll Revenues is unconstitutional and further amounts to transfers in violation of section 407 of PROMESA and applicable law. Cause further exists because, if Movant is not granted relief from the stay to protect its rights, the stay itself would be unconstitutional. Unless lifted, the stay itself will effectuate a taking of Movant s property without just compensation by preventing Movant from taking action to protect its property interests while the same are being dissipated. Movant is precisely the kind of claimant Congress sought to protect in authorizing the Court to grant relief from stay under the provisions of PROMESA. Thus, because a court is obligated to interpret an act of the U.S. Congress in a manner that avoids rendering it unconstitutional, the Court should conclude that relief from the stay should be granted to avoid continuing harm to Movant in violation of its constitutionally protected interests. INTRODUCTION 1. This Court has jurisdiction over this matter under 28 U.S.C and section 405(e)(1) of PROMESA. Venue is proper under 28 U.S.C and section 405(e)(1) of PROMESA. 2. Movant is the beneficial owner of in excess of $28.8 million in Series AA, $11.4 million in Series CC, and $22.8 million in Series CC Capital Appreciation 1968 Bonds issued by PRHTA. As discussed more fully below, the 1968 bonds are secured by and payable solely from 3

4 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 4 of 25 certain toll revenues, excise taxes, and vehicle fees pledged by PRHTA to the payment of such bonds, as well as investment earnings on moneys held in trust for the benefit of the bondholders and other funds of the Commonwealth allocated to PRHTA for payment of its debt. 3. Under the binding municipal resolution governing the 1968 Bonds issuance, PRHTA is obligated to deposit on a monthly basis the pledged 1968 Revenues (defined below), including the Toll Revenues, with a fiscal agent (the Fiscal Agent ) for the bonds. In a willful breach of this undertaking, the Governor of Puerto Rico, acting pursuant to the Moratorium Act and a series of executive orders, has directed PRHTA and various Commonwealth officers to retain or otherwise divert the pledged revenues to the payment of other expenses, thereby avoiding and dissipating the bondholders liens with respect to such revenues. 4. On June 29, 2016, the U.S. Congress enacted and, on June 30, 2016, the President signed into law, PROMESA with the intention of assisting the Commonwealth and its territorial instrumentalities in achieving fiscal stability and responsibility. The statute establishes a Financial Oversight and Management Board for Puerto Rico (the Oversight Board ) tasked with the creation of a plan of adjustment to restructure and satisfy the debts of the Commonwealth and the instrumentalities designated by the Oversight Board as covered for purposes of the Act. See PROMESA 101(b), 101(d), 104(j), 312. The plan of adjustment will be subject to court approval. See id This process begins with the Oversight Board s filing of a petition for relief in the U.S. District Court for the District of Puerto Rico commencing a voluntary case to be overseen by a District Judge appointed by the Chief Justice of the United States for purposes of Puerto Rico s restructuring. See id. 304, 307, Section 405(b) of PROMESA imposes an interim stay on certain creditor actions running from the date of the statute s enactment and terminating on the earlier of: (a) February 4

5 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 5 of 25 15, 2017, subject to an extension by the Oversight Board or U.S. District Court if certain conditions are met; and (b) with respect to the Commonwealth or any of its territorial instrumentalities, the filing of a petition for relief under Title III of PROMESA. See PROMESA 405(b), (d). Once a petition is filed under Title III of PROMESA, thereby causing the interim stay to expire, a stay under sections 362 and 922 of Title 11 of the United States Code (the Bankruptcy Code ) comes into effect. See PROMESA PROMESA allows a party in interest to file a motion in the U.S. District Court for the District of Puerto Rico to lift the interim stay before the expiration date. Section 405(e)(2) of PROMESA states: On motion of or action filed by a party in interest and after notice and a hearing, the United States District Court for the District of Puerto Rico, for cause shown, shall grant relief from the stay provided under subsection (b) of this section. PROMESA 405(e)(2). While the Bankruptcy Code similarly uses cause as the standard for lifting the stay initiated upon the filing of a bankruptcy petition (see 11 U.S.C. 362, 922), neither PROMESA nor the Bankruptcy Code define what constitutes cause to lift the stay, although the Bankruptcy Code does specify that the term includ[es] the lack of adequate protection of an interest in property. 11 U.S.C. 362(d)(1). 7. Cases decided under the Bankruptcy Code have found that cause is a broad and flexible concept, the results of which are dictated by the unique facts of a particular case. Buncher Co. v. Flabeg Solar US Corp. (In re Flabeg Solar US Corp.), 499 B.R. 475, (Bankr. W.D. Pa. 2013). Here, until the Oversight Board s filing of a petition under Title III of PROMESA, secured creditors such as Movant lack procedural and substantive protections normally afforded to such parties in a bankruptcy case. In a bankruptcy case, these protections include the right of a secured creditor holding a lien on property that is being 5

