Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 1 of 11 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

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1 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 1 of 11 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO LEX CLAIMS, LLC et al., Plaintiffs, v. 16-cv-2374 (FAB) ALEJANDRO GARCÍA PADILLA et al., Defendants. REPLY TO PLAINTIFFS OPPOSITION TO NOTICE OF PROMESA STAY Plaintiffs Second Amended Complaint seeks relief that this Court recently characterized in four related cases as having the ultimate aim [] to obtain money judgments against their borrowers or to gain an advantage in anticipated restructuring proceedings. U.S. Bank Trust Nat l Asso n. v. Commonwealth, et al., Civil No (FAB) (D.P.R), Dkt. No. 75 at 44 n These are precisely the ills that the PROMESA stay is designed to avoid, while instead fostering a cooperative and consensual opportunity for all parties to negotiate an ordered restructuring under the leadership of the Oversight Board. Contrary to this core principle, Plaintiffs urge this Court to ignore both (1) its recent order enforcing the PROMESA stay on virtually indistinguishable claims in U.S. Bank, and (2) the true relief sought in Counts 1-3 and 12 of the Second Amended Complaint. While Plaintiffs go to lengths to characterize those counts as permissible claims designed merely to declare rights and preserve their ability to recover later, 1 This Opinion and Order declining to vacate the PROMESA stay was cross-captioned and entered in each of the following consolidated cases: Brigade Leveraged Capital Structures Fund Ltd., et al. v. Garcia-Padilla, et al., Civil No (FAB) (D.P.R.), Dkt. No. 140; Nat l Pub. Fin. Guarantee Corp. v. Garcia-Padilla, et al., Civil No (FAB) (D.P.R.), Dkt. No. 92; Trigo-Gonzalez, et al. v. Garcia-Padilla, et al., Civil No (FAB) (D.P.R.), Dkt. 68; U.S. Bank Trust Nat l Asso n v. Commonwealth, et al., Civil No (FAB), Dkt. No. 75.

2 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 2 of 11 there can be no real debate that each is a calculated step toward collecting on debts owed, which PROMESA expressly prohibits at this time. Counts 1-3 and 12 each seek declaratory and injunctive relief. Recognizing that this Court may be inclined to stay the requested injunctive relief given its recent ruling in Brigade, National, Trigo and U.S. Bank, Plaintiffs retreat and ask that the Court nevertheless declare the parties rights. But Plaintiffs identify no authority for such internal claim-splitting, nor do they present any compelling reason why the Court should exercise its discretion to decide Plaintiffs Declaratory Judgment claims in a vacuum. In fact, all good discretion weighs against doing so for the very reasons the PROMESA stay was created in the first place to give the Commonwealth breathing room to pursue restructuring options. That is particularly so here, where Plaintiffs seek to prosecute, among other things, state law challenges to the legislature s decade-old diversion of sales and use tax ( SUT ) revenues to COFINA claims that could have been brought long ago. The PROMESA process is well under way. The Oversight Board is hard at work, has retained advisors, and is working through its advisors on a daily basis with the Commonwealth towards positive solutions. The Commonwealth is also communicating with creditors and keeping the Oversight Board appraised of its discussions. Furthermore, Commonwealth officials are buried in a time-consuming transition process with the purpose of allowing the incoming government to also participate constructively in the process laid out by PROMESA. Every minute and dollar spent focused on litigation in the meantime contravenes that goal and Congress express purpose in establishing the stay. All stakeholders, including the Oversight Board, collectively deserve the chance to avoid this piecemeal approach to resolving Puerto Rico s fiscal emergency and to allow the PROMESA process to function as designed. Id. at 44. 2

