In re Fin. Oversight & Mgmt. Bd. for P.R.

• Decision Date: 09 September 2020
• Docket Number: No. 17 BK 3283-LTS (Jointly Administered),17 BK 3283-LTS (Jointly Administered)
• Citation: 485 F.Supp.3d 345
• Parties: IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of The Commonwealth of Puerto Rico et al., Debtors.
• Court: U.S. District Court — District of Puerto Rico

485 F.Supp.3d 345

IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of The Commonwealth of Puerto Rico et al., Debtors.¹

No. 17 BK 3283-LTS (Jointly Administered)

United States District Court, D. Puerto Rico.

Signed September 9, 2020

PROMESA Title III

MEMORANDUM ORDER REGARDING CCDA REVENUE BOND STAY RELIEF MOTION

LAURA TAYLOR SWAIN, United States District Judge

This Memorandum Order, which is being filed contemporaneously with the Court's Memorandum Opinion and Order Denying HTA and PRIFA Revenue Bond Stay Relief Motions (the "HTA & PRIFA Order"), addresses the requests in Movants’ Consolidated Supplemental Brief Regarding Revenue Bond Lift Stay Motions (Docket Entry No. 13744 in Case No. 17-3283, the "Supplemental Brief")² for stay relief with respect to the funds constituting or derived from Hotel Taxes that are held in, or have passed through, the Scotiabank -5142 account (the "Alleged Transfer Account Monies").³ The factual background and legal conclusions set forth and incorporated by reference in the HTA & PRIFA Order are incorporated herein by reference.

For the reasons set forth in the HTA & PRIFA Order, the CCDA Stay Relief Motion is denied insofar as it seeks relief from the automatic stay to pursue remedies with respect to monies other than the Alleged Transfer Account Monies. As explained below, the final hearing with respect to the remainder of the motion is hereby adjourned sine die pursuant to 11 U.S.C. § 362(e),⁴ and shall be deemed to have occurred when the Court issues its final decisions in the CCDA Adversary Proceeding concerning the identity of the Transfer Account and the parties’ respective rights in the Alleged Transfer Account Monies.

DISCUSSION

In light of the Court's determination in the CCDA Preliminary Order that Ambac, Assured, FGIC, and BONY (collectively, the "CCDA Movants") have colorable claims to security interests in the Alleged Transfer Account Monies, the CCDA Movants raise two arguments in the Supplemental Brief that are specific to the aspects of the CCDA Stay Relief Motion seeking stay relief as to those funds. The CCDA Movants assert that stay relief under section 362(d)(2) of the Bankruptcy Code is appropriate because the Commonwealth lacks equity in the Alleged Transfer Account Monies, and such funds are not necessary to an effective reorganization. According to the CCDA Movants, the Commonwealth lacks equity in the Alleged Transfer Account Monies because the outstanding debt owed to the CCDA Movants exceeds the value of those funds, and the Commonwealth does not own or otherwise have an interest in the Alleged Transfer Account Monies. (Supp. Br. ¶ 53.) The CCDA Movants further contend that the stay must be lifted as to those monies under section 362(d)(1) because Movants’ interests in the Alleged Transfer Account Monies are not adequately protected. The CCDA Movants argue that there is currently no legal protection in place ensuring that the Alleged Transfer Account Monies will be available to the CCDA Movants and that there is no "equity cushion" protecting them from loss. (Supp. Br. ¶¶ 64, 66.) Additionally, in response to the Court's inquiry posed in the Scheduling Order, Movants submit that litigation in the CCDA Adversary Proceeding does not obviate the need for stay relief because, inter alia, "PROMESA § 305 precludes this Court from adjudicating the causes of action that CCDA Movants are entitled to bring." (Supp. Br. ¶ 5.)