6 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 6 of 25 dissipated, diverted, or diminished to protection of its interests to ensure that the secured creditor does not suffer pecuniary harm. See United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 370 (1988). In the vernacular, this is commonly referred to as a secured creditor s right to adequate protection of its interests (see id.; see also COLLIER ON BANKRUPTCY (16th ed. 2015)), which concept is specifically referenced in section 362(d)(1) of the Bankruptcy Code, as noted above. 8. In a bankruptcy case, a secured creditor may seek adequate protection from the bankruptcy court without having to obtain relief from the automatic stay. See COLLIER ON BANKRUPTCY (16th ed. 2015); see also 11 U.S.C. 361, 362, 363, 364. Moreover, a debtor in bankruptcy cannot use a secured creditor s cash collateral, defined under the Bankruptcy Code to include, among other things, cash and cash equivalents, without first obtaining the secured creditor s consent or, alternatively, court approval. See 11 U.S.C. 363(a), (c)(2). If the secured creditor so requests, the court at a minimum must prohibit or condition the debtor s use of cash collateral as is necessary to provide adequate protection of such interest. 11 U.S.C. 363(e). 1 But until the Oversight Board s filing of a petition under Title III of PROMESA, Movant lacks the ability to seek adequate protection, or its equivalent, owing to the interim stay. In other words, the interim stay itself blocks Movant s ability to seek to protect its interests unless and until the Court grants relief from the interim stay permitting Movant to seek to protect its rights. That cannot be the case. Because Respondents are currently diverting and dissipating funds in which Movant has an interest, relief from the interim stay is urgently needed and without it Movant cannot be afforded adequate protection. 1 Congress afforded cash collateral special treatment under the Bankruptcy Code for the reason that it is highly volatile, subject to rapid dissipation and requires special protective safeguards in order to assure that a holder of a lien on cash collateral is not deprived of its collateral through unprotected use by the debtor. In re Williams, 61 B.R. 567, 575 (Bankr. N.D. Tex. 1986) (quotations and citation omitted). 6

7 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 7 of Moreover, the Toll Revenues are pledged special revenues not subject to a stay in any case filed under Title III of PROMESA. This is because the Bankruptcy Code s stay incorporated by reference into a case filed under Title III of PROMESA does not operate as a stay of application of pledged special revenues to payment of indebtedness secured by such revenues. See 11 U.S.C. 922(d); see also PROMESA 301. Thus, in the event that a voluntary case has been commenced under Title III of PROMESA, creditor actions to enforce PRHTA s obligation to deposit the pledged revenues will not be subject to a stay. See In re Jefferson County, 474 B.R. 228, 274 (Bankr. N.D. Ala. 2012) (finding that the Bankruptcy Code s automatic stay did not apply to actions to enforce application of net revenues from county s sewer system to repayment of warrants secured by a pledge of such revenues). 10. Given the special protections afforded to the Toll Revenues, there is no reason why section 405(b) of PROMESA should be construed to otherwise stay creditor actions to enforce application of pledged special revenues such as the Toll Revenues. Movant should not be stuck in limbo during the interim stay period without adequate protection of its interests. For these reasons, Movant s burden to lift the interim stay here should be less exacting than the grounds for demonstrating cause under the existing case law interpreting the Bankruptcy Code. In any event, cause exists in this matter. 11. Courts have universally recognized that lack of adequate protection of a secured creditor s interest in property, a concept derived from Fifth Amendment concerns against unconstitutional takings, constitutes one (but not the only) ground for relief from the stay. As the Supreme Court made clear in Timbers of Inwood Forest, 484 U.S. at 370, a secured creditor s interest in property is not adequately protected if the security is depreciating during the term of the stay. In this instance, the value of the collateral the pledged revenues is not just 7

8 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 8 of 25 declining, the collateral itself is being diverted and spent. Accordingly, cause exists for relief from the interim stay so Movant may seek to protect its interests. 12. With the passage of time, the Commonwealth and PRHTA continue to expropriate the bondholders liens on revenues pledged to payment of the 1968 Bonds without any compensation whatsoever, let alone just compensation. Due to the limited recourse nature of the 1968 Bonds, bondholders such as Movant likely have nowhere else to look but the pledged revenues in the event of a payment default, meaning the likelihood of Movant suffering irreparable harm (to the extent it has not already suffered it) increases with each passing day the interim stay remains in effect. This likewise constitutes cause for relief from the interim stay. 13. Without relief from the stay to file the Complaint, Movant will be left with no redress for an unconstitutional taking of its property, thereby rendering PROMESA itself unconstitutional. Undoubtedly, this is exactly the result that Congress intended to avoid when providing a mechanism to lift PROMESA s interim stay. In fact, PROMESA expressly provides for the protection of liens securing the bonds, stating that the interim stay under section 405(b) does not discharge an obligation of the Government of Puerto Rico or release, invalidate, or impair any security interest or lien securing such obligation. PROMESA 405(k). In any event, the Court should construe the cause requirement of section 405(b) to permit relief from the interim stay here to avoid PROMESA itself from violating the Constitution. See United States v. Security Indus. Bank, 459 U.S. 70, 78 (1982) (applying the canon of constitutional avoidance to render a bankruptcy statute prospective-only because it would have nullified pre-enactment liens and there was substantial doubt whether doing so would comport with the Fifth Amendment). 14. Aside from effectuating an unconstitutional taking, the Commonwealth s and PRHTA s diversion of the pledged revenues also runs afoul of the Puerto Rico Constitution and 8

