Lex Claims, LLC v. Financial Oversight & Management Board
853 F.3d 548
| 1st Cir. | 2017Background
- Plaintiffs are holders of Puerto Rico general obligation (GO) bonds who sued seeking, among other things, declarations and injunctions that would force the Commonwealth to preserve or redirect sales-and-use-tax (SUT) revenues for GO bondholders and to enjoin enforcement of certain post-PROMESA measures (Executive Order and Moratorium Act).
- PROMESA imposes an immediate but temporary automatic stay of litigation against the Government of Puerto Rico, see 48 U.S.C. § 2194(a)-(b); the stay in this matter was in effect until May 1, 2017.
- The district court allowed most claims to be stayed but permitted four PROMESA-based counts (1st, 2nd, 3rd, 12th) to proceed; appellants (Oversight Board, Senior COFINA bondholders, and Ambac) appealed that denial of stay.
- The requested relief during the stay would, if granted, require the Commonwealth to segregate or transfer SUT revenues and possibly stop defaulting on GO bonds while depriving COFINA bondholders of SUT revenues—effectively directing use of government property/funds.
- The First Circuit stayed the district-court proceedings, reviewed the question de novo, and reversed the denial of the stay as to those four counts, holding that the requested relief falls within PROMESA’s stay on acts “to exercise control over property of the Government of Puerto Rico.”
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of PROMESA stay: whether stay applies to entire action or claim-by-claim | Plaintiffs implicitly: stay should not bar these specific PROMESA-based claims; district court proceeded claim-by-claim | Appellants: stay should apply to the entire action/proceeding | Court did not need to decide globally but found a substantial likelihood the entire action should be stayed; reversed denial of stay for the four counts |
| Whether plaintiffs’ requested relief constitutes an act to "exercise control" over Commonwealth property under § 2194(b)(3) | Plaintiffs: relief is not constructive possession/control; merely declaratory/negative injunctive relief to prevent dissipation | Appellants: relief would force segregation/transfer of SUT revenues and thus exercise control over government property | Held: relief seeks to control allocation/use of SUT revenues and is within PROMESA’s prohibition on acts to exercise control; stay applies |
| Whether broad definition of "control" requires constructive possession | Plaintiffs: subsection applies to constructive possession only | Appellants: "control" is broader than possession and includes restraining/directing influence | Held: "control" is broadly read (consistent with bankruptcy amendments and precedent); not limited to constructive possession |
| Whether a freestanding declaratory relief claim can proceed during stay | Plaintiffs urged a standalone declaratory claim to continue | Appellants opposed | Held: Court rejected allowing a freestanding declaratory claim to proceed during the stay (citing Piazza v. Aponte Roque) |
Key Cases Cited
- Peaje Investments LLC v. García-Padilla, 845 F.3d 505 (1st Cir. 2017) (prior First Circuit decision addressing PROMESA stay and related issues)
- Parkview Adventist Med. Ctr. v. United States, 842 F.3d 757 (1st Cir. 2016) (standards for de novo review cited)
- Thompson v. Gen. Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009) (broad definition of "control" in stay context)
- In re Weidenbenner, 521 B.R. 74 (Bankr. S.D.N.Y. 2014) (discusses constructive possession under bankruptcy stay)
- In re Atlas Exp. Corp., 761 F.3d 177 (1st Cir. 2014) (jurisdictional/appeal principles relied upon)