Assured Guaranty Corp. v. Financial Oversight & Management Board for Puerto Rico

United States Court of Appeals
For the First Circuit
No. 17-1831
IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
RICO, AS REPRESENTATIVE FOR THE COMMONWEALTH OF PUERTO RICO,
Debtor.
ASSURED GUARANTY CORP.; ASSURED GUARANTY MUNICIPAL CORP.;
NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION,
Plaintiffs, Appellees,
v.
THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS
REPRESENTATIVE FOR THE COMMONWEALTH OF PUERTO RICO; THE
FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO; PUERTO
RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY; RICARDO
ROSSELLO NEVARES, in his official capacity as Governor of the
Commonwealth of Puerto Rico; GERARDO JOSE PORTELA FRANCO, in his
official capacity as Executive Director of the Puerto Rico
Fiscal Agency and Financial Advisory Authority; RAUL MALDONADO
GAUTIER, in his official capacity as Secretary of Treasury of
the Commonwealth of Puerto Rico,
Defendants, Appellees,
OFFICIAL COMMITTEE OF UNSECURED CREDITORS,
Movant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Laura Taylor Swain, U.S. District Judge]

Of the Southern District of New York, sitting by designation.
Before
Howard, Chief Judge,
Torruella and Kayatta, Circuit Judges.
Luc A. Despins, with whom James B. Worthington, James T.
Grogan III, William K. Whitner, Eric D. Stolze, Paul Hastings LLP,
Juan J. Casillas Ayala, Diana M. Batlle-Barasorda, Alberto J. E.
Añeses Negrón, Ericka C. Montull-Novoa, and Casillas, Santiago &
Torres LLC were on brief, for movant-appellant.
Gregory Silbert, with whom Marcia L. Goldstein, Jonathan D.
Polkes, Salvatore A. Romanello, Kelly Diblasi, Gabriel A. Morgan,
Weil, Gotshal & Manges LLP, Eric Pérez-Ochoa, Alexandra C.
Casellas-Cabrera, Lourdes A. Arroyo-Portela, Adsuar Muñiz Goyco
Seda, Pérez-Ochoa, PSC, Howard R. Hawkins, Jr., Mark C. Ellenberg,
Ellen M. Halstead, Cadwalader, Wickersham & Taft LLP, Heriberto J.
Burgos-Pérez, Ricardo F. Casellas-Sánchez, Diana Pérez-Seda, and
Casellas Alcover & Burgos P.S.C. were on brief, for plaintiffs-
appellees.
Timothy W. Mungovan, with whom John E. Roberts, Martin J.
Bienenstock, Stephen L. Ratner, Mark D. Harris, and Proskauer Rose
LLP were on brief, for defendants-appellees the Financial
Oversight and Management Board for Puerto Rico and the Commonwealth
of Puerto Rico, by and through its representative the Financial
Oversight and Management Board for Puerto Rico.
September 22, 2017
HOWARD, Chief Judge. In this case, the able district
court judge followed the guidance provided in a prior opinion of
ours. Unfettered by the constraints that bound the district court,
we now chart a different course.
Movant-Appellant Official Committee of Unsecured
Creditors ("UCC") appeals from the district court's denial of its
motion to intervene in an adversary proceeding arising within the
Commonwealth's debt adjustment case under Title III of the Puerto
Rico Oversight, Management, and Economic Stability Act
("PROMESA"), see 48 U.S.C. §§ 2161-2177.1 Because we hold that 11
U.S.C. § 1109(b), a provision of the Bankruptcy Code expressly
incorporated by PROMESA, provides an "unconditional right to
intervene" within the meaning of Fed. R. Civ. P. 24(a)(1), we
reverse the order denying intervention and remand for further
proceedings consistent with this opinion.
I.
