The First Circuit’s decision in Lex Claims gives the Commonwealth of Puerto Rico and its creditors breathing room to negotiate and vindicates core principles of bankruptcy law
Milbank, Tweed, Hadley & McCloy LLP has achieved a significant victory on behalf of its client, Ambac Assurance Corporation (“Ambac”), before the United States Court of Appeals for the First Circuit. In a case that threatened to derail Puerto Rico’s efforts to reach consensual resolutions with its creditors, the First Circuit’s decision allows negotiations to move forward without the distraction of creditor litigation, and vindicates important principles concerning the application of the Bankruptcy Code’s automatic stay.
The First Circuit’s opinion reverses the district court’s decision in Lex Claims, LLC v. Alejandro García-Padilla, in which a group of holders of Puerto Rico’s general obligation bonds brought suit against Puerto Rico, the Puerto Rico Sales Tax Financing Corporation (“COFINA”), and certain officers and representatives of each. The plaintiffs seek to garnish and freeze funds belonging to COFINA, a Puerto Rico instrumentality whose debt is insured by Ambac, in contravention of express statutory and contractual provisions. The plaintiffs alleged that their claims fell outside the scope of the Congressionally-mandated litigation stay in the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”).
Patterned on the Bankruptcy Code’s automatic stay, the PROMESA litigation stay is broad, barring, among other things, acts to exercise control over the property of Puerto Rico or its instrumentalities. The district court held that the plaintiffs’ claims were not an act to exercise control over Puerto Rico or its instrumentalities because the plaintiffs did not seek to compel immediate payment on their debt. The First Circuit reversed, recognizing that the sweeping declaratory and injunctive relief sought by the plaintiffs amounted to an action to exercise control under relevant Bankruptcy Code precedent.
The appeal was argued by Milbank partner Dennis Dunne, Practice Group Leader of the firm’s Financial Restructuring Group, together with counsel for the Financial Oversight and Management Board for Puerto Rico and certain COFINA bondholders. The Milbank team also included Financial Restructuring and Litigation partner Andrew Leblanc, Litigation partner Atara Miller and Litigation associates Grant Mainland, Kate Rhodes Janofsky, Erik Wilson, Erin Dexter, and Anna Dimon.