9 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 9 of 25 Commonwealth law. This is an additional, independent basis for finding cause to lift the stay. See, e.g., Cournoyer v. Town of Lincoln, 790 F.2d 971, 977 (1st Cir. 1986). 15. Finally, the unlawful diversion of pledged Toll Revenues violates section 407(a) of PROMESA. This section states that, [w]hile an Oversight Board for Puerto Rico is in existence, if any property of any territorial instrumentality is transferred in violation of applicable law under which any creditor has a valid pledge of, security interest in, or lien on such property then the transferee shall be liable for the value of such property. PROMESA 407(a). The statute further provides that a creditor may enforce its rights under this section by bringing an action in the U.S. District Court for the District of Puerto Rico after the interim stay has been lifted (or expired), so long as the stay initiated by filing of a petition under Title III of PROMESA is not in effect. See PROMESA 407(b). Thus, PROMESA expressly contemplates a lifting of the interim stay so that a secured creditor can seek to protect its liens and avoid transfers of its collateral in violation of applicable law. 16. As noted at the outset, Movant does not ask the Court to rule on the merits of the Complaint. Rather, Movant is simply asking for an opportunity to be heard so that it can protect its property rights from further expropriation. Accordingly, the Court should lift the interim stay for cause shown to permit Movant to file the Complaint. BACKGROUND I. PRHTA 17. PRHTA is a public corporation and government instrumentality of the Commonwealth created by Act No (the Enabling Act ) to assume responsibility for the construction, operation, and maintenance of highways and other mass transportation systems in Puerto Rico. See 9 L.P.R.A Under the Enabling Act, PRHTA has the power to sue 9

10 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 10 of 25 and be sued, to make contracts and to execute all instruments necessary or incidental in the exercise of any of its powers, and to issue bonds. See 9 L.P.R.A. 2004(g), (h), (l). 18. The Enabling Act requires PRHTA, upon action or suit by a bondholder or trustee therefor, to account as it were the trustee of an express trust. 9 L.P.R.A. 2013(a)(2). The duties and responsibilities of a trustee are broadly defined by Puerto Rico statute. See, e.g., 31 L.P.R.A. 2569, 2573, 2574; see also 32 L.P.R.A aa. II. PRHTA s Issuance of Bonds and Pledge of Revenues a. Issuance of Bonds 19. Consistent with the authority granted under the Enabling Act, PRHTA issued several series of bonds under Resolution No adopted on June 13, 1968 (the 1968 Resolution ), as well as bonds issued under a separate resolution executed in 1998 (the 1998 Resolution, and together with the 1968 Resolution, the Resolutions ). As of the date hereof, a total of approximately $4.1 Billion principal face amount of bonds issued by PRHTA pursuant to the Enabling Act and Resolutions remain outstanding, with approximately $830,000,000 of this amount representing the aggregate principal face amount of outstanding bonds issued under the 1968 Resolution (collectively, the 1968 Bonds ). b. Pledge of Revenues 20. Pursuant to the Enabling Act and 1968 Resolution, the 1968 Bonds are secured by a pledge of the following revenues and funds: a. tolls and other charges imposed by PRHTA for the use of any of its traffic facilities ( Toll Revenues ); b. gross receipts of the current $0.16 per gallon excise tax on gasoline and $0.04 of the current $0.08 per gallon excise tax on gas oil and diesel oil imposed by the Commonwealth and allocated to PRHTA by the Puerto Rico Internal Revenue Code, as well as up to $120 million per fiscal year of the excise tax collected for 10

11 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 11 of 25 crude oil, partially finished and finished oil by-products, and other hydrocarbon mixtures ( Excise Taxes ); c. the gross receipts derived from the $15 per vehicle increase of annual motor vehicle license fees imposed by the Commonwealth and allocated to PRHTA by Act No. 9 of the Legislature of Puerto Rico, approved August 12, 1982 (the Vehicle Fees, and together with the Toll Revenues and Excise Taxes, the 1968 Revenues ); and d. investment earnings on deposits to the credit of funds and accounts established under the 1968 Resolution for the benefit of bondholders, except for the 1968 Construction Fund (the Investment Earnings ). See 1968 Resolution 401, 501, 601; 9 L.P.R.A. (l). 21. As special revenue bonds, the 1968 Bonds are limited recourse obligations, meaning such bonds, except as provided under section 407 of PROMESA, are ordinarily payable solely from the pledged 1968 Revenues, Investment Earnings, and other funds of the Commonwealth allocated to PRHTA for the payment of principal and interest on the 1968 Bonds. In contrast to general obligation bonds, under Puerto Rico law, the holders of 1968 Bonds (collectively, the 1968 Bondholders ) such as Movant do not have a general claim to the available resources of the Commonwealth or PRHTA other than the 1968 Revenues, Investment Earnings, and additional funds allocated to the 1968 Bonds The 1968 Resolution requires PRHTA to deposit on a monthly basis the 1968 Revenues it receives, as well as any other funds of the Commonwealth allocated to PRHTA for 2 Special revenue bonds are typically issued so that if the project or program financed fails, repayment will not come out of general treasury funds meaning the taxpayer will not have to foot the bill. General obligation bonds, on the other hand, are backed by the full faith and credit of the issuing municipality or territory, and thus generally require the issuer to raise taxes in the event that existing tax receipts are insufficient to service the debt. Because special revenue bonds are limited recourse, bondholders when making their investment decision analyze the revenue generating ability of the specific project or program financed, rather than the creditworthiness of the issuing municipality or territory as a whole. Without the ability to recoup revenues generated by the specific project or program financed, an investor in special revenue bonds is not likely to be repaid for its investment. For this reason, Title III of PROMESA and Chapter 9 of the Bankruptcy Code provide special protections for bonds secured by special revenues. 11

