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.
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
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.
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.
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.
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.
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
Vincent J. Marriott III, with whom Chantelle D. McClamb, and
Ballard Spahr LLP, as amicus curiae for The National
Federation of Municipal Analysts.
Howard, Chief Judge, Torruella, and Thompson, Circuit Judges.
TORRUELLA, CIRCUIT JUDGE.
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.
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.
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 funds (the
"Reserve Accounts") held in trust by The Bank of
New York Mellon ("BNYM").
Debt Adjustment Proceeding
March 2017, after the enactment of PROMESA and appointment of
the Board,  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.
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.
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"). 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.
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.
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 ...