Lex Claims, LLC v. Financial Oversight & Management Board , 853 F.3d 548 ( 2017 )

United States Court of Appeals
For the First Circuit
No. 17-1241
LEX CLAIMS, LLC ET AL.,
Plaintiffs, Appellees,
v.
FINANCIAL OVERSIGHT AND MANAGEMENT BOARD,
Intervenor, Appellant,
ALEJANDRO GARCÍA-PADILLA ET AL.,
Defendants.
No. 17-1248
LEX CLAIMS, LLC ET AL.,
Plaintiffs, Appellees,
v.
JOSE F. RODRIGUEZ ET AL.,
Intervenors, Appellants,
ALEJANDRO GARCÍA-PADILLA ET AL.,
Defendants.
No. 17-1272
LEX CLAIMS, LLC ET AL.,
Plaintiffs, Appellees,
v.
AMBAC ASSURANCE CORPORATION,
Defendant, Appellant,
ALEJANDRO GARCÍA-PADILLA ET AL.,
Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Francisco A. Besosa, U.S. District Judge]
Before
Howard, Chief Judge,
Lynch and Barron, Circuit Judges.
Michael Luskin, with whom Stephan Hornung and Luskin, Stern
& Eisler LLP were on brief, for appellant Financial Oversight and
Management Board.
Susheel Kirpalani, with whom David Cooper, Daniel Salinas-
Serrano, Darren M. Goldman, Daniel P. Mach, Quinn Emanuel Urquhart
& Sullivan LLP, Rafael Escalera, Sylvia M. Arizmendi, Carlos R.
Rivera-Ortiz, and Reichard & Escalera were on brief, for appellants
Jose F. Rodriguez, Decagon Holdings 2, LLC, Decagon Holdings 1,
LLC, Decagon Holdings 3, LLC, Decagon Holdings 4, LLC, Decagon
Holdings 5, LLC, Decagon Holdings 6, LLC, Decagon Holdings 7, LLC,
Decagon Holdings 8, LLC, Decagon Holdings 9, LLC, Decagon Holdings
10, LLC, Golden Tree Asset Management LP, Merced Capital, LP, Old
Bellows Partners LLP, Scoggin Management LLP, Taconic Master Fund
1.5 LP, Taconic Opportunity Master Fund LP, Tilden Park Capital
Management LP, Whitebox Advisors LLC, Varde Credit Partners
Master, LP, Varde Investment Partners, LP, Varde Investment
Partners Offshore Master, LP, and Varde Skyway Master Fund, LP.
Dennis F. Dunne, with whom Andrew M. Leblanc, Atara Miller,
Grant R. Mainland, Milbank, Tweed, Hadley & McCloy, LLP, Roberto
A. Cámara-Fuertes, and Ferraiuoli LLC were on brief, for appellant
Ambac Assurance Corporation.
Mark T. Stancil, with whom Ariel N. Lavinbuk, Donald Burke,
and Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP
were on brief, for appellees.
April 4, 2017
PER CURIAM. This is our second set of appeals involving
the automatic stay provision of the Puerto Rico Oversight,
Management, and Economic Stability Act ("PROMESA"), see 48 U.S.C.
§§ 2101-2241, which employs language very similar to that of the
bankruptcy stay statute. For additional background, we refer the
reader to our prior opinion in Peaje Investments LLC v. García-
Padilla, 845 F.3d 505 (1st Cir. 2017). Here, the parties dispute
whether four claims included in the plaintiffs' Second Amended
Complaint (namely, the first, second, third, and twelfth causes of
action) are within the scope of PROMESA's temporary stay (set to
expire on May 1, 2017). See 48 U.S.C. § 2194(a)-(b).
In district court, the plaintiffs, holders of general
obligation ("GO") bonds issued by the Commonwealth of Puerto Rico,
conceded that the majority of their claims were subject to the
stay. The court, however, allowed the suit to proceed on the four
specific counts now at issue, all of which are purportedly brought
under various provisions of PROMESA. Appellants Financial
Oversight and Management Board, Jose F. Rodriguez et al. (the
"Senior COFINA bondholders"), and Ambac Assurance Corporation
(together, the "Appellants") challenge this ruling on appeal. We
have jurisdiction under 28 U.S.C. § 1291. See In re Atlas Exp.
Corp., 761 F.3d 177, 182 (1st Cir. 2014).