3 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 3 of 11 Consistent with the terms of PROMESA s stay provision and under this Court s inherent power to manage the cases on its docket, this case should properly be stayed. ARGUMENT A. Counts 1-3 And 12 Are Stayed By PROMESA 405(B)(3)-(6) 1. Plaintiffs Claims Are Actions To Recover On Their Bonds Plaintiffs contend that counts 1-3 and 12 ( PROMESA Claims ) are not stayed by PROMESA because they merely seek declaratory and injunctive relief, and do not aim to assess, collect or recover on a debt ( 405(b)(6)), obtain possession of Commonwealth property ( 405(b)(3)), or create, perfect or enforce a lien ( 405(b)(4)-(5)). Plaintiffs suggest that the relief sought in this case, unlike a run-of-the-mill creditor recovery action, would merely prevent the Commonwealth from continuing to dissipate assets. Dkt. No. 127 at In fact, Plaintiffs PROMESA Claims, individually and collectively, are efforts to collect on debts owed. The Court s recent decision in U.S. Bank is instructive. There, plaintiffs requested declaratory and injunctive relief, alleging, among other things, that the Moratorium Act and Executive Order violate the Puerto Rico Constitution and are preempted by Section 303 of PROMESA just as the Plaintiffs here contend. U.S. Bank, Dkt. No. 75 at 7-8. Although the U.S. Bank plaintiffs argued that granting such relief would not diminish the assets available to other creditors, this Court reject[ed] plaintiffs attempts to pull the wool over its eyes and confirmed the stay in the consolidated actions. Id. at 44 n.11. The Court explained 2 Plaintiffs also half-heartedly contend that Defendants stay arguments under Sections 405(b)(3)-(6) are somehow forfeited because they were not raised prior to the Court s stay ruling on the First Amended Complaint. See Dkt. No. 127 at 9, 11, 13. But plaintiffs rely only on the legal standard for a motion to reconsider and cite no authority for the proposition that a litigant is precluded from raising all available arguments in favor of a statutorily mandated stay of a newly amended complaint. 3

4 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 4 of 11 that the true harm resulting to plaintiffs from the continued existence of the challenged provisions of the Moratorium Act and related Executive Orders is largely (if not purely) pecuniary in nature. Id. at 36. Accordingly, the U.S. Bank plaintiffs ultimate aim [was] to obtain money judgments against their borrowers or to gain an advantage in anticipated restructuring proceedings. Id. at 44 n So too here. Even a cursory review of Plaintiffs PROMESA Claims reveals that they are premised on the same spurious foundation as the allegations in U.S. Bank and Peaje. Plaintiffs allege that they are entitled to declaratory and injunctive relief because the Commonwealth s actions, the Moratorium Act, and Executive Order either violate the Puerto Rico Constitution (and thus Sections 204 and 207 of PROMESA) or are preempted by Section 303 of PROMESA. See Dkt. No. 78 at And, just as the plaintiffs in U.S. Bank argued, Plaintiffs here maintain that prosecution of their PROMESA Claims does not run the risk that one creditor s individual recovery will diminish the resources available for other creditors. Dkt. No. 127 at 10. Under U.S. Bank, however, Plaintiffs PROMESA Claims are properly understood as actions to vindicate their pecuniary interests at the expense of other creditors. As there, Plaintiffs PROMESA Claims would, in essence, permit [Plaintiffs] to jump to the front of the line to protect their own interests before other creditors have had the opportunity to defend theirs. U.S. 3 The Court likewise rejected stay arguments in Peaje over plaintiffs contention that the collateral on their bonds was not adequately protected an argument akin to Plaintiffs argument here that they have no adequate remedy at law. See Peaje Invs., LLC v. Garcia-Padilla, Civ. No (FAB) (D.P.R.), Dkt. No. 74, at (staying declaratory judgment claim alleging Moratorium Act and Executive Order are preempted by PROMESA). In both cases, plaintiffs seek nothing more than payment on their debts. But an aggrieved creditor may seek recovery under PROMESA 407(b) to undo any monetary loss that they suffer during the pendency of the automatic stay... [and] there is simply no compelling reason why plaintiffs cannot be expected to utilize that remedy. U.S. Bank, Dkt. No. 75 at 40. 4