12 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 12 of 25 the payment of principal and interest on the 1968 Bonds, with the Fiscal Agent 3 for the 1968 Bonds. See 1968 Resolution 401. The moneys deposited with the Fiscal Agent are credited to one of several funds and accounts based on a waterfall payment protocol established pursuant to the 1968 and 1998 Resolutions. Id. Moneys deposited in the first three accounts under the waterfall provision, collectively known as the 1968 Sinking Fund, are held in trust for and are subject to a lien and charge in favor of, the 1968 Bondholders until disbursed by the Fiscal Agent for (a) payment of interest on the 1968 Bonds when due, (b) payment of principal of the 1968 Bonds at their respective maturities, or (c) payment of the purchase or redemption price of such bonds when purchased or redeemed in accordance with the 1968 Resolution. See id. 401, 406, Section 2013 of the Enabling Act provides that 1968 Bondholders such as Movant may bring suit upon the 1968 Bonds, including [b]y mandamus or other suit, action, or proceeding at law or in equity to enforce [their] rights against [PRHTA], its officers, agents, and employees to perform and carry out its and their duties and obligations [under the Enabling Act] and its and their covenants and agreements with bondholders. 9 L.P.R.A c. Priority of PRHTA Bonds Vis-à-Vis Commonwealth Expenditures 24. The Constitution of Puerto Rico permits the Commonwealth under certain conditions to divert certain pledged revenues to pay public debt of the Commonwealth, such as the Commonwealth s general obligation bonds, but only to the extent that such revenues are considered available resources of the Commonwealth. Section 8 of Article VI of the Constitution of Puerto Rico provides: In case the available resources including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the 3 The Fiscal Agent for the 1968 Bonds is presently Bank of New York Mellon. 12

13 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 13 of 25 public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law. See P.R. Const. ar. VI, The Toll Revenues and Investment Earnings are not considered available resources under Puerto Rico law and thus are not subject to diversion under any circumstances. See Offering Memorandum for PRHTA Series AA Refunding Bonds, dated June 17, 2010, at 19. While the Commonwealth is permitted to divert revenues from pledged Excise Taxes and Vehicle Fees to pay the public debt, an important precondition, among other things, must be satisfied: all other available resources for the relevant fiscal year must be insufficient to pay the public debt. 26. Further, even if the preconditions to a constitutional diversion of funds have been satisfied, the Commonwealth s Legislative Assembly has passed various laws expressly granting the bonds issued by PRHTA a priority that is second only to payment of the public debt, meaning revenues pledged to payment of such bonds cannot be diverted for general expenditures of the Commonwealth or PRHTA under any circumstances. See 13 L.P.R.A (a)(1)(B) (pledge of Excise Taxes); 9 L.P.R.A. 2021, 5681 (pledge of Vehicle Fees); see also 23 L.P.R.A. 104(c)(1)-(5) (Puerto Rico Office of Management and Budget Act priority guidelines for disbursement of public funds, assigning a second priority to PRHTA debt, junior only to payment of the public debt). III. Diversion of Non-Toll Revenues 27. On November 30, 2015, the Governor issued Administrative Bulletin No. OE (the November 2015 Executive Order ) directing the Puerto Rico Secretary of Treasury to retain revenues from Excise Taxes and Vehicle Fees for application to the public 13