On March 20, 2017, we stayed the district court action
pending further notice. We found it unnecessary to consider
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whether the PROMESA stay should be applied to the entire "action
or proceeding," as the Appellants argue, or claim-by-claim, as the
district court ruled. Noting the unitary nature of the plaintiffs'
claims and the relief sought during the PROMESA stay period, we
saw a substantial likelihood that the entire action should have
been stayed. Full briefing and oral argument followed. After
expedited consideration, and applying de novo review, see Parkview
Adventist Med. Ctr. v. United States, 842 F.3d 757, 762 (1st Cir.
2016), we now hew to the same outcome and reverse the decision of
the district court insofar as it denied a stay of the first,
second, third, and twelfth counts of the Second Amended Complaint.
We write briefly in explanation.
The Commonwealth1 has various creditors, of which the
two dominant groups by debt load are the GO bondholders and the
Puerto Rico Sales Tax Financing Corporation ("COFINA")
bondholders.2 We can safely assume that the Oversight Board's
PROMESA negotiations, now entering their critical stage in the
final month of the PROMESA stay, must find a way to accommodate
and balance the respective interests of these bondholders if there
is to be a consensual resolution.
1 The term as used here includes instrumentalities of the
Commonwealth such as COFINA. See 48 U.S.C. § 2104(11).
2 See Fiscal Plan for Puerto Rico 26 (Mar. 13, 2017),
https://juntasupervision.pr.gov/wp-
content/uploads/wpfd/50/58c71815e9d43.pdf.
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When Congress enacted PROMESA and its "immediate--but
temporary--stay" of litigation, 48 U.S.C. § 2194(m)(5), it could
hardly have envisaged that, during the stay period, one of these
groups of bondholders could seek and potentially obtain injunctive
relief that would dispossess the other by driving its bonds into
default. And yet, that is what the GO bondholders evidently intend
to do. The "Relief That Plaintiffs Seek At This Time" (meaning
during the stay period) is sweeping. Beyond certain declarations
as to the legality of the Commonwealth's post-PROMESA measures and
the constitutional priority of the GO bonds "over all other
expenditures, including payments to COFINA and COFINA
bondholders," the plaintiffs also seek to:
--"[e]njoi[n] enforcement or implementation
of the unlawful Executive Order and the
Moratorium Act" as applied to the
Constitutional Debt;
--"prohibi[t] the diversion of revenues
arising from collection of the SUT [sales
and use tax] (or any substitute revenues)
to COFINA and requir[e] the Commonwealth
Officer Defendants . . . and the COFINA
Defendants to direct such funds to Puerto
Rico's Treasury";
--"direc[t] the COFINA Defendants to transfer
any revenues received from the collection
of the Commonwealth's SUT in their
possession or held on behalf of COFINA to
the Commonwealth";
--"direc[t] the Commonwealth Officer
Defendants to segregate and preserve such
funds arising from collection of the SUT or
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transferred from the COFINA Defendants";
and
--"requir[e] the Commonwealth Officer
Defendants, in their official capacities as
Commonwealth officers, to segregate and
preserve all funds clawed back, to be clawed
back, or available to be clawed back under
contractual and legal provisions expressly
acknowledging that those funds are subject
to turnover for purposes of paying the
Constitutional Debt."3
In toto, the relief that the plaintiffs seek during the
stay period would, at a minimum, force the Commonwealth to set
aside SUT revenues and "clawed back" (or available to be clawed
back) funds; indeed, if taken at face value, "enjoining" the
enforcement of the Executive Order and the Moratorium Act, which
together resulted in the Commonwealth's default on the
Constitutional Debt, might mean that the Commonwealth must stop
defaulting on the GO bonds and pay those bondholders now. The
flip side is, of course, that the Commonwealth might default on
all COFINA bonds, which would be starved of SUT revenues as well
as any alternative funding.4 An "act" of litigation that leads
3 It is telling that the GO bondholders omit to itemize the
relief they seek now anywhere in their brief, instead describing
it in the most general terms as "negative injunctive relief that
would prevent the Commonwealth from continuing to dissipate assets
in violation of PROMESA," and as compelling Puerto Rico "only to
'move' funds within its government and 'retain' those funds."
4 COFINA bonds are "non-recourse" bonds, leaving holders with
no security beyond the SUT revenue stream. See P.R. Laws Ann.
tit. 13, § 13(d).
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the Commonwealth to default on such a large tranche of its debt,
while preserving the corresponding funds for a rival class of
bonds, exercises "control" over the Commonwealth's property in any
reasonable sense of that term. See 48 U.S.C. § 2194(b)(3)
(staying, among other things, "any act . . . to exercise control
over property of the Government of Puerto Rico"). To rule
otherwise, as the district court did, was an error of law. We
know of no analogous bankruptcy case declining to automatically
stay debt litigation involving relief comparable to that requested
here.