Congress enacted PROMESA in June 2016 to address an
ongoing financial crisis in the Commonwealth of Puerto Rico
("Commonwealth"). Peaje Invs. LLC v. García-Padilla, 845 F.3d
1We have twice previously decided appeals under PROMESA. See
Lex Claims, LLC v. Fin. Oversight & Mgmt. Bd., 853 F.3d 548 (1st
Cir. 2017); Peaje Invs. LLC v. García-Padilla, 845 F.3d 505 (1st
Cir. 2017). Each of these prior cases related to the statute's
"temporary stay of debt-related litigation against the Puerto Rico
government." Peaje, 845 F.3d at 509. Because the Commonwealth
has since entered debt adjustment proceedings, that temporary stay
has expired by its own terms. See 48 U.S.C. § 2194(d)(2).
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505, 509 (1st Cir. 2017). The statute created a Financial
Oversight and Management Board ("Board") to "help Puerto Rico
'achieve fiscal responsibility and access to the capital
markets.'" Id. at 515 (quoting 48 U.S.C. § 2121(a)). Among other
things, PROMESA empowered the Board to oversee the development of
an annual "Fiscal Plan" estimating the government's revenues and
expenditures. 48 U.S.C. § 2141.
PROMESA also gave the Board the ability to commence
quasi-bankruptcy proceedings to restructure the Commonwealth's
debt under a part of the statute often referred to as "Title III."
See id. § 2164(a). Title III expressly incorporates large swaths
of the Bankruptcy Code, as well as the entirety of the Federal
Rules of Bankruptcy Procedure. See id. §§ 2161(a), 2170. On May
3, 2017, the Board commenced Title III proceedings on behalf of
the Commonwealth, thus triggering these provisions. It
subsequently commenced Title III cases for certain Commonwealth
instrumentalities. The district court ordered that all of the
Title III cases be jointly administered.
On the same day that the Title III petition was filed,
Plaintiffs-Appellees Assured Guaranty Corp., Assured Guaranty
Municipal Corp., and National Public Finance Guarantee Corporation
(together, the "plaintiffs"), companies that insure certain Puerto
Rico bonds, initiated an adversary proceeding within the larger
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Title III case.2 The plaintiffs alleged that the Commonwealth's
Fiscal Plan (approved by the Board), as well as a recently enacted
Commonwealth statute implementing that plan, violated both PROMESA
and the United States Constitution. The plaintiffs sought
declaratory relief, an injunction prohibiting the Commonwealth and
the Board from implementing the Fiscal Plan, and a stay of the
confirmation of any plan of adjustment in the Title III case.
The UCC was appointed in June 2017. Such a creditors'
committee, the duties and powers of which are outlined by statute,
see 11 U.S.C. § 1103(c), is intended to serve as "the primary
negotiating bod[y] for the formulation of the plan of
reorganization" representing the interests of the "class[] of
creditors . . . from which [it was] selected." H.R. Rep. No. 95-
595, at 401 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6357. A
creditors' committee is "arguably the one party in interest that,
for all practical purposes, typically represents stakeholders with
2As discussed in more detail below, the word "case" has a
specialized meaning in this context. "A bankruptcy case is what
is commenced by the filing of a petition for bankruptcy relief.
It is, in colloquial terms, the whole ball of wax." 7 Collier on
Bankruptcy ¶ 1109.04[1][a][i] (Alan N. Resnick & Henry J. Sommer
eds., 16th ed. 2016) [hereinafter Collier] (internal quotation
marks omitted). The word "proceeding," by contrast, refers to
"any one of the myriad discrete judicial proceedings within a case
that is commenced by a request in a form of pleading, such as a
complaint, motion or application for judicial action. . . .
Collectively, the term 'case' encompasses all of the discrete
proceedings that follow the filing of a petition for bankruptcy
relief, including adversary proceedings." Id.- 5 -
the most interest in the outcome of virtually every proceeding."
Collier ¶ 1109.04[2][d][ii]; see also Phar-Mor, Inc. v. Coopers &
Lybrand, 22 F.3d 1228, 1240 (3d Cir. 1994) (noting that bankruptcy
statutes have "relieved" courts "of most administrative matters"
such that "the responsibility for monitoring the operations of the
debtor and its compliance with appropriate bankruptcy procedures
has fallen largely to the creditors' committee").
