IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of Puerto Rico Electric Power Authority (PREPA), Debtor. THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of Puerto Rico Electric Power Authority (PREPA), Debtor, Appellee, FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO; PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY, Objectors, Appellees, v. AD HOC GROUP OF PREPA BONDHOLDERS; ASSURED GUARANTY CORPORATION; ASSURED GUARANTY MUNICIPAL CORPORATION; NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION; SYNCORA GUARANTEE, INC., Movants, Appellants.
No. 17-2079
United States Court of Appeals For the First Circuit
August 8, 2018
Hon. Laura Taylor Swain, U.S. District Judge; Before Howard, Chief Judge, Kayatta, Circuit Judge, and Torresen, Chief U.S. District Judge.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO. *Of the Southern District of New York, sitting by designation. **Of the District of Maine, sitting by designation.
Martin J. Bienenstock, with whom Timothy W. Mungovan, Stephen L. Ratner, Mark D. Harris, Chantel L. Febus, and Proskauer Rose LLP were on brief, for appellee Financial Oversight and Management Board for Puerto Rico as representative of Puerto Rico Electric Power Authority.
Thomas Moers Mayer, with whom Amy Caton, Gregory A. Horowitz, Alice J. Byowitz, Douglas Buckley, Kramer Levin Naftalis & Frankel LLP, Manuel Fernandez-Bared, Linette Figueroa-Torres, Nayda Perez-Roman, and Toro Colon Mullet P.S.C. were on brief, for appellants Ad Hoc Group of PREPA Bondholders.
Heriberto Burgos Perez, Ricardo F. Casellas-Sanchez, Diana Perez-Seda, Casellas Alcover & Burgos P.S.C., Howard R. Hawkins, Mark C. Ellenberg, Ellen Halstead, and Cadwalader, Wickersham & Taft LLP, on brief for appellants Assured Guaranty Corp. and Assured Guaranty Municipal Corp.
Gregory Silbert, Marcia Goldstein, Jonathan Polkes, Kelly DiBlasi, Gabriel A. Morgan, Weil, Gotshal & Manges LLP, Eric Perez-Ochoa; Alexandra Casellas-Cabrera Lourdes; Arroyo Portela, and Adsuar Muniz Goyco Seda & Perez-Ochoa, P.S.C., on brief for appellant National Public Finance Guarantee Corp.
Carlos A. Rodriguez-Vidal, Solymar Castillo-Morales, Goldman Antonetti & Cordova, LLC, My Chi To, Elie J. Worenklein, and Debevoise & Plimpton LLP, on brief for appellant Syncora Guarantee, Inc.
I.
Title III of PROMESA authorizes Puerto Rican governmental entities (such as PREPA) to restructure their debts in a manner akin to municipal debt restructuring under Chapter 9 of the bankruptcy code. Compare
Appellants, to whom we will refer as “the bondholders,” are holders and insurers of debt issued by PREPA and governed by a 1974 Trust Agreement. Under that Trust Agreement, PREPA pledged to the bondholders its revenues to repay over time the money PREPA acquired by issuing the bonds, plus interest. On July 3, 2017, PREPA defaulted on its payments. The bondholders accuse PREPA of breaching a promise to seek a rate increase sufficient to cover debt payments, of failing to collect on customer accounts, and of mismanaging operations. For these reasons, the bondholders asked the district court overseeing the Title III bankruptcy (the “Title III court“) for relief from the automatic stay pursuant to
The Title III court denied the bondholders’ request for relief from the automatic stay. It reasoned, first, that PROMESA section 305 (“Section 305“), codified at
II.
We address first the limitation imposed by Section 305. That section provides:
[N]otwithstanding any power of the court, unless the Oversight Board consents
or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with-- (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the use or enjoyment by the debtor of any income-producing property.
Anticipating the possibility that this “consent” argument would fail, the bondholders also urge a more nuanced reading of Section 305 as limiting only what the Title III court can itself directly order. The Title III court disagreed. It read Section 305 as not only preventing the Title III court from directly interfering with the listed powers and properties of PREPA, but also from indirectly interfering by issuing an order for the purpose of allowing another court to engage in any such interference, at least when the relief sought is the appointment of a receiver. The Title III court reasoned that Section 305 and other PROMESA provisions create a structure that is “protective of the autonomy of public entities engaged in debt adjustment proceedings.” It also read the word “otherwise” in Section 305 as prohibiting the Title III court from indirectly doing (i.e., allowing others to do) what it could not directly do.2
We agree with the bondholders that Section 305 does not tie the Title III court‘s hands quite so much as that court found it did. Our reasoning begins with the statutory text. The text of Section 305 trains on the powers of “the court,” plainly the Title III court. It states specifically what that court may not do: “interfere with” certain powers and assets of the debtor “by any stay, order, or decree.” The bondholders’ principal request for relief does not ask the Title III court to issue any such stay, order, or decree that itself interferes with the debtor‘s powers or assets. Rather, the bondholders ask the Title III court to stand aside -- by lifting the stay -- to allow another court under Commonwealth law to decide whether to do what the Title III court is assumed not to be able to do. Nothing in that text plainly calls for us to read a prohibition on interference by the Title III court so broadly as to encompass an action that might allow another court to decide whether to interfere with the powers or properties of the debtors.