5 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 5 of 11 Bank, Dkt. No. 75 at (internal citation omitted). When viewed in this light, Plaintiffs allegations can only be described as efforts to recover or collect on Plaintiffs bonds, control property, or enforce a lien, and are therefore stayed by 405(b)(6), 405(b)(3), and 405(b)(4)- (5) of PROMESA. To view Plaintiffs claims in any other way raises serious standing concerns. To satisfy the constitutional component of standing, a plaintiff must have suffered an injury in fact, i.e., an invasion of a legally protected interest. That injury must be concrete and particularized... and it must be distinct and palpable. Dubois v. U.S. Dep t of Agric., 102 F.3d 1273, 1281 (1st Cir. 1996) (citations omitted). Plaintiffs sole grievance is the potential loss in value of their bonds. If Plaintiffs are not suing to recover on their bonds, their claims are merely abstract allegations seeking a generic injunction to obey the law, filed by a party with no injury resulting from the alleged violation of the law. Either this is an action to recover on a debt or Plaintiffs lack standing to pursue their claims. 2. Plaintiffs Cannot Disclaim The Injunctive Relief Sought Plaintiffs also argue that even if their claims for injunctive relief are stayed, this Court should nevertheless issue declarations that the Commonwealth s conduct violates PROMESA. Dkt. No. 127 at 14. But Plaintiffs cite no authority for the proposition that the PROMESA stay should extend to some, but not all, forms of relief in a single cause of action. Plaintiffs are masters of their own Complaint. They chose to request injunctive and declaratory relief on each of the counts at issue and must live with that choice to the extent either requested remedy implicates the PROMESA stay. 3. Declaratory Relief Is Discretionary And Should Not Be Granted Here Because the Declaratory Judgment Act has been understood to confer on federal courts 5

6 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 6 of 11 unique and substantial discretion in deciding whether to declare the rights of litigants, the normal principle that federal courts should adjudicate claims within their jurisdiction yields to considerations of practicality and wise judicial administration. Wilton v. Seven Falls Co., 515 U.S. 277, 286, 288 (1995); see also Lichoulas v. City of Lowell, 555 F.3d 10, 13 (1st Cir. 2009) (affirming district court s decision not to hear declaratory action). Practical considerations counsel against exercising jurisdiction to decide Plaintiffs Declaratory Judgment claims here. The burdens of litigation threaten to undermine the entire PROMESA process and the goal of a coordinated approach. Plaintiffs bid for partial relief precludes a comprehensive and consolidated course of action, and is further evidence that Plaintiffs are trying to gain a tactical advantage in the ongoing PROMESA process. C. Count 2 Is Predicated On A State Law Claim Stayed By PROMESA Plaintiffs argue Count 2 should not be stayed because it seeks to enforce PROMESA 303(3), which preempts unlawful executive orders that alter the rights of bondholders. Specifically, Plaintiffs claim that because Executive Order halted payments on General Obligation bonds, it unlawfully subordinated their rights to those of COFINA bondholders and is therefore preempted by PROMESA 303(3). Dkt. 127 at 7. At its core, however, Count 2 is an aging state constitutional claim unrelated to PROMESA, which Plaintiffs concede requires the determination of an unsettled question of state law: namely, whether SUT revenues constitute available resources under Article VI, Section 8 of the Puerto Rico Constitution. Id. To answer this question, a reviewing court must determine the validity of the 2007 COFINA enabling statute, which authorizes SUT revenue to be set aside to repay COFINA bonds. See 13 L.P.R.A. 12. Even Plaintiffs concede this claim implicates the constitutional validity of the Commonwealth s assignment of SUT revenues to COFINA 6