14 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 14 of 25 debt instead of releasing such funds to PRHTA for deposit with the Fiscal Agent. See November 2015 Executive Order, First clause. The November 2015 Executive Order expressly states that the Commonwealth is funding general expenses ( los gastos ) with the revenues pledged to repayment of the 1968 Bonds. See id. at fifth Whereas clause. 28. On December 8, 2015, the Governor issued an additional executive order, Administrative Bulletin No. OE (the December 2015 Executive Order ). While the December 2015 Executive Order directs the Director of the Office of Management and Budget ( OMB ) to be guided by the statutory priorities when making budgetary adjustments, he is directed to do so with the purpose of guaranteeing essential services and ensuring the proper functioning of the Government. See December 2015 Executive Order, First clause. Various other officers and agents of the Commonwealth are then ordered to take into account, whether directly or indirectly, the OMB Director s budgetary adjustments when managing the Commonwealth s cash flows. See id. at Second, Third, and Fourth clauses. Certified translations of the November 2015 Executive Order and December 2015 Executive Order are attached hereto as Exhibit C and Exhibit D, respectively. 29. On December 17, 2015, the Deputy Secretary of the Treasury, Juan Flores Galarza, partially implemented the December 2015 Executive Order by issuing Circular Letter No (the Circular Letter ) setting forth guidelines for the release of funds under the custody of the Secretary of the Treasury, including the proceeds of the diverted Excise Taxes and Vehicle Fees. After excluding certain federal funds from their application, these guidelines provide for the payment of interest and amortization on the public debt and various general expenditures of the Commonwealth, while entirely omitting any mention of expenditures for payment of PRHTA debt from the revenues pledged to repayment of the 1968 Bonds. See 14

15 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 15 of 25 Circular Letter, at 2-4. A certified translation of the Circular Letter is attached hereto as Exhibit E. 30. While Movant believes that the preconditions to a diversion of funds pursuant to the Puerto Rico Constitution have not been satisfied and further that the November 2015 Executive Order and December 2015 Executive Order, as partially implemented by the Circular Letter, violate the priority afforded to PRHTA debt under Puerto Rico law, the Complaint does not currently challenge these executive orders or the Circular Letter, and Movant instead reserves all of its rights to amend the complaint or otherwise with respect to the Commonwealth s and PRHTA s expropriation of pledged Excise Taxes and Vehicle Fees. IV. Moratorium Act 31. On April 6, 2016, the Commonwealth enacted the Moratorium Act. 32. The Moratorium Act directs the Governor to prioritize payment of essential services over the debt obligations of government entities (including PRHTA) during the covered period, defined as the period beginning on the date of enactment until January 31, See Moratorium Act 103(m), 201(a). The Moratorium Act permits the Governor to extend the covered period up to two months, through March See id. 33. Section 201(a) of the Moratorium Act empowers the Governor to issue executive orders to: (a) declare a state of emergency with respect to the Commonwealth or any other government entity within the Commonwealth, defined to include PRHTA; and (b) suspend the payment of covered obligations of any of the foregoing entities. See id. 201(a). 4 Covered 4 Section 202(a) of the Moratorium Act provides that the Commonwealth must continue to pay the minimum public debt payment with respect to interest obligations on the public debt. See id. 202(a). Principal payments on public debt and principal and interest payments on non-public debt, however, may be suspended by executive order during the covered period. See id. 201, 202(a). The 1968 Bonds are considered non-public debt under Puerto Rico law. 15

16 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 16 of 25 obligations are defined to include, among other things, any interest obligation, principal obligation or enumerated obligation of a government entity that is due or becomes due during the emergency period in respect of such government entity. Id. 103(l). Section 201(a) of the Moratorium Act further provides that, if directed by the Governor, any stay issued under an executive order shall remain in place during the designated emergency period. See id. 201(a). 34. Various other sections of the Moratorium Act similarly empower the Governor to impair the rights of PRHTA bondholders such as Movant: a. Section 201(b) of the Moratorium Act permits the Governor to expropriat[e] property or rights in property interests related to covered obligations to the extent he claims necessary to further the public interest. See id. 201(b). While the Moratorium Act states that just compensation or other relief may be sought in the Court of First Instance in the event of an expropriation, it does not require the Commonwealth to deposit funds with the court before seizing property. See id. b. Section 201(d) of the Moratorium Act permits the Governor to unilaterally suspend or modify any obligation (statutory or otherwise) to: (i) appropriate money to pay or secure covered obligations; (ii) transfer money to pay or secure any covered obligation; (iii) setoff revenues used to pay or cover, directly or indirectly, certain covered obligations; and (iv) ensure payment of a covered obligation as if the Moratorium Act were not enacted. See id. 201(d). c. Section 201(e) of the Moratorium Act permits the Governor to reprioritize the payment priorities set forth in the OMB Act. See id. 201(e). d. Section 201(b) of the Moratorium Act imposes a blanket stay on creditor remedies against the designated entities during the emergency period, including court proceedings and rights of acceleration, termination, modification, and setoff. See id. 201(b)(i)-(iii). V. May 2016 Executive Order and June 2016 Executive Orders 35. On May 17, 2016, the Governor signed an executive order declaring a state of emergency at PRHTA, Administrative Bulletin No. OE (the May 2016 Executive 16

