Peaje Invs. LLC v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.)Peaje Invs. LLC v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.)
I.
The Authority was formed in 1965 as a public corporation and instrumentality of the Commonwealth. Pursuant to its enabling act ("Act" or "Enabling Act"), it
The Resolution guaranteed that the Authority would "promptly pay the principal of and the interest on every bond issued," but that it would do so "solely from Revenues and from any funds received by the Authority for that purpose from the Commonwealth which Revenues and funds are hereby pledged to the payment thereof in the manner and to the extent" provided by the Resolution.
In April 2016, in response to growing economic problems in Puerto Rico, the Commonwealth enacted the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, pursuant to which then-Governor Alejandro García-Padilla issued several executive orders that suspended the Authority's obligation to deposit toll revenues with the Fiscal Agent. Peaje contends that, as a result, the Authority and the Commonwealth began using the toll revenues for purposes other than those allowed by the Resolution, including to pay operating expenses. In July 2016, Peaje filed suit in district court to challenge this diversion of funds. But Congress had just enacted PROMESA, instituting a temporary stay of all proceedings against the Commonwealth and its instrumentalities. See
Specifically, Peaje asserted the following claims in two identical verified complaints, filed in the respective Title III cases of the Authority and the Commonwealth: (1) a declaration that the Authority's toll revenues qualify as "pledged special revenues" under Code section 922(d) ; (2) adequate protection or, in the alternative, relief from the stay; (3) a declaration that Code section 922(d) preempts fiscal plan implementation; (4) a declaration that Code section 922(d) requires the Authority to deposit toll revenues with the Fiscal Agent; (5) a declaration that neither Code section 552 nor 928(b) apply to its bonds; (6) a declaration that to the extent Code section 928(b) applies to its bonds, netting out "necessary operating expenses" would constitute a taking in violation of the Constitution; (7) relief from the stay so that it can challenge, on constitutional grounds, the diversion of toll revenues; and (8) injunctive relief requiring the Authority to resume depositing the toll revenues with the Fiscal Agent.
Along with its complaints, Peaje filed a motion for a temporary restraining order ("TRO") enjoining the Authority from continuing to divert the toll revenues.
After Peaje filed its Reply in the Title III court, defendants moved, on waiver
II.
We turn first to the Title III court's decision to grant defendants' motion to strike. We have previously reviewed similar orders for abuse of discretion. See Amoah v. McKinney,
Some statutory context is necessary to understand Peaje's potential waiver. As we explain more fully in the next section of this opinion, the Code divides liens into three mutually exclusive categories, two of which are relevant here: statutory liens and security interests.
With this framework in mind, we find that the district court did not abuse its discretion in granting the motion to strike. We begin where these adversary proceedings began, with the filing of the verified complaints. In its complaints, Peaje alleged, among other things:
[T]he 1968 Bondholders' lien results from both the Enabling Act that created HTA and the binding municipal resolution governing Plaintiff's Bonds. Thus, that lien is a "statutory lien" within the meaning of Section 101(53) of the Bankruptcy Code,11 U.S.C. § 101 (53).
Peaje then went on to explicitly disclaim that Code sections 928 and 552(a) applied to its lien:
As a result, Section 552 of the Bankruptcy Code does not apply to Plaintiff's Bonds, as the application of that provision is limited to "lien[s] resulting from any security agreement ...[,]" see11 U.S.C. § 552 (a).... Nor does Section 928(b) of the Bankruptcy Code apply to those Bonds. That provision in some instances subordinates a bondholder's lien on "special revenues" to the "necessary operating expenses" of the "project or system" that generates those revenues, but is also limited in application to "lien[s] resulting from any security agreement["]....
Later in its complaints, Peaje reaffirmed that its lien was "unaffected by Section 928(b) because that lien does not result from a security agreement within the meaning of that provision." Peaje made similar statements regarding section 552.
Next, in its application for a TRO, filed the same day as the verified complaints, Peaje again argued that its "lien on the Toll Revenues [was] unaffected by Section 928(b) because that lien does not result from a security agreement within the meaning of that provision."
Then in the initial hearing on Peaje's request for a TRO, held on June 5, 2017, Peaje's attorney stated:
There is not a security interest here. There is not a voluntary security agreement like you would see under Article 9.... This is not a security agreement or security interest under Article 9. This is a lien that is established pursuant to a municipal ordinance.
So, in three separate contexts prior to filing its Reply, Peaje explicitly denied that it held a security interest.