Upon its appointment, the UCC filed a motion seeking
"leave to intervene" in the adversary proceeding "under Bankruptcy
Rule 7024." The relevant rule simply provides that Fed. R. Civ.
P. 24 "applies in adversary proceedings." Fed. R. Bankr. P. 7024.
Rule 24 states, in pertinent part, that "the court must permit
anyone to intervene who . . . is given an unconditional right to
intervene by a federal statute." Fed. R. Civ. P. 24(a)(1). The
UCC's leading argument in district court was that 11 U.S.C.
§ 1109(b), one of the many subsections of the Bankruptcy Code made
applicable in Title III proceedings, conferred such an
"unconditional right." The statute provides that any "party in
interest," specifically defined to include "a creditors'
committee," "may raise and may appear and be heard on any issue in
a case under this chapter." 11 U.S.C. § 1109(b). The UCC
alternatively argued that it was entitled to permissive
intervention under Rule 24(b).
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The plaintiffs opposed the UCC's attempt to intervene.
The Board, for its part, filed a "limited opposition," taking the
position that the UCC was not entitled to Rule 24 intervention,
but that § 1109(b) independently allowed it to "appear, be heard,
and raise any issue it has constitutional and prudential standing
to raise." In its reply, the UCC "agree[d] to the scope—and
limits—of intervention urged by the Oversight Board." The limited
participation sought by the UCC included the ability to review
discovery (but not to propound discovery requests), to attend
depositions (but not to examine witnesses), and to file briefs and
be heard at arguments.
On August 10, 2017, the district court issued an order
denying the UCC's motion to intervene. With respect to
intervention as of right, the court relied exclusively on a
footnote from our decision in Kowal v. Malkemus (In re Thompson),
965 F.2d 1136, 1142 n.8 (1st Cir. 1992), stating that § 1109(b)
"does not afford a right to intervene under Rule 24(a)(1)." The
district court went on to reject the UCC's request for permissive
intervention.
This expedited appeal followed. In its briefing, the
UCC continues to emphasize that it "seek[s] no greater level of
participation" than that requested in its district court reply.
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II.
As an initial matter, we have appellate jurisdiction
over the denial of the UCC's motion to intervene as of right. See,
e.g., Peaje, 845 F.3d at 515. We review de novo the legal issue
of whether § 1109(b) provides an "unconditional right to intervene"
within the meaning of Rule 24. See Term Loan Holder Comm. v. Ozer
Grp., L.L.C. (In re Caldor Corp.), 303 F.3d 161, 166 (2d Cir.
2002); see also Candelario-Del-Moral v. UBS Fin. Servs. Inc. of
P.R. (In re Efron), 746 F.3d 30, 35 (1st Cir. 2014).
The district court's rejection of the UCC's argument on
this point was based solely on the Thompson footnote indicating
that § 1109(b) "does not afford a right to intervene under Rule
24(a)(1)." 965 F.2d at 1142 n.8. It was certainly understandable
for the district court to rely on this language, which appears
directly applicable to the present case. But Thompson's discussion
of § 1109(b) was pure dicta. Indeed, that appeal arose from a
Chapter 7 bankruptcy and, accordingly, § 1109(b) was inapplicable
on its face. See 11 U.S.C. § 1109(b) (conferring the right to
"raise and . . . appear and be heard on any issue in a case under
this chapter" (emphasis added)); Hartford Underwriters Ins. v.
Union Planters Bank, N.A., 530 U.S. 1, 8 (2000) (holding that
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§ 1109(b) was "by its terms inapplicable" in case which had been
"converted from Chapter 11 to Chapter 7").3
Far from turning on an interpretation of § 1109(b),
Thompson was decided on the sole ground that the putative
appellants, non-parties who had not even formally moved to
intervene, lacked standing to appeal a bankruptcy court order
approving the settlement of an adversary proceeding. See 965 F.2d
at 1140. In reaching this conclusion, the court noted that "mere
participation in a hearing on the approval of a settlement" did
not "constitute de facto intervention." Id. at 1141-42. It was
at this point that the court included a footnote stating that
"[s]imilar limitations on participation by 'parties in interest'
are recognized elsewhere under the Code." Id. at 1142 n.8
(emphasis added). It went on to cite § 1109(b) as one such example,
as well as the Fifth Circuit's interpretation of that provision.
