Milk Industry Regulatory v. Rosa Dairy Farm, 622 B.R. 806

Background

Debtors (Rosa Dairy Farm, Inc. and individual owners) operate a dairy in Puerto Rico and filed chapter 12; they own ~82,666 liters of biweekly milk quota, partially encumbered by creditor Condado 4, LLC.
Debtors’ confirmed plan anticipated leasing quota to generate income; prior leases totaling 37,500 liters were in place when two were set to expire.
Debtors filed a motion under § 363 to lease an additional 10,000 liters for 12 months so lease proceeds could be paid directly to Condado to fund plan payments.
Puerto Rico regulator ORIL objected, asserting Puerto Rico law/regulation (5,000‑quart cap in P.R. Laws Ann. tit. 5, § 1136 and Regulation No. 8660) prohibits leases over 5,000 quarts except by ORIL authorization and that ORIL approval is a condition precedent to court approval.
Bankruptcy court granted the motion without a hearing, stating ORIL’s regulatory discretion must not interfere with federal policy; on appeal the BAP affirmed but on different grounds: (1) bankruptcy courts may authorize leases under § 363(b) as a first step using business‑judgment review, and (2) debtors must still submit the court order and request ORIL approval under Regulation No. 8660 (a two‑step process).

Issues

Issue	Appellees' Argument	ORIL's Argument	Held
Whether bankruptcy court may authorize lease of milk quota exceeding PR statutory/regulatory cap	Bankruptcy court authority under § 363(b) and federal bankruptcy policy permit court authorization as first step; lease is necessary to fund plan	Bankruptcy law does not preempt state regulatory limits; § 363(b) does not remove requirement to comply with state statute/regulation	Court may authorize under § 363(b) (business‑judgment review) but authorization does not preempt ORIL approval; two‑step process required
Whether debtor must obtain ORIL approval before seeking bankruptcy court authorization	Requiring ORIL approval first would be "cart before the horse"; regulation contemplates submission referencing a bankruptcy court order	ORIL contends its approval is a condition precedent and preferred sequence	Held debtors may first obtain bankruptcy court authorization and then file with ORIL referencing that order per Regulation No. 8660
Whether bankruptcy court must defer to ORIL’s interpretation of Regulation No. 8660	Court need not defer when exercising bankruptcy business‑judgment review; federal policy supports reorganization	ORIL, as specialized agency, should receive deference on regulatory matters	BAP rejected blanket deference claim for bankruptcy § 363(b) authorization; ORIL still retains regulatory authority and final approval role
Whether bankruptcy court abused discretion under § 363(b) in granting lease	Debtors showed lease income was essential to reorganization and satisfied business‑judgment standard	ORIL argued court misapplied law by authorizing contrary to statutory cap	No abuse of discretion: business‑judgment factors satisfied; affirmation based on § 363(b) analysis plus requirement to seek subsequent ORIL approval

Key Cases Cited

United States v. Gonzalez-Alvarez, 277 F.3d 73 (1st Cir. 2002) (describing Puerto Rico milk regulation framework)
Stellwagen v. Clum, 245 U.S. 605 (U.S. 1918) (federal bankruptcy law preempts state law only on conflict)
FDIC v. Torrefaccion Cafe Cialitos, Inc., 62 F.3d 439 (1st Cir. 1995) (addressing preemption principles)
Ritzen Grp., Inc. v. Jackson Masonry, LLC, 140 S. Ct. 582 (U.S. 2020) (finality rule for appellate jurisdiction)
Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (U.S. 2015) (finality in bankruptcy orders)
Vázquez Laboy v. Doral Mortg. Corp. (In re Vázquez Laboy), 647 F.3d 367 (1st Cir. 2011) (finality discussion in bankruptcy appeals)
Salve Regina Coll. v. Russell, 499 U.S. 225 (U.S. 1991) (principles on statutory and regulatory construction)
Fed. Refinance Co. v. Klock, 352 F.3d 16 (1st Cir. 2003) (statutory construction rules applied to regulations)
In re Hoover, 828 F.3d 5 (1st Cir. 2016) (appellate courts may affirm on alternative grounds)