And yet, as Peaje points out, the comments quoted above from the June 5 hearing were sandwiched between two statements suggesting a broader assertion of lien rights. First, Peaje stated: "We don't say in our papers that we have a statutory lien or nothing. We say that we have a lien. We say that this lien arises from a municipal ordinance." And later, it continued: "We say this is a lien, first and foremost."
On the other hand, had Peaje been proceeding on the alternative theory that it should be granted relief to protect its interests secured by a security agreement rather than a statutory lien, one would have expected to see an explanation for how to accommodate the effects of Code section 928(b), including an analysis of what constituted necessary operating expenses. And while Peaje's attorney asserted in the June 5 hearing that to the extent the Authority could surcharge its lien, it could do so only to a limited extent to account for the expenses necessary for generating the revenue stream, this argument was absent from Peaje's actual filing. In its motion for a TRO, Peaje rested primarily on its position that Code sections 552 and 928(b) left its lien "unaffected"
Peaje argues that defendants conceded, both in this case and in related proceedings, that Peaje holds a lien of some type. There are, indeed, documents in the record, including bond offering statements from the Authority, reflecting that bonds issued under the 1968 Resolution are secured by a pledge of certain revenues of the Authority. But even assuming that defendants to some extent have conceded the existence of a lien, Peaje does not argue, nor could it, that defendants have conceded that Peaje holds a lien on the post-petition revenues it now seeks to obtain. Cf. Peaje I,
In sum, whether Peaje waived its non-statutory lien argument is admittedly a close call. One can easily see why the statements to which the Title III court pointed made it appear that Peaje was limiting itself to asserting a statutory lien. At the same time, however, the mutually exclusive nature of a security interest and a statutory lien under the Code invited Peaje's counsel to characterize its lien as statutory (and thus by definition not a security interest), without intending to waive the logically alternative argument, which defendants' prior statements in Peaje I had not made an obvious subject of dispute. See Peaje I,
Ultimately, what gives us confidence that the Title III court did not abuse its discretion in granting the motion to strike is the fact that any waiver here is not permanent, a point that the Title III court itself made. Moreover, even were we to rule in favor of Peaje on this issue, and thus consider the other issues on appeal based on the premise that Peaje holds a security interest, the most Peaje could realistically expect to gain is a remand to take a renewed shot at obtaining relief on a supplemented record that reflects where matters now stand. For the reasons we explain in Part IV of this opinion, that is exactly what Peaje gets.
III.
We turn now to the pivotal issue that Peaje presented below and raises on appeal: Does it have a statutory lien on any property of the Authority? The district court resolved this issue in the context of analyzing Peaje's request for a preliminary injunction, a ruling that we review overall for abuse of discretion. See Waldron v. George Weston Bakeries Inc.,
The Code defines a lien as a "charge against or interest in property to secure payment of a debt or performance of an obligation."
a lien arising solely by force of a statute on specified circumstances or conditions, or lien of distress for rent, whether or not statutory, but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute.
If the lien arises by force of statute, without any prior consent between the parties or judicial action, it will be deemed a statutory lien.... If the creation of the lien is dependent upon an agreement, it is a security interest even though there is a statute which may govern many aspects of the lien. The fact that a statute describes the characteristics and effects of a lien does not by itself make the lien a statutory lien.
Peaje argues that it holds a statutory lien by virtue of the Enabling Act. See P.R. Laws Ann. tit. 9 §§ 2001 -2035. It points to various provisions of the Act that it claims "provide[ ] for [its] lien on the circumstances and conditions identified in its provisions." But none of the provisions Peaje cites supports this assertion. Under the Act:
[T]he Authority is hereby empowered to ... borrow money for any of its corporate purposes, and to issue bonds of the Authority in evidence of such indebtedness and to secure payment of bonds and interest thereon by pledge of, or other lien on, all or any of its properties, revenues or other income....
P.R. Laws Ann. tit. 9 § 2004, (l). The Act further specifies that "the Authority may from time to time issue and sell its own bonds," id. § 2012(a), and that those bonds "may be authorized by resolution or resolutions of the Authority," id. § 2012(b). As to the pledging of revenues, the Act provides:
Any resolution or resolutions authorizing any bonds may contain provisions, which shall be a part of the contract with the holders of the bonds:
(1) As to the disposition of the entire gross or net revenues and present or future income or other funds of the Authority,including the pledging of all or any part thereof to secure payment of the principal of and interest on the bonds....
