Court Opinion

ID: 4157973
Source: CourtListenerOpinion
Date Created: 2017-04-04 22:01:34.497503+00
Date Added: 2024-06-11T12:09:23.361152
License: Public Domain

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.

                              - 5 -
          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

                              - 6 -
             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).

                                 - 7 -
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

                                         - 8 -
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

                                         - 9 -
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).

                                    - 10 -
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.

                              - 11 -