7 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 7 of 11 [and] that question must be resolved in order to address Plaintiffs alleged harm. Dkt. No. 127 at 7 (emphasis added); see also Dkt. No. 87 at 12 (Plaintiffs noting that legality of assigning SUT revenues to COFINA is in fact an unsettled question ). Even assuming 303(3) allows Plaintiffs to circumvent the 405 stay (which it does not), this Court should not allow Plaintiffs to upend the PROMESA process by shoehorning a first impression state law constitutional claim past the PROMESA stay. See U.S. Bank, Dkt. No. 75 at (bringing constitutional claims does not entitle plaintiffs to automatic relief from PROMESA stay); see also In re City of San Bernardino, No. 5:15-cv ODW, 2016 WL , at *5 (C.D. Cal. Sept. 19, 2016) (noting there is no exception to the Bankruptcy Code s automatic stay for constitutional claims, even if that category of claims is deserving of an exemption). D. Counts 1-3 and 12 Should Be Stayed Under the Court s Inherent Authority Plaintiffs further contend that prosecuting only their PROMESA Claims would advance the statute s objectives by fostering an orderly restructuring process, and thus the Court should not stay those claims pursuant to its inherent authority in the event it concludes they are not automatically stayed by PROMESA. Dkt. No. 127 at According to Plaintiffs, resolution of the PROMESA Claims in their favor would free up SUT revenues purportedly assigned to COFINA, thereby promoting voluntary negotiations between the parties. Id. at 17. Plaintiffs suppositions, however, are inconsistent with the will of Congress. It is true, as Plaintiffs suggest, that Congress envisioned an orderly restructuring process when it enacted PROMESA. But it is also true that PROMESA embodies [a] comprehensive approach to fiscal, management, and structural problems and adjustments. PROMESA 405(m)(4) (emphasis added). Indeed, a central purpose of the statute is to allow the Government 7

8 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 8 of 11 of Puerto Rico a limited period of time during which it can focus its resources on negotiating a voluntary resolution with its creditors instead of defending numerous, costly creditor lawsuits. Id. 405(n)(2). This Court has applied the PROMESA stay in similar fashion. In Brigade, National, Trigo and U.S. Bank, this Court instructed that [a]ll stakeholders, including the Oversight Board, collectively deserve the chance to avoid [a] piecemeal approach to resolving Puerto Rico s fiscal emergency and to allow the PROMESA process to function as designed. U.S. Bank, Dkt. No. 75 at 44. The same is true here. Moreover, all parties to this litigation, deserve the opportunity to pursue the ideal solution of solv[ing] the entire puzzle at once through a comprehensive, consolidated restructuring approach. Maintaining the stay [here] would help to preserve that model option for the benefit of all parties. Id. at (citation omitted). 4 Plaintiffs attempt to bolster their argument by painting a bleak picture of the PROMESA process. They suggest that the outgoing Administration has impeded that process through the use of obstruction rather than constructive engagement with the Board and creditors. Dkt. No. 127 at 16. Plaintiffs contend that it is the height of irony to suggest that staying all, rather than most, of their claims would facilitat[e] the Oversight Board s task of promptly arriving at a consensual solution. Id. at With these goals in mind, Congress made explicit that PROMESA stays any action or proceeding that could have been brought prior to the statute s enactment. PROMESA 405(b). Plaintiffs argue, by reference to 362 of the Bankruptcy Code, that whether to stay claims must be made decided on a claim-by-claim basis, not on an action or proceeding as a whole. But context matters and resort to 362 alone ignores fundamental differences between the two statutes, the lack of a one-to-one relationship between section 405 of PROMESA and section 362 of the Bankruptcy, and the need to be mindful of the specific Congressional findings and the enumerated purposes of PROMESA s automatic stay contained within section [which] offer valuable insight into Congress basic motive in including the stay provision and [which] have no counterpart in section 362 of the Bankruptcy Code. U.S. Bank, Dkt. No. 75 at 21. 8