17 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 17 of 25 Order ). A certified translation of the May 2016 Executive Order is attached hereto as Exhibit F. 36. The May Executive 2016 Order suspends PRHTA s obligation to deposit the pledged Toll Revenues with the Fiscal Agent for the credit of the bondholders, notwithstanding the bondholders liens with respect to such revenues, thereby effectuating a taking, without just compensation, of the bondholders property rights in such cash collateral. See May 2016 Executive Order, Third clause. The May 2016 Executive Order also purports to bar federal court proceedings relating to PRHTA debt: As per [Section] 201(b) of the Act, no action whatsoever shall be taken and no claim or legal proceeding shall be initiated or continued in any court of any jurisdiction that is related to or arises out of a Covered Obligation of [PRHTA]. See id. at Fourth clause. 37. On June 30, 2016 i.e., the day that the December 2015 Executive Order and May 2016 Executive Order were set to expire the Governor issued two new executive orders: (a) Administrative Bulletin No. EO (the First June 2016 Executive Order ); and (b) Administrative Bulletin No. EO (the Second June 2016 Executive Order ). Certified translations of the First June 2016 Executive Order and Second June 2016 Executive Order are attached hereto as Exhibit G and Exhibit H, respectively. 38. The First June 2016 Executive Order suspends the payment of all debt obligations of PRHTA that come due during the covered period expiring on January 31, See First June 2016 Executive Order, Second clause. The Second June 2016 Executive Order then states that the May 2016 Executive Order shall remain in effect through this covered period, meaning that the Toll Revenues will continue to be diverted and likely spent elsewhere through and including January 31, See Second June 2016 Executive Order, Fifth clause. 17

18 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 18 of 25 The Second June 2016 Executive Order also provides that PRHTA s obligation under the 1968 Resolution to transfer non-toll Revenues to the Fiscal Agent is similarly suspended until January 31, See id. 39. The First June 2016 Executive Order and Second June 2016 Executive Order each impose a bar on suits by bondholders, with the executive orders using substantially similar language: In accordance with [Section] 201(b) of the [Act], no action shall be taken and no claim or proceeding shall be initiated or continued in any court of any jurisdiction related to any Covered Obligation of any Government Entity or one associated with it. Compare First June 2016 Executive Order, Seventh clause, with Second June 2016 Executive Order, Twelfth clause. VI. PROMESA 40. On June 29, 2016, the U.S. Congress enacted and, on June 30, 2016, the President signed into law, PROMESA. The statute establishes an Oversight Board for Puerto Rico tasked with the creation of a plan of adjustment to restructure and satisfy the debts of the Commonwealth and the instrumentalities designated by the Oversight Board as covered for purposes of the Act. See PROMESA 101(b), 101(d), 104(j), 312. The plan of adjustment is subject to court approval. This process begins with the Oversight Board s filing of a petition for relief in the U.S. District Court for the District of Puerto Rico commencing voluntary cases to be overseen by a District Judge appointed by the Chief Justice of the United States for purposes of the restructuring. See PROMESA 304, As noted above, the enactment of PROMESA initiated an interim stay that may be lifted for cause shown upon the filing of a motion or action and after notice and a hearing. See PROMESA 405(e)(2). PROMESA makes clear that the interim stay should not impact any 18

19 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 19 of 25 security interest or lien on the 1968 Bonds or similar obligations of the Commonwealth or its territorial instrumentalities. See PROMESA 405(k). Section 303 of PROMESA further provides that unlawful executive orders that alter, amend, or modify rights of holders of any debt of the territory or territorial instrumentality, or that divert funds from one territorial instrumentality to another or to the territory, shall be preempted by this Act. PROMESA Finally, PROMESA provides creditors with protection against transfers of property subject to a valid pledge by stating that any transferee shall be liable for the value of such property: While an Oversight Board for Puerto Rico is in existence, if any property of any territorial instrumentality of Puerto Rico is transferred in violation of applicable law under which any creditor has a valid pledge of, security interest in, or lien on such property, or which deprives any such territorial instrumentality of property in violation of applicable law assuring the transfer of such property to such territorial instrumentality for the benefit of its creditors, then the transferee shall be liable for the value of such property. PROMESA 407(a). Creditors are permitted to enforce their rights under section 407(a) of PROMESA by bringing an action in the U.S. District Court for the District of Puerto Rico after the interim stay has been lifted (or expired), so long as the stay initiated by filing of a petition under Title III of PROMESA is not in effect. See PROMESA 407(b). ARGUMENT 43. The Court should lift the interim stay in effect under section 405(b) of PROMESA for cause shown to permit Movant to file and prosecute the Complaint. First, Movant s property interests in liens on the Toll Revenues are not adequately protected during the stay because the Commonwealth and PRHTA continue to expropriate such revenues without any compensation to 1968 Bondholders such as Movant. Second, the Court should construe section 405(b) as authorizing relief from the interim stay in this instance in order to avoid rendering 19

