Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

In re Financial Oversight and Management Board for Puerto Rico

United States Court of Appeals, First Circuit

March 26, 2019

IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE COMMONWEALTH OF PUERTO RICO; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE PUERTO RICO HIGHWAYS & TRANSPORTATION AUTHORITY, Debtors.
v.
THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE COMMONWEALTH OF PUERTO RICO; FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO; PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AURTHORITY; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE PUERTO RICO HIGHWAYS & TRANSPORTATION AUTHORITY; RICARDO ROSSELLÓ-NEVARES; GERARDO JOSÉ PORTELA-FRANCO; CARLOS CONTRERAS-APONTE; JOSÉ IVÁN MARRERO-ROSADO; RAÚL MALDONADO-GAUTIER; NATALIE A. JARESKO, Defendants, Appellees, ASSURED GUARANTY CORPORATION; ASSURED GUARANTY MUNICIPAL CORPORATION; FINANCIAL GUARANTY INSURANCE COMPANY; NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION, Plaintiffs, Appellants, JOSÉ B. CARRIÓN III; ANDREW G. BRIGGS; CARLOS M. GARCÍA; ARTHUR J. GONZÁLEZ; JOSÉ R. GONZÁLEZ; ANA J. MATOSANTOS; DAVID A. SKEEL, JR.; CHRISTIAN SOBRINO, Defendants.

          APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO Hon. Laura Taylor Swain, [*] U.S. District Judge

          Mark C. Ellenberg, with whom Howard R. Hawkins, Jr., Lary Stromfeld, Ellen V. Holloman, Gillian Groarke Burns, Thomas J. Curtin, Casey Servais, Cadwalader, Wickersham & Taft LLP, Heriberto Burgos-Pérez, Ricardo F. Casellas-Sánchez, Diana Pérez-Seda, and Casellas Alcover & Burgos were on brief, for appellants Assured Guaranty Corp. and Assured Guaranty Municipal Corp. Eric Pérez-Ochoa, Alexandra Casellas-Cabrera, Lourdes Arroyo-Portela, Adsuar Muñiz Goyco Seda & Pérez-Ochoa, P.S.C., Jonathan Polkes, Marcia Goldstein, Gregory Silbert, Kelly DiBlasi, Gabriel A. Morgan, and Weil, Gotshal & Manges LLP on brief, for appellant National Public Finance Guarantee Corporation. María E. Picó, Rexach & Picó, CSP, Martin A. Sosland, Jason W. Callen, and Butler Snow LLP on brief, for appellant Financial Guaranty Insurance Company.

          Mark D. Harris, with whom Timothy W. Mungovan, Martin J. Bienenstock, Stephen J. Ratner, Jeffrey W. Levitan, Michael A. Firestein, Lary Alan Rappaport, Proskauer Rose LLP, Hermann D. Bauer, and O'Neill & Borges LLC were on brief, for appellees The Financial Oversight and Management Board for Puerto Rico, for itself and as representative for the Commonwealth of Puerto Rico and the Puerto Rico Highways and Transportation Authority, and Natalie A. Jaresko.

          Luis Marini, Marini Pietrantoni Muñiz, LLC, John J. Rapisardi, Peter Friedman, Elizabeth L. McKeen, and O'Melveny & Myers LLP on brief, for appellees the Puerto Rico Fiscal Agency and Financial Advisory Authority and Gerardo Portela-Franco.

          Luc A. Despins, with whom William K. Whitner, James B. Worthington, James T. Grogan III, Paul Hastings LLP, Juan J. Casillas-Ayala, Diana M. Battle-Barasorda, Alberto J.E. Añeses-Negrón, Ericka C. Montull-Novoa, and Casillas, Santiago & Torres LLC were on brief, for Official Committee of Unsecured Creditors.

          Laura E. Appleby, with whom Steven Wilamowsky, Aaron Krieger, Chapman and Cutler LLP and Kevin Carroll, as amicus curiae for The Securities Industry and Financial Markets Association.

