The United States Bankruptcy Court for the District of Puerto Rico ruled that the automatic stay protections of the Bankruptcy Code do not prevent Puerto Rico's financial regulator from continuing its enforcement action against The Phoenix Fund LLC, a private equity fund that filed for Chapter 11 bankruptcy protection on February 23, 2026. The court simultaneously ruled that the pre-petition receiver appointed by the regulator, and not the fund's prior management, holds the sole authority to act as debtor-in-possession in the bankruptcy proceeding.
Background on The Phoenix Fund LLC
The Phoenix Fund LLC is a private equity fund established under Act No. 185 of November 12, 2014, known as the Private Equity Fund Law. The fund holds a Tax Exemption Decree effective December 30, 2022, granted pursuant to Puerto Rico's Incentives Code (Act No. 60-2019), and operates under Regulation No. 9461, the Regulation for the Supervision of Private Equity Funds. The fund's business generally involves raising capital from investors to pursue investments.
As a private equity fund operating in Puerto Rico, the fund is subject to the regulatory oversight and authority of the Office of the Commissioner of Financial Institutions of Puerto Rico (OCIF). OCIF is the entity charged under Puerto Rico law to oversee, supervise, and regulate private equity funds, among other financial entities.
Events Leading to the Bankruptcy Filing
On January 27, 2025, OCIF initiated an examination of the fund's operations. OCIF was unable to complete the examination, citing the fund's alleged noncompliance with its regulatory obligations. Following several procedural events, OCIF issued a Consent Order on June 25, 2025, through which Driven, P.S.C. was appointed to conduct a special examination of the fund and all of its affiliated entities.
On February 18, 2026, OCIF issued an Amended Complaint and Order of (I) Cease and Desist, (II) Liquidation of Private Equity Fund, and (III) Interim and Permanent Appointment of Receiver to Carry Out the Liquidation (the Amended Complaint and Receivership Order). The order directed the fund to cease and desist from accepting any new investments, ordered the liquidation of the fund, directed the fund to cooperate fully with the Receiver for the taking of possession of the fund's assets, and appointed Driven, P.S.C. as interim Receiver. Through the order, OCIF conferred upon Driven all faculties and authorities previously held by the fund's members, directors, managers, and authorized persons, including the authority to file voluntary bankruptcy petitions and to act as debtor-in-possession in such a proceeding.
Five days later, on February 23, 2026, the fund's president signed a corporate resolution authorizing the filing of a Chapter 11 bankruptcy petition. The resolution stated that the receivership may not be in the best interest of all stakeholders and that continuation of the fund's affairs without bankruptcy protection may result in the fund's demise. The Chapter 11 petition was filed the same day.
OCIF's Motions Before the Bankruptcy Court
On February 25, 2026, OCIF filed two interrelated motions with the bankruptcy court. The first, a Motion to Continue Enforcement Action, sought an order permitting OCIF to continue its administrative enforcement proceeding, styled Office of the Commissioner of Financial Institutions v. The Phoenix Fund LLC, Case No. C25-V-001, arguing that the automatic stay provisions of the Bankruptcy Code did not apply to bar OCIF's regulatory and police powers. The second, an Urgent Motion Recognizing Authority, sought an emergency order recognizing Driven, P.S.C. as the entity authorized to act as debtor-in-possession on behalf of the fund.
Court's Legal Analysis
The court framed the central legal issue as the intersection of two constitutional principles: the right to file for bankruptcy under Article I, Section 8, Clause 4 of the U.S. Constitution, and the police power of the state under the Tenth Amendment.
Regarding the automatic stay, the court applied the police power exception codified in 11 U.S.C. § 362(b)(4), which exempts from the automatic stay government actions taken to enforce police and regulatory power. The court applied two tests: the "pecuniary purpose" test, which evaluates whether the government action protects the government's pecuniary interest or advances public welfare; and the "public policy" test, which distinguishes between actions that effectuate public policy and those that merely adjudicate private rights.
The court determined that OCIF's intervention was driven by the fund's failure to comply with its obligations under the Incentive Code. It found that the enforcement action was aimed at safeguarding the public welfare of Puerto Rico's financial system, that it conferred no financial benefit on OCIF or any related government agency, and that it did not constitute a collection action. Accordingly, the court held that the police power exception applied and that the automatic stay did not bar OCIF from continuing the enforcement action.
The court further noted that the corporate resolution filed with the bankruptcy petition illustrated the conduct the police power exception is intended to prevent: a debtor seeking refuge in bankruptcy court to frustrate necessary governmental functions.
Authority to Act as Debtor-in-Possession
On the question of authority, the court held that under Puerto Rico law — specifically Section 2044.03(g)(2)(iv) of the Incentive Code and Article 10(b) of the OCIF Enabling Act — OCIF had the authority to order the liquidation of the fund and to appoint a receiver with control over its direction and administration. The court further held that, under federal bankruptcy law, when a receiver is appointed with management authority over a debtor entity, that receiver's status automatically transforms into debtor-in-possession pursuant to 11 U.S.C. § 1101(1).
The court relied on the Second Circuit's decision in In re Bayou Grp., LLC, 564 F.3d 541 (2nd Cir. 2009), which addressed the status of a court-appointed receiver vested with management authority over a debtor upon the commencement of a bankruptcy case. Applying that framework, the court concluded that Driven, P.S.C. — not the fund's prior management — held the exclusive authority to seek bankruptcy protection and act as debtor-in-possession.
The court also cited the Consent Order's provision that the appointment of Driven as Receiver enjoined the fund's directors from filing the bankruptcy petition. In support, the court referenced In re Milestone Educ. Inst., 167 B.R. 716 (Bankr. D. Mass. 1994), which addressed the effect of a receivership order that bars directors from their management functions.
Court's Ruling and Next Steps
The court granted both of OCIF's motions, ruling that the automatic stay is inapplicable to the continued prosecution of the enforcement action in OCIF's administrative forum, including enforcement of the Amended Complaint and Receiver Order, the Consent Order, and the appointment of Driven, P.S.C. as Receiver with authority to act as debtor-in-possession.
The court ordered Driven, P.S.C. to inform the court within twenty-one days how it intends to proceed in the bankruptcy case. A status conference is scheduled for May 19, 2026 at 10:00 AM.
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