The plaintiffs counter that they are not seeking
"constructive possession" of Commonwealth property. But
§ 2194(b)(3) encompasses more than possession and constructive
possession. In the analogous subsection of the bankruptcy stay
statute, courts have defined "control" quite broadly. See Thompson
v. Gen. Motors Acceptance Corp., 566 F.3d 699, 702 (7th Cir. 2009)
(defining "control" to include the exercise of "restraining or
directing influence over" property (quoting Merriam-Webster's
Collegiate Dictionary (11th ed. 2003))). Such a broad definition
is also consistent with legislative history. Prior to 1984, the
bankruptcy "stay provision only prohibited any act to obtain
possession of property belonging to a bankruptcy estate." Id.Congress amended the statute to also prohibit "conduct 'exercising
control'" over such property. Id. PROMESA incorporated this
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amended language. "Although Congress did not provide an
explanation of that amendment, the mere fact that Congress expanded
the provision to prohibit conduct above and beyond obtaining
possession of an asset suggests" that the current stay provision
must not be so limited as the plaintiffs contend. Id. (citation
omitted). The lone case cited by the plaintiffs on this issue
merely stands for the proposition that the relevant subsection of
the bankruptcy stay statute includes acts of constructive
possession. See In re Weidenbenner, 521 B.R. 74, 79 (Bankr.
S.D.N.Y. 2014). The court did not purport to hold that
constructive possession is required to trigger the stay.
From this expansive understanding of "control," it
follows that the stay applies to litigation seeking declaratory
and injunctive relief at least where, as here, the express purpose
of the lawsuit is to preclude the Commonwealth from using its own
funds as it sees fit. Indeed, in the Chapter 9 context, district
courts have often found declaratory and injunctive actions against
the municipality to violate the bankruptcy stay statute. See In
re City of San Bernardino, 558 B.R. 321, 329 (C.D. Cal. 2016); In
re City of San Bernardino, 530 B.R. 489, 499 (C.D. Cal. 2015); In
re City of Detroit, 504 B.R. 97, 166-67 (Bankr. E.D. Mich. 2013);
In re Jefferson Cty., 484 B.R. 427, 446-47 (Bankr. N.D. Ala. 2012).
While we do not imply that all such litigation constitutes an
exercise of "control," or endorse the specific holdings of the
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cases cited above, the claims at issue here plainly constitute
attempts to exercise control over Commonwealth revenues.
The plaintiffs also cite authorities for the
unremarkable proposition that the relevant subsection of the
bankruptcy stay provision does not necessarily preclude "post-
petition suits to enjoin unlawful conduct." But the only such
unlawful conduct alleged here is the Commonwealth's allocation of
its own revenues to pay certain creditors as opposed to others.
As explained above, the plaintiffs' attempt to alter that resource-
allocation decision through litigation falls comfortably within
PROMESA's stay of acts to exercise control over Commonwealth
property. The cases relied on by the plaintiffs are readily
distinguishable. See, e.g., Dominic's Rest. of Dayton, Inc. v.
Mantia, 683 F.3d 757, 761 (6th Cir. 2012) (holding that bankruptcy
stay did not apply to contempt proceedings stemming from debtor's
alleged trademark infringement).
Because the relief that the plaintiffs seek at this time
is stayed by § 2194(b)(3),5 regardless of when the underlying
claims arose, it is unnecessary to consider whether pleading
artifice alone has converted what would otherwise have been pre-
PROMESA local-law claims into PROMESA-based federal claims. We
5 We reject the plaintiffs' invitation, mentioned for the
first time at oral argument, to allow a freestanding claim for
declaratory relief to go forward. See Piazza v. Aponte Roque, 909
F.2d 35, 37 (1st Cir. 1990).
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similarly need not decide whether the plaintiffs' claims also fall
within any other subsection of the PROMESA stay provision, or
whether the district court should have exercised its inherent
authority to issue a discretionary stay.
The district court's holding that the PROMESA stay did
not apply to the plaintiffs' first, second, third, and twelfth
causes of action is REVERSED, and the matter is remanded for
proceedings consistent with this opinion. The court's denial of
the Senior COFINA bondholders' motion to intervene solely for the
purposes of addressing the stay issue is therefore moot.6 See
Peaje, 845 F.3d at 515 n.6. The mandate shall issue forthwith,
and the parties shall bear their own costs.
6 The district court subsequently permitted the Senior COFINA
bondholders to intervene in the case more generally.
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