See id. (citing Fuel Oil Supply & Terminaling v. Gulf Oil Corp.,
762 F.2d 1283, 1286-87 (5th Cir. 1985)).
3In resisting this conclusion, the plaintiffs rely on our
statement in LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning
Corp.), 196 F.3d 1, 5 (1st Cir. 1999), that, while Chapter 7
includes no provision "comparable" to § 1109(b), a similar "right
to be heard" still applies in that context. Even overlooking the
fact that Mailman was decided seven years after Thompson, it is
far from clear that the gloss provided by the former opinion could
have served as a basis for allowing intervention as of right in
the latter case. See Fed. R. Civ. P. 24(a)(1) (requiring "an
unconditional right to intervene [provided] by a federal statute"
(emphasis added)).
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Because the Thompson footnote's discussion of § 1109(b)
was dicta, we are not bound by it. See Dedham Water Co. v.
Cumberland Farms Dairy, Inc., 972 F.2d 453, 459 (1st Cir. 1992).
While the district court cannot be faulted for relying on the
footnote, we possess a greater degree of "flexibility" than that
court "with respect to [our] own precedents." Eulitt v. Me. Dep't
of Educ., 386 F.3d 344, 349 (1st Cir. 2004).
Having established that Thompson does not bind us, we
consider afresh whether § 1109(b) confers an unconditional right
to intervene in an adversary proceeding. In seeking an answer to
this query, the district court "[a]ssum[ed] without deciding that
[the] adversary proceeding[] is indeed a 'case' within the meaning
of" the statute. It went on to hold that, pursuant to Thompson,
even granting the UCC this favorable assumption, the participatory
rights provided by § 1109(b) amounted to something less than Rule
24 intervention.
But the primary supportive authority cited by Thompson
on this point relied on the very distinction between cases and
adversary proceedings that the district court had just assumed
away. In Fuel Oil, the Fifth Circuit began by frankly
acknowledging that, "[b]ased on the Bankruptcy Code alone, . . .
the argument that § 1109(b) creates an absolute right to intervene
in adversary proceedings appears strong." 762 F.2d at 1286.
Despite the support for such a reading in the plain language of
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the statute, the court ultimately held that § 1109(b) did not apply
in adversary proceedings. In reaching this result, it relied on
courts' general hesitation to "find unconditional statutory rights
of intervention," as well as various statutory provisions and rules
that "draw[] distinctions between bankruptcy 'cases' and the
proceedings related to them." Id. Two other circuits have, in
dicta, suggested agreement with Fuel Oil's analysis of this issue.
See Richman v. First Woman's Bank (In re Richman), 104 F.3d 654,
658 (4th Cir. 1997); Vermejo Park Corp. v. Kaiser Coal Corp. (In
re Kaiser Steel Corp.), 998 F.2d 783, 790 (10th Cir. 1993).4
In the more than thirty years since Fuel Oil was decided,
however, the weight of persuasive authority has shifted
considerably. Both the Second and Third Circuits have rejected
Fuel Oil's reasoning, holding instead that § 1109(b) provides a
statutory right to intervene under Rule 24(a)(1). See Caldor, 303
F.3d at 176; Phar-Mor, 22 F.3d at 1240 (citing Official Unsecured
Creditors' Comm. v. Michaels (In re Marin Motor Oil, Inc.), 689
F.2d 445 (3d Cir. 1982)). In Caldor, the most recent appellate
opinion to decide this issue, the Second Circuit appropriately
began "with the language of the statute itself." 303 F.3d at 167
4
Richman, like Thompson, was a Chapter 7 case, so § 1109(b)
was facially incapable of providing the requisite statutory right
of intervention. See Richman, 104 F.3d at 659 n.7. In Kaiser,
the Tenth Circuit held that the putative appellants were not
parties in interest and therefore were not entitled to the rights
conferred by § 1109(b). See 998 F.2d at 788.