The Court is unable to determine as a matter of law on the current record whether the CCDA Movants are entitled to stay relief under section 362(d)(2) of the Bankruptcy Code or whether adequate protection is sufficiently lacking so as to establish cause for stay relief under section 362(d)(1). Section 362(d)(2) mandates, on request of a party in interest, that stay relief be granted "with respect to a stay of an act against property" if "(A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization[.]" 11 U.S.C. § 362(d)(2). The party requesting stay relief under section 362(d)(2) has the burden of proof on the issue of the debtor's equity in the property, and the party opposing such relief has the burden of establishing that the property is necessary for an effective reorganization. See 11 U.S.C. § 362(g). Here, whether viewed through the lens of section 362(d)(2)(A) or section 362(d)(2)(B), the inquiry under section 362(d)(2) necessarily turns on whether the Commonwealth retains a right under Article VI, Section 8, of the Constitution of the Commonwealth of Puerto Rico to claw back any of the Alleged Transfer Account Monies for the purpose of making payments on general obligation bonds and, if so, to what extent. The CCDA Movants argue that the conditions precedent under Article VI, Section 8, have never been triggered. However, because the CCDA Movants’ argument rests at least in part on disputed factual contentions, the Court cannot determine at this time whether the CCDA Movants have met their burden of showing lack of equity, or whether the Commonwealth has met its burden of showing that the Alleged Transfer Account Monies are necessary for an effective reorganization. Thus, further proceedings, including the consideration of disputed issues of fact, are necessary to determine the question of the CCDA Movants’ entitlement to stay relief under section 362(d)(2).

Outstanding questions of fact likewise preclude a finding of entitlement to stay relief for lack of adequate protection under section 362(d)(1) as a matter of law at this juncture. A "secured creditor lacks adequate protection if the value of its collateral is declining as a result of the stay. It must, therefore, prove this decline in value—or the threat of a decline—in order to establish a prima facie case." In re Elmira Litho, Inc., 174 B.R. 892, 902 (Bankr. S.D.N.Y. 1994) (citations omitted). The CCDA Movants contend that the Commonwealth has not provided any form of adequate protection under section 361 of the Bankruptcy Code and that the Oversight Board remains free to dissipate the Alleged Transfer Account Monies at will. (Supp. Br. ¶¶ 62-64.) The CCDA Movants also allege that at least $15 million in Alleged Transfer Account Monies have been transferred to Commonwealth accounts and used for general Commonwealth purposes, that there is no "equity cushion" protecting the funds from loss, and that most of the Alleged Transfer Account Monies are currently held in accounts at banks that have "junk" credit ratings on their debt. (Id. ¶¶ 65, 66.) Because, as discussed above, the Court cannot currently determine the extent of the monies in which the CCDA Movants have a lien, or the Commonwealth's rights with respect to the Alleged Transfer Account Monies, the Court is also unable to evaluate whether the CCDA Movants have made a prima facie showing of entitlement to adequate protection.

The preceding conclusions are supported by the CCDA Movants’ own acknowledgments that the factual record as it pertains to both the section 362(d)(2) and adequate protection issues is underdeveloped. (See Joint Status Report with Respect to Further Proceedings Regarding the Revenue Bond Stay Relief Motions , Docket Entry No. 13601, ¶ 10 ("Addressing these issues will require additional discovery. Among other things, to assess ‘adequate protection,’ CCDA Movants will need evidence sufficient to establish the value of the lien, including all transfers into and out of the Scotiabank -5142 account (and downstream accounts) to determine what funds have been transferred subject to the lien and where those funds are currently held. To address the issue of ‘equity,’ CCDA Movants need evidence concerning whether any rights the Commonwealth has under Article VI, Section 8 ... have been triggered."); Supp Br. ¶ 6 ("[T]he factual record as it currently stands does not permit a precise or complete calculation of the value of CCDA Movants’ property interest without additional discovery.").) Furthermore, as explained in the CCDA Preliminary Order, a central factual dispute underlying both of these issues—namely, whether Scotiabank -5142 is in fact the Transfer Account—remains unresolved. The CCDA Movants suggest primarily that, because they have a colorable claim that the conditions of Article VI, Section 8, have not been satisfied, the automatic stay should be lifted to enable another court to decide any relevant factual disputes, and, in the...