919 F.3d 121
1st Cir.2019Background
- PROMESA created the Financial Oversight and Management Board (the Board) and authorized Title III debt-restructuring proceedings for Puerto Rico entities modeled on Chapter 9 municipal bankruptcy principles.
- The Puerto Rico Highways & Transportation Authority (PRHTA) issued bonds secured by pledged toll revenues and pledged special excise taxes; those revenues were to be deposited into reserve accounts held by BNYM for bondholders.
- After the Board certified a financial plan, Title III cases were filed for the Commonwealth and PRHTA; AAFAF instructed BNYM to stop payments from the reserve accounts, and PRHTA subsequently defaulted on a bond payment.
- Insurers (subrogated bond insurers) sued in adversary proceedings seeking declarations and injunctive relief that Sections 928(a) and 922(d) of the Bankruptcy Code (made applicable by PROMESA §301) require continued remittance/payment of pledged special revenues during Title III proceedings and exempt bondholder enforcement from the automatic stay.
- The district court dismissed claims under Fed. R. Civ. P. 12(b)(6), holding that Section 928 preserves consensual prepetition liens but does not mandate turnover or payment, and Section 922(d) excepts the "application" of pledged special revenues from the automatic stay but does not compel payment or authorize enforcement actions that would conflict with PROMESA §305 (analogous to 11 U.S.C. §904).
- On appeal, the First Circuit affirmed, concluding that Sections 928(a) and 922(d) permit but do not require continued payments and that PROMESA §305 limits judicial interference with debtor property and revenues.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does 11 U.S.C. §928(a) require turnover or continued payment of special revenues during bankruptcy? | §928(a) preserves liens and therefore requires continued remittance/payments to protect bondholders. | §928(a) only preserves consensual prepetition liens against §552(a); it is silent as to enforcement or compelled payments. | Held: §928(a) preserves liens but does not mandate turnover or payment during Title III. |
| Does 11 U.S.C. §922(d) exempt bondholder enforcement actions from the automatic stay and compel debtor to apply pledged revenues to debt? | §922(d) is an absolute exception to the automatic stay for pledged special revenues, allowing bondholders to force turnover/enforcement. | §922(d) only excepts the "application" of pledged revenues from the stay, allowing voluntary payment or application by a third party in possession; it does not authorize compelled judicial turnover or enforcement that conflicts with §904/ PROMESA §305. | Held: §922(d) permits but does not require payment; it does not authorize bondholder enforcement that would interfere with PROMESA §305. |
| Does PROMESA §305 (analogous to 11 U.S.C. §904) permit courts to order turnover of debtor revenues despite §922(d)? | Insurers: §922(d) is specific and should control over §305; thus §305 does not bar the relief sought. | Debtors: §305 prohibits judicial interference with debtor property/revenues absent Board consent or plan provision; §922(d) does not override §305. | Held: §305 bars judicial interference; §922(d) does not override §305 and cannot be read to compel turnover. |
| Do bondholders/insurers have a cognizable property interest in the reserve account funds sufficient to compel payment? | Insurers assert ownership/trust/lien interests in reserve account funds entitling them to payments. | Debtors contend reserve funds are not outright bondholder property; any interest is contingent/reversionary and §305/automatic stay limit relief. | Held: Court affirmed dismissal of these claims (Insurers did not develop this argument on appeal); district court found no plausible outright ownership claim and dismissed the second claim for lack of relief. |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for dismissals)
- United States v. Ron Pair Enters., Inc., 489 U.S. 235 (statutory interpretation: enforce plain meaning)
- Connecticut Nat'l Bank v. Germain, 503 U.S. 249 (plain statutory language controls; legislative history unnecessary when unambiguous)
- In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 872 F.3d 57 (describing PROMESA Title III framework)
- Fin. Oversight & Mgmt. Bd. for P.R. v. Ad Hoc Grp. of PREPA Bondholders (In re Fin. Oversight & Mgmt. Bd. for P.R.), 899 F.3d 13 (PROMESA §305 limits judicial interference)
- Aurelius Inv., LLC v. Commonwealth of P.R., 915 F.3d 838 (appointment/constitutional issues regarding Board)
- Jamo v. Katahdin Fed. Credit Union (In re Jamo), 283 F.3d 392 (automatic stay is broad protection for debtors)