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(citation omitted). The court explained that the word "case," as
used in the bankruptcy context, "is a term of art" with a
specialized meaning. Id. at 168. It "refers to litigation
'commenced by the filing with the bankruptcy court of a petition'
under the appropriate chapter of Title 11." Id. (citing 11 U.S.C.
§§ 301, 302, 303(b), 304(a)). The term "proceeding," on the other
hand, refers to a "particular dispute or matter arising within a
pending case—as opposed to the case as a whole." Id. (citation
omitted). This distinction between the larger case and the various
subsidiary proceedings is consistent with our own precedent, as
well as the leading treatise. See Thompson, 965 F.2d at 1140("[A]n adversary proceeding is a subsidiary lawsuit within the
larger framework of a bankruptcy case."); Collier
¶ 1109.04[1][a][i]. Because "the plain text of § 1109(b) does not
distinguish between issues that occur in . . . different types of
proceedings within a Chapter 11 case," the Second Circuit concluded
that the statute applies to adversary proceedings. Caldor, 303
F.3d at 169 (emphasis omitted).
We believe that the Second and Third Circuits have the
better view and, accordingly, hold that the UCC was entitled to
intervene under § 1109(b) and Rule 24(a)(1). The statutory
language is, indeed, quite broad, providing that "a creditor's
committee . . . may raise and may appear and be heard on any issue
in a case under this chapter." 11 U.S.C. § 1109(b) (emphasis
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added). We agree with the Third Circuit that "[i]t is unlikely
that Congress would have used such sweeping language if it had not
meant 'case' to be a broadly inclusive term." Marin, 689 F.2d at
451. "Because every issue in a case may be raised and adjudicated
only in the context of a proceeding of some kind, it is apparent
that the reference . . . to 'any issue in a case' subsumes issues
in a proceeding." Collier ¶ 1109.04[1][a][ii]. And the rights
conferred by § 1109(b) are unconditional, as the provision imposes
no conditions whatsoever on the ability of a party in interest to
raise issues.5 Like the Second and Third Circuits, we find the
counterarguments to this interpretation unpersuasive. See Caldor,
303 F.3d at 170-76; Marin, 689 F.2d at 450, 453-56.
The plaintiffs' argument against intervention is largely
predicated on their contention that § 1109(b) does not provide an
unconditional right to participate in an adversary proceeding.
The plaintiffs do, however, also point out that the statute "says
nothing about intervention at all." This language suggests that
the right to appear and be heard under § 1109(b) amounts to
5
The plaintiffs' argument to the contrary is largely rooted
in their conflating unqualified rights and unconditional ones.
They assert that "the right conferred by Section 1109(b) is
qualified, not unconditional," and proceed to cite a number of
decisions restricting the participation of parties in interest to
varying degrees. As explained below, the rights provided by
§ 1109(b), and intervention rights generally, may be qualified in
a number of ways at the district court's discretion. But this
fact does nothing to alter the unconditional nature of the
statute's applicability.
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something less than a right to intervene. In light of courts'
broad discretion to control and limit the scope of intervention,
discussed in more detail below, we view the rights described in
§ 1109(b) to be entirely consistent with intervention rights
generally. Accordingly, § 1109(b) provides the UCC with an
"unconditional right to intervene" in the adversary proceeding.
Fed. R. Civ. P. 24(a)(1).6
Our holding that the UCC is entitled to participate in
the district court proceedings does not, of course, dictate the
scope of that participation. See Adelphia Commc'ns Corp. v. Rigas
(In re Adelphia Commc'ns Corp.), 285 B.R. 848, 851 (Bankr. S.D.N.Y.
2002) ("[I]t does not necessarily follow that once having
intervened, intervenors have the right to litigate as the
possessors of causes of action do, or to act wholly free of any
limitations imposed by the Court in the interests of orderly
procedure."). Crucially, "courts are not faced with an all-or-
nothing choice between grant or denial" of an intervention motion.
United States v. City of Detroit, 712 F.3d 925, 931-32 (6th Cir.