9 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 9 of 11 But Plaintiffs hypothesis ignores the realities on the ground. In fact, contrary to Plaintiffs suggestions, the PROMESA process is proceeding precisely as Congress intended. The Oversight Board is operational, has retained professional advisers, 5 is holding near-daily calls with the Commonwealth and its advisers, and has held three public meetings, the most recent of which took place in Puerto Rico on November 21, Moreover, the Board and its counsel have made requests for and received numerous updates on financial information from Commonwealth officials and advisers. See Oversight Board Mot. to Intervene, Dkt. No. 62 at 14. At the request of the Oversight Board the Commonwealth is working to submit to the Oversight Board alternate scenarios to the ones contained in the fiscal plan presented on October 14, 2016, and the Oversight Board stands ready to work with the Commonwealth to certify a revised fiscal plan by January 31, Finally, the Oversight Board has made public its intention to invite the Commonwealth s creditors to negotiate the terms of restructuring after December 15. Id. It is no surprise, then, that the Oversight Board opposes Plaintiffs request for relief from the PROMESA stay (as do the numerous other proposed intervenors to this case). In its motion to intervene, the Oversight Board made clear that [o]ngoing litigation is a major distraction that interferes with the [] Board s congressional mandate to oversee a fair and orderly restructuring of the Commonwealth s debt. Dkt. No. 62, Ex. A at 9. The Oversight Board also acknowledged that the Commonwealth s limited resources are better spent working with the Oversight Board and helping the Oversight Board begin its monumental tasks of negotiating fiscal plans and 5 The Oversight Board has retained Proskauer Rose LLP as lead outside legal counsel, O Neill & Borges LLC as outside legal counsel, and McKinsey & Co. as strategic consultant. The Board also has an outstanding request for proposals (RFPs) for firms interested in providing services to the Board as Financial Advisor. Dec. 4, 2015 Release, available at 6 See Nov. 23, 2016 Letter from Oversight Board Chairman to Governor García Padilla, at 3-4, available at 9

10 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 10 of 11 ensuring that Puerto Rico regains access to capital markets, rather than defending the multiple litigations that have already been commenced and the additional cases that will likely follow in the event the Court allows this case to proceed. Id. The Commonwealth needs this time to collaborate with its creditors and the Oversight Board in addressing Puerto Rico s crippling debt. It seems obvious, however, that the more resources the Commonwealth devotes to litigating this dispute, the fewer resources it can allocate to the restructuring effort. As this Court has recognized, vacating the stay will invite other participants in the litigation process to seek to do the same.... [T]he distraction and expense inherent in this cascading litigation would stretch the government s resources and personnel, and quickly deprive the Commonwealth of the breathing room that Congress believed it would need both to fulfill its crucial obligations to the Oversight Board and to reopen constructive dialogue with its creditors. U.S. Bank, Dkt. No. 75 at This Court should avoid that outcome and, in the event it concludes PROMESA itself does not automatically stay Counts 1-3 and 12, exercise its discretion to stay the entirety of this case. See Marquis v. F.D.I.C., 965 F.2d 1148, 1154 (1st Cir. 1992) ( federal district courts possess the inherent power to stay pending litigation.... ). 7 CONCLUSION For the reasons discussed herein and in Defendants notice of stay (Dkt. No. 84), Defendants respectfully request that the Court stay all counts contained in Plaintiffs Second Amended Complaint at Docket No. 78. RESPECTFULLY SUBMITTED. 7 To the extent the Court concludes that any of Counts 1-3 or 12 are not stayed, Defendants request that it be mindful that the first paragraph in each count purports to incorporate all preceding paragraphs in the second amended complaint, see Dkt. No. 78 at 126, 135, 145, 191, and thus clarify that such incorporation does not have the effect of un-staying any otherwise stayed counts or numbered paragraphs within the complaint. 10

11 Case 3:16-cv FAB Document 157 Filed 12/09/16 Page 11 of 11 I HEREBY CERTIFY that on this same date, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system which will send notification of such filing to all counsel of record. In San Juan, Puerto Rico, this 9th day of December, ANTONETTI MONTALVO & RAMIREZ COLL P.O. Box San Juan, PR Tel: (787) Fax: (787) s/ Salvador Antonetti-Zequeira SALVADOR ANTONETTI-ZEQUEIRA USDC-PR No santonet@amrclaw.com s/ José L. Ramírez-Coll JOSÉ L. RAMÍREZ-COLL USDC-PR No jramirez@amrclaw.com and KIRKLAND & ELLIS LLP 655 Fifteenth Street, N.W. Washington, D.C Tel: (202) Fax: (202) s/ Michael F. Williams MICHAEL F. WILLIAMS Pro Hac Vice mwilliams@kirkland.com 11

Case 3:16-cv FAB Document 66 Filed 10/14/16 Page 1 of 8 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

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