931 F.3d 111
1st Cir.2019Background
- Puerto Rico Title III (PROMESA) proceedings raised whether bondholders may enforce pre-petition liens on "pledged special revenues" post-petition without first obtaining stay relief from the Title III court.
- Relevant statutory provisions: automatic stay (11 U.S.C. § 362 incorporated into PROMESA), exceptions for municipal special revenues (11 U.S.C. §§ 922(d), 928(a)–(b)).
- Bondholders/insurers (petitioners) allege the Commonwealth and fiscal agent halted payments from reserve accounts and diverted pledged revenues, seeking to compel continued payment or obtain funds without moving for stay relief.
- Panel held §§ 922(d) and 928 do not permit creditors to commence judicial enforcement actions without first obtaining relief from the automatic stay; the provisions allow application of revenues in the creditor’s or trustee’s hands and preserve liens on post-petition revenues but do not compel payments.
- Concurrence (joined in denial of rehearing en banc) and dissent disagree: concurrence emphasizes text limits exceptions to application by holder/trustee; dissent argues text, context, and legislative history show Congress intended uninterrupted payment/enforcement (without a lift-stay requirement) to preserve bondholders’ bargain and market stability.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §§ 922(d)/928 permit creditors to commence judicial proceedings to compel a debtor to continue paying pledged special revenues post-petition without first getting stay relief | 922(d)/928 exempt pledged revenues from the automatic stay and thus allow enforcement (including judicial enforcement) to secure mandatory post-petition payments | The statutory exception merely allows application of pledged revenues in the hands of a trustee/creditor and preserves liens on post-petition revenues; it does not authorize starting enforcement litigation without stay relief | Court: §§ 922(d)/928 do not authorize creditors to commence enforcement actions without first obtaining relief from the automatic stay; they permit application of pledged revenues in possession and preserve liens, subject to court injunction on specific showing |
| Scope of "application of pledged special revenues" in § 922(d) — voluntary payments vs. compelled enforcement | "Application" (and legislative history) contemplates payment to bondholders (not just application by holder); Congress intended to avoid market disruption and ensure reasonable assurance of timely payment | "Application" refers to funds already collected by trustee/creditor; language contains no compulsion of debtor to pay post-petition | Held: § 922(d) permissive (allows application notwithstanding stay) but does not compel judicial enforcement to force debtor to pay without stay relief |
| Effect of § 928(a)/(b) on post-petition pledged revenues and creditor remedies | § 928 preserves lien on post-petition revenues and implies enforcement rights to prevent diversion; creditors need not seek stay relief for enforcement | § 928 merely preserves the lien and limits creditor’s interest (subject to necessary operating expenses); enforcement still governed by stay regime | Held: § 928 preserves liens on post-petition revenues and limits pool by necessary operating expenses; it does not eliminate the stay requirement for initiating judicial enforcement |
| Constitutional concerns (Takings/Tenth Amendment) from applying the automatic stay to pledged revenues | Bondholders say forcing delay or diversion may amount to a taking or improper interference with state revenue schemes; canon of avoidance counsels a construction avoiding constitutional problems | Government argues bankruptcy stay has long-standing constitutional precedent and protections (adequate protection, temporary delay) | Held: Court rejects need to read §§ 922/928 to displace stay on enforcement; existing bankruptcy jurisprudence addresses constitutional concerns and does not require different statutory reading |
Key Cases Cited
- Ambac Assurance Corp. v. Commonwealth of Puerto Rico (In re Fin. Oversight & Mgmt. Bd. for P.R.), 927 F.3d 597 (1st Cir. 2019) (panel held §§ 922/928 do not permit enforcement actions without stay relief)
- Assured Guaranty Corp. v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 919 F.3d 121 (1st Cir. 2019) (panel opinion addressing scope of §§ 922/928 in PROMESA Title III)
- Thompson v. General Motors Corp., 566 F.3d 699 (7th Cir. 2009) (automatic stay covers passive retention/exercise of control over collateral)
- Lex Claims, LLC v. Fin. Oversight & Mgmt. Bd., 853 F.3d 548 (1st Cir. 2017) (citing Thompson on stay breadth)
- United States v. Bekins, 304 U.S. 27 (1938) (upholding municipal bankruptcy statute against Tenth Amendment challenge)
- Wright v. Union Central Life Insurance Co., 311 U.S. 273 (1940) (discussing protections for secured creditors in bankruptcy)
- United Sav. Ass'ns of Tex. v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 793 F.2d 1380 (5th Cir. 1986) (stay delays enforcement temporarily; adequate protection protects creditor value)
- In re Jefferson County, 474 B.R. 228 (Bankr. N.D. Ala. 2012) (persuasive view that 1988 amendments aimed to keep pledged revenues flowing and permit enforcement without lift-stay motion)