20 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 20 of 25 PROMESA itself unconstitutional. Third, in addition to effectuating an unconstitutional taking, this diversion of revenues violates the Puerto Rico Constitution and Commonwealth law, which provides an independent reason under the case law for lifting the stay. Fourth, the unlawful diversion of pledged Toll Revenues violates section 407(a) of PROMESA, and relief from the interim stay is therefore necessary to enforce compliance with the statute itself and hold transferees accountable for these violations. 44. Section 405(e)(2) of PROMESA states: On motion of or action filed by a party in interest and after notice and a hearing, the United States District Court for the District of Puerto Rico, for cause shown, shall grant relief from the stay provided under subsection (b) of this section. PROMESA 405(e)(2). Although PROMESA does not define the concept of cause, it is evident that Congress borrowed this concept from the Bankruptcy Code and, by analogy, the case law construing the cause requirement under the Code establishes that relief from stay should be granted in this instance. 45. Consistent with the idea that cause to lift the stay is a broad and flexible concept dictated by the unique facts of a particular case, Buncher Co., 499 B.R. at , courts generally evaluate whether cause exists from the perspective of the totality of the circumstances and often consider, among other factors, the policies underlying the stay and the competing interests of the debtor and the movant. See In re Scarborough-St. James Corp., 535 B.R. 60, 68 (Bankr. D. Del. 2015). 46. As a general matter, cause exists when the harm that would result from a continuation of the stay would outweigh any harm that might be suffered by the debtor or the debtor s estate if the stay is lifted. United States v. Shaughnessy (In re Shaughnessy), BAP No. MW , 2007 Bankr. LEXIS 3164, at *6-7 (B.A.P. 1st Cir. Aug. 17, 2007). 20

21 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 21 of The Bankruptcy Code specifically lists the lack of adequate protection of an interest in property as one ground for finding cause for relief from the stay. See 11 U.S.C. 362(d). And where a creditor s collateral is being taken as it is here, cause exists to lift the stay. 48. Under the case law, cause can be established in a wide range of circumstances, including, as mentioned, diminution in value of a secured creditor s collateral, as well as the debtor s mismanagement or malfeasance. See, e.g., In re Lopez, 446 B.R. 12, 20 (Bankr. D. Mass. 2011) (diminution of secured creditor s collateral); Le Sannom Bldg. Corp. v. Nathanson, Case No. 92 Civ (LAP), 1993 U.S. Dist. LEXIS 11677, at *10 (S.D.N.Y. Aug. 17, 1993) (mismanagement of collateral jeopardizing interests of creditors); In re Merchant, 256 B.R. 572, 577 (Bankr. W.D. Pa. 2000) (malfeasance by debtor). 49. The interim stay should be lifted to permit Movant to file the Complaint because its property interests in liens on the Toll Revenues are not being adequately protected. The concept of adequate protection is derived from the [F]ifth [A]mendment protection of property interests. In re Planned Systems, Inc., 78 B.R. 852, 861 (Bankr. S.D. Ohio 1987). As the Supreme Court explained in Timbers of Inwood Forest, 484 U.S. at 370, a secured creditor s interest in property is not adequately protected if the security is depreciating during the term of the stay. See also In re J&M Salupo Dev. Co., Inc., 388 B.R. 809, 812 (Bankr. N.D. Ohio 2009) (finding that lack of adequate protection may be shown by erosion of creditor s position or of threatened erosion ). In Lopez, 446 B.R. at 20, the court found cause to lift the stay where the debtor was in arrears and the value of the secured creditor s collateral was declining in comparison to the increasing amount of its claims. Similarly, in In re Anchorage Boat Sales, Inc., 4 B.R. 635, 642 (Bankr. E.D.N.Y. 1980), the court lifted the stay for cause, reasoning in part that the secured creditor faced an undue risk of harm from the continuation of the stay 21

22 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 22 of 25 because under article 9 of the Uniform Commercial Code it could lose its security interest in cash proceeds that had been commingled by the debtor. In the absence of competent proof demonstrating adequate protection has been provided or is unnecessary under the circumstances, a creditor is entitled to relief from the stay. See In re Greiman, 45 B.R. 574, 584 (Bankr. N.D. Iowa 1985). 50. The facts here are far more egregious than cases such as Lopez and Anchorage Boat Sales where the stay was lifted merely because the secured creditor s collateral was declining or faced undue risk. Here, the harm is more acute given that the Commonwealth and PRHTA have expropriated and continue to expropriate the 1968 Bondholders property interests in the Toll Revenues without any compensation whatsoever, let alone just compensation. As noted above, the 1968 Bonds are limited recourse obligations, meaning such bonds, except as provided under section 407 of PROMESA, are ordinarily payable solely from the pledged 1968 Revenues, Investment Earnings, and other funds of the Commonwealth allocated to PRHTA for the payment of principal and interest on such bonds. Due to the limited recourse nature of the 1968 Bonds, bondholders such as Movant likely have nowhere else to look but the pledged revenues in the event of a payment default, meaning the likelihood of Movant suffering irreparable harm (to the extent it has not already) increases with each passing day the stay remains in effect. And in light of uncertainty regarding PRHTA s future financial performance and the ability of the Commonwealth under certain circumstances (that do not currently exist) to divert non-toll revenues to the payment of general obligation bonds in any fiscal year in which available resources are insufficient for public debt service, the need for the 1968 Bondholders to receive the benefit of their bargain today through restoration of their liens is even more pronounced, notwithstanding any moneys that may be on deposit in the 1968 Sinking Fund. As 22