          Vincent J. Marriott III, with whom Chantelle D. McClamb, and Ballard Spahr LLP, as amicus curiae for The National Federation of Municipal Analysts.

          Before Howard, Chief Judge, Torruella, and Thompson, Circuit Judges.

          TORRUELLA, CIRCUIT JUDGE.

         Appellants, financial guarantee insurers that had insured bonds from the Puerto Rico Highway and Transportation Authority ("PRHTA") (hereinafter the "Insurers"), appeal from the dismissal of their Amended Complaint in an adversary proceeding arising within the debt adjustment proceeding that the Financial Oversight and Management Board (the "Board") commenced on behalf of the PRHTA under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"), see 48 U.S.C. §§ 2161-2177. Because the district court did not err when it dismissed the Insurers' Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6) on the grounds that neither Section 922(d) nor Section 928(a) of the United States Bankruptcy Code entitle the Insurers to the relief they sought, we affirm.

         I. Background

         1. PROMESA

         This is one of a sequence of appeals related to PROMESA, a statute enacted by Congress "in June 2016 to address an ongoing financial crisis in the Commonwealth of Puerto Rico." In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 872 F.3d 57, 59 (1st Cir. 2017) (citation omitted). To "help Puerto Rico achieve fiscal responsibility and access to the capital markets," the statute created the Board, which has "the ability to commence quasi-bankruptcy proceedings to restructure the Commonwealth's debt under a part of the statute often referred to as 'Title III.'" Id. PROMESA is largely modeled on municipal debt reorganization principles set forth in Chapter 9 of the Bankruptcy Code.

         2. The PRHTA Bonds

         In 1965, the Commonwealth of Puerto Rico ("the Commonwealth") created the PRHTA, a public corporation, to "oversee and manage the development of roads and various means of transportation" in the Commonwealth by passing Act No. 74-1965, known as the "Enabling Act." Assured Guar. Corp. v. Commonwealth of Puerto Rico (In re Fin. Oversight & Mgmt. Bd. of P.R.), 582 B.R. 579, 585-86 (D.P.R. 2018); see generally P.R. Laws Ann. tit. 9, § 2002. Pursuant to its Enabling Act, the PRHTA can secure capital by issuing municipal bonds. The PRHTA has issued several series of bonds (the "PRHTA Bonds") under Resolution No. 68-18 and Resolution No. 98-06 (collectively the "Resolutions"). The Insurers allege that pursuant to the Enabling Act and the Resolutions, the PRTHA Bonds are secured by a gross lien on (i) the revenues derived from the tolls on four highways within the Commonwealth (the "Pledged Toll Revenues"); (ii) gasoline, diesel, crude oil, and other special excise taxes levied by the Commonwealth (the "PRHTA Pledged Tax Revenues"); and (iii) special excise taxes consisting of motor vehicle license fees collected by the Commonwealth (together with the PRHTA Pledged Tax Revenues, the "PRHTA Pledged Special Excise Taxes"). According to the Insurers, the Puerto Rico Secretary of Treasury is required by statute to transfer the PRHTA Pledged Special Excise Taxes to PRHTA each month for the benefit of PRHTA bondholders. They further allege that the Pledged Toll Revenues and the PRHTA Pledged Special Excise Taxes (collectively, the "PRHTA Pledged Special Revenues") are the Insurers' property, which the PRHTA must transfer to the fiscal agent for the PRHTA Bonds on a monthly basis to replenish tripartite[1] funds (the "Reserve Accounts") held in trust by The Bank of New York Mellon ("BNYM").

         3. The Debt Adjustment Proceeding

         In March 2017, after the enactment of PROMESA and appointment of the Board, [2] the Board certified a financial plan by which the PRHTA Pledged Special Revenues formerly being deposited in the Reserve Accounts would instead be diverted and subsumed into the general revenues of Puerto Rico. On May 3 and 21, 2017, the Board commenced debt adjustment proceedings on behalf of the Commonwealth and the PRHTA, respectively, pursuant to Title III of PROMESA.