2013) (citing Fed. R. Civ. P. 24, advisory committee's note to
1966 amendment ("Intervention of right . . . may be subject to
appropriate conditions or restrictions responsive among other
6
Because we hold that Rule 24(a)(1) is satisfied, we need
not consider the UCC's alternative argument that the district court
erred in denying its request for permissive intervention under
Rule 24(b).
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things to the requirements of efficient conduct of the
proceedings.")). This flexibility allows district courts to
"get[] all interested parties to the table" in the hopes of
reaching "an effective and fair solution," while at the same time
"preventing an expansion of . . . scope" capable of threatening
the court's "control" over the matter. Id. at 932. These
competing concerns are particularly poignant in the present case,
which represents "the largest proceeding to restructure debt in
the history of the American municipal bond market."
The precise scope of the UCC's intervention is a matter
committed to the district court's "broad discretion." Id. at 933.
Courts have exercised that discretion to limit the participation
of intervenors as of right in a number of ways. An intervening
party, for example, cannot "preclude other parties from settling
their own disputes." Local No. 93, Int'l Ass'n of Firefighters v.
City of Cleveland, 478 U.S. 501, 529 (1986); see also Smart World
Techs., LLC v. Juno Online Servs., Inc. (In re Smart World Techs.,
LLC), 423 F.3d 166, 181 (2d Cir. 2005) (holding that § 1109(b)
"does not authorize creditors to pursue settlement" of an adversary
proceeding). Courts may further restrict intervention to "the
claims raised by the original parties," Fund for Animals, Inc. v.
Norton, 322 F.3d 728, 737 n.11 (D.C. Cir. 2003), or a particular
set of issues, see Harris v. Pernsley, 820 F.2d 592, 599 (3d Cir.
1987). Finally, intervenors may be denied discovery, at least in
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some circumstances. See United States v. Albert Inv. Co., 585
F.3d 1386, 1396 (10th Cir. 2009).
Because it held that the UCC was not entitled to
intervene in the adversary proceeding, the district court had no
occasion to consider the scope of such intervention. This is a
matter best left for that court to decide in the first instance
given its "greater familiarity with this case and interest in
managing its own docket." Detroit, 712 F.3d at 933.7 We do
observe, however, that the limited participation requested by the
UCC appears to fit comfortably within the framework outlined above.
The district court also declined to rule on whether the
UCC complied with Rule 24(c), which requires that a motion to
intervene "be accompanied by a pleading that sets out the claim or
defense for which intervention is sought." Fed. R. Civ. P. 24(c).
We have recently cited with approval cases holding that a court
has the discretion to permit intervention in some circumstances
7 Along similar lines, the district court did not address the
UCC's standing to appear and be heard on any particular issue in
the adversary proceeding. While Article III standing is "almost
always satisfied with respect to any party in interest in a chapter
11 case," courts have additionally required that "the interests of
a party seeking to participate lie within the 'zone of interests'
protected by the particular statute or legal rule implicated in
the given proceeding." Collier ¶ 1109.04[4]; see also In re James
Wilson Assocs., 965 F.2d 160, 169 (7th Cir. 1992) (holding that
§ 1109(b) was not "intended to waive" this "limitation[] on
standing"). Any ruling on this point in the present appeal would
be premature, but we note the standing issue as another possible
source of limitation on the UCC's participation in the adversary
proceeding.
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even when the motion to intervene is not accompanied by a pleading.
See Peaje, 845 F.3d at 515. We also stated in Peaje that, in the
absence of prejudice to a party, it would be an abuse of discretion
to deny intervention for failure to include a pleading. Id. In
the unique circumstances of the present case, we find that the
UCC's interest in the litigation was sufficiently clear to excuse
any technical non-compliance with Rule 24(c). Consistent with its
above-discussed discretionary powers, the court may, however,
require that the UCC file a more specific and comprehensive
pleading.
III.
For the foregoing reasons, the district court's order
denying intervention is REVERSED, and the matter is remanded for
proceedings consistent with this opinion. The mandate shall issue
forthwith, and the parties shall bear their own costs.
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