The statute‘s use of the word “otherwise” does not alter our reading. The word “otherwise” serves not as a
Our interpretation of the text of Section 305 secures even firmer footing when grounded in context because Title III of PROMESA also incorporates section 362(d)(1) of the bankruptcy code.
If we were nevertheless to read Section 305 broadly as barring the Title III court from lifting the automatic stay as otherwise allowed by section 362(d)(1) to enable another court to take action interfering with the debtor‘s property, we would effectively wipe out section 362(d)(1) whenever the creditor needed protection of its interest in that property.3 The creditor would be left to stand by helplessly as the debtor spent the creditor‘s collateral, leaving the debtor entirely unsecured. As we have previously said, we would “doubt the constitutionality of” a rule that would allow a debtor to “expend every penny of the Movants’ collateral, leaving the debt entirely unsecured.” Peaje Investments LLC v. García-Padilla, 845 F.3d 505, 511–12 (1st Cir. 2017) (“Peaje I“). Such a marked change in the status quo ante undercutting creditor rights, see United States v. Whiting Pools, Inc., 462 U.S. 198, 207 (1983) (describing rights and treatment of secured creditors in bankruptcy, including right to adequate protection), would be an ambitious undertaking unlikely to have been implemented by Congress without some discussion and expression of awareness.
The Title III court did try to deflect these problems by stating that its refusal to lift the stay arose in the context of a request for a receiver, certainly a robust form of interference with the debtor‘s finances and property. The implication -- which the debtor‘s brief makes express -- is that perhaps the Title III court would lift the stay to allow another court to provide some other type of protection of collateral. But neither the Title III court nor the debtor points to any toehold in the language of Section 305 that would accommodate a distinction allowing the Title III court to lift the stay to allow another court to interfere with the debtor‘s property sometimes but not others. Either Section 305 only bars the Title III court itself from
The Title III court also pointed out that Section 305 would not bar section 362(d) relief when the Oversight Board consents to the requested relief. But the principal aim of section 362(d)(1) is to protect the creditor when protection is needed, which is customarily when the debtor is not obliging. In short, saying that a creditor can get relief from the stay when the debtor‘s representative consents effectively wipes out section 362(d)(1) precisely when it is most likely needed.
We also find no inconsistency between the apparent purpose served by Section 305 and a reading of that section as only barring the Title III court itself from directly interfering with the debtor‘s powers or property. Like the Title III court, we read Section 305 as respectful and protective of the status of the Commonwealth and its instrumentalities as governments, much like section 904 of the municipal bankruptcy code respects and protects the autonomy of states and their political subdivisions. See
Finally, the limited case law on this subject provides no holdings or reasoning that call for a contrary interpretation of Section 305. Other courts have had occasion to pass on the plain meaning of
For these reasons, we hold that Section 305 does not prohibit as a matter of course the Title III court from lifting the stay when the facts establish a creditor‘s entitlement to the appointment of a receiver in a different court in order to protect a creditor‘s collateral should that protection otherwise be necessary and appropriate. Although we share the Title III court‘s concerns about the deleterious impact that a robust receivership outside the Title III court‘s control might have on the efforts of the Title III court to consolidate and adjust the debtor‘s affairs, those concerns are best addressed in deciding whether, precisely to what extent, and for what purpose relief from the automatic stay might be granted. In other words, it might be possible to grant tailored relief for the
III.
We turn next to the Title III court‘s holding that the exclusive jurisdiction provision contained in PROMESA section 306(b),
This grant of exclusive jurisdiction has to our knowledge never limited the bankruptcy court‘s power to allow others to act on the debtor‘s property with the permission of the bankruptcy court. For example, bankruptcy courts routinely grant leave to allow a creditor to sell a debtor‘s property without threat to the exclusive jurisdiction rule. See, e.g., Catalano v. Comm‘r of Internal Revenue, 279 F.3d 682, 687 (9th Cir. 2002) (order lifting stay to permit bank to foreclose on residential property did not extinguish the estate‘s interest in the property or constitute abandonment of the property).