         BNYM continued to make payments to the PRHTA bondholders through June 20, 2017, when the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF" for its Spanish acronym), on behalf of PRHTA, instructed BNYM to cease making scheduled payments from the Reserve Accounts. The reasoning behind the instruction was that making such payments would constitute an act "to exercise control" over PRHTA's property in violation of the automatic stay that arose under 11 U.S.C. § 362(a), as incorporated by Section 301 of PROMESA, following the filing of the Title III petition on the PRHTA's behalf. Thereafter, on July 3, 2017, the PRHTA defaulted on a scheduled bond payment of $219 million. BNYM is abstaining from distributing funds from the Reserve Accounts until this matter is resolved.[3]

         In June 2017, the Insurers initiated adversary proceedings against the Commonwealth, the PRHTA, the Board, the AAFAF, the Governor of the Commonwealth, and other individual defendants in their official capacity (collectively the "Debtors").[4] In their Amended Complaint, which included four claims for relief, the Insurers essentially alleged that failure to continue to remit the PRHTA Pledged Special Revenues into the Reserve Accounts and pay them as payments come due violates Chapter 9 of the Bankruptcy Code. Specifically, the Insurers' first claim sought declarations that the PRHTA Bonds were secured by special revenues, that the application of such revenues to payments on the bonds is exempted from the automatic stay imposed by Title III of PROMESA, and that failure to continue to remit the PRHTA Pledged Special Revenues during the pendency of the Title III proceedings is in violation of Sections 922(d) and 928 of Chapter 9 of the Bankruptcy Code (which Section 301 of PROMESA makes applicable to Title III proceedings). The second claim sought declarations that the funds held in the Reserve Accounts are: (a) property of the PRHTA bondholders, (b) held in trust for the benefit of the bondholders, and (c) subject to a lien in their favor. They further sought a declaration that the PRHTA lacked enough property interest to prevent the disbursement of the funds currently held in the Reserve Accounts unless or until the PRHTA Bonds are fully retired or defeased. The third claim sought injunctive relief against further alleged violations of Sections 922(d) and 928 of the Bankruptcy Code. Finally, the fourth claim sought injunctive relief requiring the PRHTA to resume remittance of the special revenues securing the PRHTA Bonds in accordance with Sections 922(d) and 928 of the Bankruptcy Code.

         The Debtors moved to dismiss the Amended Complaint under Fed.R.Civ.P. 12(b)(1) and 12(b)(6), for lack of subject matter jurisdiction and failure to state a claim upon which relief could be granted. They essentially argued that the Amended Complaint failed to state a claim for relief because neither Section 922(d) nor Section 928 of the Bankruptcy Code requires PRHTA to remit payment of special revenues to bondholders during the pendency of the Title III proceedings nor do those statutes create a cause of action for bondholders to compel payment. Further, they claimed the PRHTA bondholders did not have a property interest in the funds in the Reserve Accounts.

         After holding a hearing, the district court granted the motion to dismiss. Assured, 582 B.R. at 585. It held that neither provision of Chapter 9 requires or empowers the court to order continued remittance of PRHTA Pledged Special Revenues to the Reserve Accounts or payment of PRHTA Pledged Special Revenues to the PRHTA bondholders during the pendency of Title III proceedings. Specifically, the court found that "Section 928 does not mandate the turnover of special revenues." Id. at 593. Rather, "Section 928(a) merely exempts consensual prepetition liens on special revenues acquired by the debtor post-petition from Section 552(a) of the Bankruptcy Code, which could otherwise invalidate such liens with respect to revenues acquired post-petition." Id. Regarding Section 922(d), the court held that although it "excepts the 'application' of special revenues from the automatic stay," it does not "except actions to enforce special revenue liens," id. at 596, or otherwise impose a payment obligation, id. at 594. Therefore, the court concluded, the Insurers had failed ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.