Case 3:16-cv-02365-ADC Document 1 Filed 07/18/16 Page 1 of 25

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO
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Peaje Investments LLC,

Movant,
-againstHon. Alejandro Garcia Padilla, Hon. Juan C.
Zaragoza Gomez, Hon. Luis G. Cruz Batista,
Hon. Carmen Villar Prado, Puerto Rico
Highways & Transportation Authority,
Respondents.

Civil No. 16-cv-

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 MOVANTS 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.

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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 nonToll 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. 2013.

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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 Movants
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 Movants 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. 1331 and section

405(e)(1) of PROMESA. Venue is proper under 28 U.S.C. 1391 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

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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. 314. This process begins with the Oversight Boards 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 Ricos restructuring. See id. 304, 307, 308.
5.

Section 405(b) of PROMESA imposes an interim stay on certain creditor actions

running from the date of the statutes enactment and terminating on the earlier of: (a) February

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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 301.
6.

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,
482-83 (Bankr. W.D. Pa. 2013). Here, until the Oversight Boards 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

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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 creditors right to adequate protection of its interests (see id.; see also 3-361
COLLIER ON BANKRUPTCY 361.05 (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 3-361 COLLIER ON
BANKRUPTCY 361.05 (16th ed. 2015); see also 11 U.S.C. 361, 362, 363, 364. Moreover, a
debtor in bankruptcy cannot use a secured creditors cash collateral, defined under the
Bankruptcy Code to include, among other things, cash and cash equivalents, without first
obtaining the secured creditors 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 debtors 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 Boards 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 Movants 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.

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).

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9.

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 Codes stay
incorporated by reference into a case filed under Title III of PROMESA does not operate as a
stay of application of pledged special revenuesto 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
PRHTAs 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
Codes automatic stay did not apply to actions to enforce application of net revenues from
countys 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, Movants 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

creditors 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 creditors
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 collateralthe pledged revenuesis not just

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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 PROMESAs 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 Commonwealths and

PRHTAs diversion of the pledged revenues also runs afoul of the Puerto Rico Constitution and

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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 instrumentalityis transferred in violation of
applicable law under which any creditor has a valid pledge of, security interest in, or lien on such
propertythen 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. 74-1965 (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. 2002. Under the Enabling Act, PRHTA has the power to sue

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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. 3352-3353aa.
II.

PRHTAs 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. 68-18 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

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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.2
22.

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

Special revenue bonds are typically issued so that if the project or program financed fails, repayment will not
come out of general treasury fundsmeaning 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.

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the payment of principal and interest on the 1968 Bonds, with the Fiscal Agent3 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, 501.
23.

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. 2013.
c.

Priority of PRHTA Bonds Vis--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 Commonwealths 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.

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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, 8.
25.

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 Commonwealths 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. 31751(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-

2015-046 (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

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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-2015-049 (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 Directors budgetary adjustments when managing the
Commonwealths 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. 1300-15-16 (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

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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 Commonwealths and
PRHTAs 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,
2017. See Moratorium Act 103(m), 201(a). The Moratorium Act permits the Governor to
extend the covered period up to two months, through March 2017. 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

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.

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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:

V.

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).
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-2016-018 (the May 2016 Executive

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Order). A certified translation of the May 2016 Executive Order is attached hereto as Exhibit
F.
36.

The May Executive 2016 Order suspends PRHTAs 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, 2016i.e., the day that the December 2015 Executive Order and

May 2016 Executive Order were set to expirethe Governor issued two new executive orders:
(a) Administrative Bulletin No. EO-2016-30 (the First June 2016 Executive Order); and (b)
Administrative Bulletin No. EO-2016-31 (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, 2017.
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, 2017. See Second June 2016 Executive Order, Fifth clause.

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The Second June 2016 Executive Order also provides that PRHTAs obligation under the 1968
Resolution to transfer non-Toll Revenues to the Fiscal Agent is similarly suspended until January
31, 2017. 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 continuedin 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 Boards 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, 308.
41.

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

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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 303.
42.

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,
Movants 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
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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 482-83,
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
debtors estate if the stay is lifted. United States v. Shaughnessy (In re Shaughnessy), BAP No.
MW 06-068, 2007 Bankr. LEXIS 3164, at *6-7 (B.A.P. 1st Cir. Aug. 17, 2007).

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47.

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 creditors 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 creditors collateral, as well as the

debtors mismanagement or malfeasance. See, e.g., In re Lopez, 446 B.R. 12, 20 (Bankr. D.
Mass. 2011) (diminution of secured creditors collateral); Le Sannom Bldg. Corp. v. Nathanson,
Case No. 92 Civ. 8716 (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 creditors
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 creditors 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 creditors 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

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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 creditors 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 PRHTAs 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

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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 Commonwealths and

PRHTAs 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.

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54.

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
possessionaccording 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 Commonwealths and PRHTAs 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 Ricos 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

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instrumentality, or that divert funds from one territorial instrumentality to another or to the
territory, shall be preempted by this Act. PROMESA 303.
57.

Finally, the unlawful diversion of Toll Revenues violates PROMESAs

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 2016.
MONSERRATE SIMONET &
GIERBOLINI, LLC

/s/ Dora L. Monserrate Peagarcano

Dora L. Monserrate Peagarcano
101 San Patricio Avenue
Maramar Plaza, Suite 1120
Guaynabo, Puerto Rico 00968
Phone:
(787) 620-5300
Fax:
(787) 620-5305

DECHERT LLP

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 10036
-andG. Eric Brunstad, Jr. (pro hac vice pending)
90 State House Square
Hartford, Connecticut 06103

Attorneys for Peaje Investments LLC

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