899 F.3d 13
1st Cir.2018Background
- PREPA (Puerto Rico Electric Power Authority) filed a Title III PROMESA petition; that filing triggered the automatic stay under 48 U.S.C. § 2161 (incorporating 11 U.S.C. § 362).
- Holders and insurers of PREPA revenue bonds (bondholders) claimed PREPA defaulted and mismanaged operations, risking diminution of their collateral (pledged PREPA revenues under a 1974 Trust Agreement).
- Bondholders sought relief from the automatic stay under 11 U.S.C. § 362(d)(1) (incorporated by PROMESA) to permit a Commonwealth court to appoint a receiver over PREPA to protect their collateral and seek rate relief.
- The Title III (district) court denied stay relief, reasoning PROMESA § 305 (48 U.S.C. § 2165) barred interference with debtor powers or property without Oversight Board consent and PROMESA § 306(b) (48 U.S.C. § 2166(b)) vested exclusive jurisdiction over debtor property in the Title III court; alternatively it found no "cause" to lift the stay.
- The First Circuit reviewed whether Sections 305 and 306 categorically prohibit lifting the stay to allow another court to appoint a receiver, and whether the Title III court abused its discretion in denying relief.
Issues
| Issue | Bondholders' Argument | Oversight Board/PREPA's Argument | Held |
|---|---|---|---|
| Whether PROMESA § 305 bars the Title III court from lifting the automatic stay to allow another court to appoint a receiver over PREPA | Section 305 should not be read to prohibit the Title III court from standing aside; allowing Title III filing is not blanket consent but §305 does not prevent lifting the stay to permit third‑party action to protect collateral | §305 prohibits any interference with debtor powers/property absent Oversight Board consent, including indirectly by allowing another court to do so | §305 does not categorically bar lifting the stay to permit another court to appoint a receiver to protect a creditor’s collateral; §305 prevents the Title III court itself from directly interfering but does not eliminate §362(d)(1) relief when needed to protect creditor interests. |
| Whether PROMESA § 306(b) (exclusive jurisdiction) prevents the Title III court from permitting third‑party actions (e.g., receivership) affecting debtor property | Exclusive jurisdiction does not preclude the Title III court from authorizing other forums to act with Title III oversight; such permission preserves rather than surrenders control | §306(b) vests exclusive control and so precludes allowing another court to exercise control over debtor property | §306(b) does not bar the Title III court, after finding "cause," from lifting the stay to allow a creditor to seek receivership in another forum; the Title III court retains ultimate prerogative. |
| Whether the Title III court abused its discretion in denying relief on the merits (balance of harms / adequate protection) | Bondholders argued they were entitled to at least an evidentiary consideration of their adequate‑protection claim and tailored relief (limited receivership) | Title III court emphasized risks to Title III restructuring and PREPA operations, concluding harms outweighed bondholders' temporary impediments | The First Circuit vacated and remanded: the Title III court made insufficient findings on property interests, adequate protection, and balancing of harms; those factual and discretionary determinations must be reconsidered. |
Key Cases Cited
- Peaje Investments LLC v. García-Padilla, 845 F.3d 505 (1st Cir.) (discusses creditor protections and constitutionality issues in PROMESA context)
- Celotex Corp. v. Edwards, 514 U.S. 300 (1995) (bankruptcy court "related to" jurisdiction principles)
- United States v. Whiting Pools, Inc., 462 U.S. 198 (1983) (treatment of secured creditors in bankruptcy)
- In re Tribune Co. Fraudulent Conveyance Litig., 818 F.3d 98 (2d Cir.) (purpose of §362(d)(1) to protect creditor interests)
- Lyda v. City of Detroit (In re City of Detroit), 841 F.3d 684 (6th Cir.) (section 904/§305 interpreted to bar direct orders altering municipal operations)
- SW Boston Hotel Venture, LLC v. City of Boston (In re SW Boston Hotel Venture, LLC), 748 F.3d 393 (1st Cir.) (standard of review for bankruptcy fact‑finding)
- Sonnax Indus. v. Tri Component Prod. Corp. (In re Sonnax Indus.), 907 F.2d 1280 (2d Cir.) (factors guiding stay relief and forum litigation)
- United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988) (meaning of "adequate protection" under §362)
- Mazzeo v. Lenhart (In re Mazzeo), 167 F.3d 139 (2d Cir.) (burden allocation on motions for stay relief)