As the Title III court found, these provisions permit the Authority to secure the payment of bonds by making a pledge of revenues, but they do not require that it do so. Even the language of section 2015 of the Act applies only to funds "pledged ... pursuant to ... § 2004(l)," id. § 2015, and such pledges are voluntary. See id. § 2004(l) (the Authority is "empowered" to issue bonds and secure them with pledges of revenues); see also id. § 2012(e) (a resolution authorizing bonds "may contain provisions" pledging revenues (emphasis added) ). We therefore agree with the district court that "[n]o lien arises solely by force of [these] statutory provision[s]."
Peaje counters that a statutory lien need not be specified "exclusively and formally in some statutory text." Rather, Peaje argues, the Code provides that a statutory lien can arise from specified circumstances or conditions and, in its view, these include "regulatory elaboration and agency action." Peaje is correct about the definition but wrong about its application.
Under the Code, a statutory lien "aris[es] solely by force of a statute on specified circumstances or conditions."
The Enabling Act differs from these statutes in an important respect: A pledge of revenues does not attach automatically when the Authority passes a resolution issuing bonds. Rather, it arises only when the Authority chooses to grant it. Because the Act does not automatically trigger a lien upon the performance of a specified condition, apart from the Authority's decision to grant a lien, it does not create a statutory lien.
Perhaps aware that it faces an uphill battle, Peaje's backup argument is that, even if the Enabling Act does not by itself create a statutory lien, the Act together with the 1968 Resolution does. Peaje is correct that the Resolution contains mandatory language suggestive of lien creation. See 1968 Resolution, Art. IV, § 401 (funds held by the Fiscal Agent "shall be subject to a lien and charge in favor of the holders of the bonds issued and outstanding under this Resolution and for the further security of such holders until paid out or transferred as herein provided");
Peaje's only response is to point to a case holding that a regulation adopted by a Commonwealth regulatory agency, the Department of Natural and Environmental Resources, had "the same legal status as a law passed by the legislature." Armstrong v. Ramos,
In sum, Peaje does not hold a statutory lien. As anticipated by the parties, this conclusion, together with our conclusion that the Title III court did not abuse its discretion in construing the limited nature of Peaje's motion, resolves this appeal. With the only asserted lien (a statutory lien) found not to exist, for purposes of this appeal Peaje claims no relevant property interest necessary to compel relief from the automatic stay. See
IV.
Before concluding, we address the Title III court's alternative bases for denying relief as set forth briefly in the court's opinion: that Peaje failed to establish irreparable harm and that defendants established adequate protection of Peaje's interests. Peaje's contention on appeal that the district court "inverted" the burden of proof for the adequate protection analysis is defied by the district court's conclusion "that the Defendants have met their burden of showing that Peaje's interest is adequately protected." Nevertheless, for two reasons, we think it necessary for the Title III court to revisit these rulings anew should Peaje on remand renew its requests for relief consistent with this opinion. First, we find it difficult to evaluate such a brief treatment of two critical issues without understanding, at least, the Title III court's view as to the precise nature and extent of Peaje's collateral, its value at the time the Authority filed the bankruptcy petition, and the percentage of the toll revenues required in order to allow the toll highways to operate so as to generate future revenues. Second, the Title III court's analysis was necessarily sensitive to its view of how events would unfold, and much has transpired since September 2017, when it issued the order. We therefore vacate these two alternative findings, solely to make clear that they have no preclusive effect on remand. All that being said, nothing in this opinion should be read as implying any decision not expressly addressed within it.
V.
For the foregoing reasons, we affirm both the Title III court's order granting defendants' motion to strike and the primary grounds for its order denying Peaje's request for a preliminary injunction and relief from the stay. We otherwise vacate and remand for further proceedings consistent with this opinion, including the resolution of any updated motions for relief Peaje should choose to file. No costs are awarded.
Notes
Peaje contends that its lien also extends to certain tax revenues of the Authority. However, this portion of Peaje's purported lien is not at issue in this appeal.
Although neither party addresses this point, the automatic stay under Code section 362 applies to proceedings against the debtor, while the automatic stay under Code section 922 applies to proceedings against officers or inhabitants of the debtor. See
In the time since Peaje filed the adversary proceedings now on appeal, the Authority has defaulted on its bond payments.
This application was later converted into a motion for a preliminary injunction.
Defendants also raised PROMESA section 305,
Defendants have consistently referred to Peaje's alternative position as a consensual lien. But the Code's definitions section does not use this language, instead identifying a lien arising out of a contractual arrangement as a security interest. We use the latter term.
"The term 'security agreement' means [an] agreement that creates or provides for a security interest."
We are aware of contrary reasoning in Alliance Capital Mgmt. L.P. v. County of Orange (In re County of Orange ),