Allowing the Title III court to permit or enlist others to take action with the court‘s permission enhances rather than limits the control given to the Title III court by Section 306. See In re Ridgemont Apartment Assocs., 105 B.R. 738, 741 (Bankr. N.D. Ga. 1989) (lifting stay for creditor to obtain a receiver to collect some income from debtor‘s rental property did not cede exclusive jurisdiction over the debtor‘s property, as Congress gave “considerable flexibility” to bankruptcy courts to protect both creditors and debtors). Moreover, were we to read Section 306 as precluding the Title III court from allowing a Commonwealth court to protect a creditor‘s collateral from actions of the debtor, we would create the same problem that our reading of Section 305 sought to avoid: The creditor would have no forum that could provide any protection. Section 306 is better understood as a housekeeping provision keeping the bankruptcy process ultimately under the prerogative of the Title III court. Even when the Title III court lifts the stay, that prerogative remains. Thus, we conclude that Section 306(b) does not prevent a Title III court from, after a determination of “cause,” lifting the stay to allow a creditor to seek the appointment of a receiver in another court.
IV.
The Title III court also included a brief section in its order stating, in the alternative, that it would deny the requested relief from the automatic stay even if it had the power to do otherwise. In so stating, it identified the impediments that a receiver appointed outside the adjustment proceeding would pose to the successful conclusion of that proceeding. The Title III court, however, undertook no assessment of the extent to which any collateral of the bondholders might be irreversibly harmed in the interim, or whether PREPA could demonstrate that it was adequately protecting that interest, factors a court would ordinarily examine and weigh. See United Sav. Ass‘n of Texas v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 370 (1988) (adequate protection means that the value of the creditor‘s interest in the collateral must be protected from diminution while the property is being used or retained during the bankruptcy proceeding); Mazzeo v. Lenhart (In re Mazzeo), 167 F.3d 139, 142 (2d Cir. 1999) (burden falls first on the creditor to make an initial showing of cause, then on the debtor to show lack of cause). It is true that the bondholders took the position that their motion could be decided “on the basis of law and limited undisputed facts.” But one of the predicate legal issues was whether and to what extent the bondholders possessed property interests. The Title III court found it unnecessary to decide that issue. We, in turn, decline to do so now without first having the issue framed by proceedings in the Title III court. Cf. SW Boston Hotel Venture, LLC v. City of Boston (In re SW Boston Hotel Venture, LLC), 748 F.3d 393, 402 (1st Cir. 2014) (bankruptcy court fact-finding is reviewed for clear error); see also Whispering Pines Estates, Inc. v. Flash Island, Inc. (In re Whispering Pines Estates, Inc.), 369 B.R. 752, 757 (B.A.P. 1st Cir. 2007) (review of stay relief order is for abuse of discretion).
We agree with the parties that the factors identified by the Second Circuit in Sonnax and recited by the Title III court provide a helpful framework for considering whether the Title III court should permit litigation to proceed in a different forum. See Sonnax Indus. v. Tri Component Products Corp. (In re Sonnax Indus.), 907 F.2d 1280, 1286 (2d Cir. 1990). But the Title III court’s order does not make clear what use it made of these guideposts beyond a high-level consideration of the balance of the harms. It also made no findings regarding what limitations it might be able to impose upon the receiver.
Additionally, to say that the potential harm to the debtor and the Title III process “far outweighs the temporary impediments imposed on the bondholders” would also seem to require some assessment of the pre-petition value of the bondholders’ collateral (if any exists), whether the bondholders face a threat of uncompensated diminution in such value, whether the bondholders are seeking the protection of existing collateral or, instead, the creation of new collateral, and what, if any, adequate protection PREPA can offer short of a receiver being appointed to manage it if protection is warranted. See United Sav. Ass‘n of Texas, 484 U.S. at 370; Lend Lease v. Briggs Transp. Co. (In re Briggs Transp. Co.), 780 F.2d 1339, 1344 (8th Cir. 1985) (debtor can propose a form of relief to provide adequate protection of a secured creditor‘s interest in property). Without more to understand what the Title III court weighed on each side of the balance of the harms, we cannot say whether there was adequate support upon which to rest the Title III court‘s exercise of its discretion in finding that “cause” did not exist.
The Title III court did observe in its order of September 14, 2017, that the bondholders only faced “temporary impediments.” Much time has since passed, and the situation on the ground -- and at PREPA -- has changed greatly since last September in the wake of Hurricanes Irma and Maria. Additionally, our decision today in Peaje Investments LLC v. Financial Oversight and Management Board for Puerto Rico (In re Financial Oversight and Management Board for Puerto Rico), Nos. 17-2165, 17-2166, 17-2167, confirms some of the basic ground rules that may govern the ascertainment and classification of security interests in this case. Having now
That being said, nothing in this opinion should be read as implying any decision concerning issues not expressly addressed in this opinion.
V.
For the reasons stated above, we vacate the order denying the bondholders’ request for relief from the automatic stay and we remand for further proceedings consistent with this opinion. No costs are awarded.