23 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 23 of 25 the court in Williams, 61 B.R. at 575, aptly put it: Once cash collateral has been dissipated and spent, court-fashioned sanctions such as retroactive adequate protection, appointment of a Chapter 11 trustee or prohibitions against the further use of cash collateral can be hollow victories for a secured creditor and do not rise to the level of a remedy. Id. 51. Without relief from the interim stay, 1968 Bondholders such as Movant will be deprived of redress for government takings of their property without compensation, a result that itself would render PROMESA itself unconstitutional under the Fifth Amendment of the U.S. Constitution. This is exactly the result that Congress intended to avoid when providing a mechanism to lift the interim stay under PROMESA for cause, a familiar concept from the Bankruptcy Code that recognizes the need for secured creditors to receive adequate protection of their bargained-for property interests. And perhaps even more telling, Congress in enacting PROMESA expressly stated that the interim stay under section 405(b) does not discharge an obligation of the Government of Puerto Rico or release, invalidate, or impair any security interest or lien securing such obligation. PROMESA 405(k). In any event, the Court should construe section 405(e) as authorizing relief from the interim stay in this instance in order to avoid any conflict with the Constitution. See Security Indus. Bank, 459 U.S. at 78. For these reasons, the interim stay should be lifted to permit Movant to file the Complaint. 52. Importantly, Respondents will not suffer any significant harm if the stay is lifted. They will be merely required to defend the Complaint and, to the extent Movant prevails, comply with their pre-existing legal obligations. 53. Aside from effectuating an unconstitutional taking, the Commonwealth s and PRHTA s diversion of pledged Toll Revenues also runs afoul of the Puerto Rico Constitution and Commonwealth law, thereby providing an additional, independent basis for lifting the stay. 23

24 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 24 of Section 7 of PROMESA requires that the Commonwealth and its instrumentalities comply with federal law, except as otherwise provided in the Act. See PROMESA 7. Section 959(b) of Title 28, in turn, requires trustees, receivers, and managers in any cause pending in any court of the United States, including a debtor in possession, subject to certain exceptions for railroad reorganizations not applicable here, to manage and operate the property in his possession according to the requirements of the valid laws of the State in which such property is situated. 28 U.S.C. 959(b). 55. In Cournoyer, 790 F.2d at 977, the First Circuit found that 28 U.S.C. 959(b), along with exemptions from the stay under sections 362(b)(4) and (5) of the Bankruptcy Code for police and regulatory powers, indicate strongly that the automatic stay should not be used as a shield against the application and enforcement of valid state and local laws. The Court in In re Canarico Quarries, Inc., 466 F. Supp. 1333, 1339 (D.P.R. 1979), similarly recognized that a [d]ebtor must operate its business in full compliance with the laws and regulations of the State. 56. As explained above, in addition to being unconstitutional under the U.S. Constitution, the Commonwealth s and PRHTA s diversion of Toll Revenues violates the Puerto Rico Constitution, as well as Commonwealth law, by expropriating Toll Revenues not subject to diversion and furthermore by diverting other revenues to payment of general expenditures, thereby violating Puerto Rico s statutory priority scheme. Although the Moratorium Act by its terms authorizes the Governor to sign executive orders violating the statutory priority afforded to PRHTA debt, 28 U.S.C. 959(b) applies only to valid laws, not unconstitutional laws such as the Moratorium Act. Section 303 of PROMESA further provides that unlawful executive orders that alter, amend, or modify rights of holders of any debt of the territory or territorial 24

25 Case 3:16-cv FAB Document 1 Filed 07/18/16 Page 25 of 25 instrumentality, or that divert funds from one territorial instrumentality to another or to the territory, shall be preempted by this Act. PROMESA Finally, the unlawful diversion of Toll Revenues violates PROMESA s prohibition during the interim stay period of transfers of property subject to a valid pledge or security interest. See PROMESA 407. Relief from the interim stay is therefore necessary to enforce the statute and hold parties accountable for these violations. 58. Accordingly, the Court should lift the interim stay pursuant to section 405(e) of PROMESA CONCLUSION WHEREFORE, Movant requests that the Court (a) enter the Order lifting the interim stay under section 405(b) of PROMESA to permit Movant to file and prosecute the Complaint and (b) grant such other relief to Movant as the Court deems just and proper. RESPECTFULLY SUBMITTED, in San Juan, Puerto Rico, this 18th day of July MONSERRATE SIMONET & GIERBOLINI, LLC DECHERT LLP /s/ Dora L. Monserrate Peñagarícano Dora L. Monserrate Peñagarícano 101 San Patricio Avenue Maramar Plaza, Suite 1120 Guaynabo, Puerto Rico Phone: (787) Fax: (787) Allan S. Brilliant (pro hac vice pending) Robert J. Jossen (pro hac vice pending) John D. Biancamano (pro hac vice pending) Andrew C. Harmeyer (pro hac vice pending) 1095 Avenue of the Americas New York, New York and- G. Eric Brunstad, Jr. (pro hac vice pending) 90 State House Square Hartford, Connecticut Attorneys for Peaje Investments LLC 25