Court Opinion

ID: 9408523
Source: CourtListenerOpinion
Date Created: 2023-07-12 22:01:18.570427+00
Date Added: 2024-06-11T17:20:44.417674
License: Public Domain

United States Court of Appeals
                     For the First Circuit

No. 22-1829

 IN RE: 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, AS
     REPRESENTATIVE FOR THE PUERTO RICO SALES TAX FINANCING
     CORPORATION, a/k/a Cofina; THE FINANCIAL OVERSIGHT AND
  MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE
      EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF THE
    COMMONWEALTH OF PUERTO RICO; THE FINANCIAL OVERSIGHT AND
  MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE
PUERTO RICO HIGHWAYS AND TRANSPORTATION AUTHORITY; THE FINANCIAL
       OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS
  REPRESENTATIVE FOR THE PUERTO RICO ELECTRIC POWER AUTHORITY
(PREPA); THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
  RICO, AS REPRESENTATIVE OF THE PUERTO RICO PUBLIC BUILDINGS
                           AUTHORITY,

                            Debtors,

THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS
 REPRESENTATIVE FOR THE PUERTO RICO HIGHWAYS AND TRANSPORTATION
                           AUTHORITY,

                       Debtor, Appellee,

                               v.

                  THE VÁZQUEZ-VELÁZQUEZ GROUP,

                      Objector, Appellant,

 FRANKLIN ADVISERS, INC.; NUVEEN ASSET MANAGEMENT; HON PEDRO R.
   PIERLUISI URRUTIA; PUERTO RICO FISCAL AGENCY AND FINANCIAL
                       ADVISORY AUTHORITY,

                     Objectors, Appellees,

     MAPFRE PRAICO INSURANCE COMPANY; FINCA MATILDE, INC.,

                Objectors/Claimants, Appellees,
   ASSURED GUARANTY CORP.; ASSURED GUARANTY MUNICIPAL CORP.;
 NATIONAL PUBLIC FINANCE GUARANTEE CORP.; OFFICIAL COMMITTEE OF
UNSECURED CREDITORS; FINANCIAL GUARANTY INSURANCE COMPANY; AMBAC
ASSURANCE CORPORATION; AMERINATIONAL COMMUNITY SERVICES, LLC, as
   servicer for the GDB Debt Recovery Authority; CANTOR-KATZ
 COLLATERAL MONITOR LLC, as Collateral Monitor for the GDB Debt
                       Recovery Authority,

                        Creditors, Appellees.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
                 FOR THE DISTRICT OF PUERTO RICO

         [Hon. Laura Taylor Swain,* U.S. District Judge]

                                Before

                     Kayatta, Lynch, and Thompson,
                            Circuit Judges.

     John E. Mudd and Law Offices of John E. Mudd on brief for
appellant.
     Timothy W. Mungovan, John E. Roberts, Adam Deming, Martin J.
Bienenstock, Mark D. Harris, Brian S. Rosen, and Proskauer Rose
LLP on brief for debtor-appellee the Financial Oversight and
Management Board for Puerto Rico, as representative for the Puerto
Rico Highways and Transportation Authority.

                            July 12, 2023

     *    Of   the   Southern   District   of   New   York,   sitting   by
designation.
           LYNCH,    Circuit   Judge.      The   Vázquez-Velázquez         Group

appeals the Title III court's determination, in the course of its

confirmation of the Modified Fifth Amended Title III Plan of

Adjustment     ("Plan")    for    the     Puerto     Rico    Highways           and

Transportation Authority ("PRHTA"), that the Group's claims for

additional compensation made in a separate federal lawsuit are

dischargeable.      See In re Fin. Oversight and Mgmt. Bd. for P.R.,

2022 WL 6949992, at *22 n.14 (D.P.R. Oct. 12, 2022) (Title III

court   decision);    Vázquez-Velázquez    v.    P.R.    Highway     &   Transp.

Auth., 2021 WL 3501380 (D.P.R. Aug. 9, 2021) (separate lawsuit).

The Group argues its members' claims in the underlying lawsuit are

not dischargeable under Sections 7, 204(d), and 304(h) of the

Puerto Rico Oversight, Management, and Economic Stability Act

("PROMESA"),   which    concern   Puerto    Rico's      compliance       with   or

implementation of federal laws and obligations.               See 48 U.S.C.

§§ 2106, 2144(d), 2164(h).

           We affirm the Title III court's determination.

                                   I.

           The Group is composed of sixty-nine current and former

PRHTA employees who received extra compensation in addition to

their salaries for their service as project administrators or

project supervisors and their spouses and conjugal partners.                They

received extra compensation under PRHTA Regulation 02-017, adopted

in 2011, until the PRHTA announced its noncompliance with the

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regulation in Informative Bulletin 2015-007 dated October 2, 2014.

See Vázquez-Velázquez, 2021 WL 3501380, at *4.                The PRHTA broke

with Regulation 02-017 both retroactively as to such services

rendered    but   not    yet   paid   from    July   1-October     1,   2014,    and

prospectively.      Id.    The PRHTA stated that it was required to no

longer give effect to Regulation 02-017 by P.R. Act No. 66-2014,

the "Government of the Commonwealth of Puerto Rico Special Fiscal

and   Operational       Sustainability       Act,"   which   the    Puerto      Rico

Legislature enacted in June 2014.1            Id.

            At issue here is only the Group's objection to the

PRHTA's Modified Fifth Amended Title III Plan of Adjustment,

specifically to the Title III court's determination that the

Group's claims for additional compensation are dischargeable under

the Plan.    Before describing the Group's specific challenge to the

Plan, we provide relevant context.               In 2016, Congress enacted

      1    The Group sued the PRHTA in federal district court,
alleging that the decision to not comply with Regulation 02-017
was not required by P.R. Act No. 66-2014. It reasoned from that
that the PRHTA violated the Group's rights "of procedural due
process and substantive due process under the Fourteenth Amendment
Due Process Clause," "under the Takings Clause of the Fifth
Amendment, Equal Protection Clause of the Fourteenth Amendment,
and the Contract Clause in Article 1, Section 10, Clause 1 of the
Constitution of the United States," and under Puerto Rico law.
Vázquez-Velázquez, 2021 WL 3501380, at *1.     The district court
dismissed the Group's federal constitutional claims and declined
to exercise supplemental jurisdiction over its claims under Puerto
Rico law. Id. at *15. Certain of those federal constitutional
and state law claims are now before this court in a separate
appeal. See Vázquez-Velázquez v. P.R. Highway & Transp. Auth.,
No. 21-1739 (1st Cir. filed Nov. 3, 2022).

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PROMESA to address the Commonwealth of Puerto Rico's financial

crisis.     See 48 U.S.C. §§ 2101-2241.              PROMESA established the

Financial Oversight and Management Board for Puerto Rico ("FOMB")

to   "achieve     fiscal    responsibility     and       access    to   the   capital

markets."       Id. § 2121(a).      Title III of PROMESA authorizes the

FOMB to commence debt restructuring on behalf of the Commonwealth

and its covered instrumentalities, like the PRHTA.                   Id. § 2164(a).

               In May 2017, the FOMB commenced a Title III case on

behalf of the PRHTA.          After several years of negotiations, the

FOMB and stakeholders reached a comprehensive agreement for a Plan

of Adjustment to restructure PRHTA debt.                  The Group objected to

the Plan on the basis that it improperly treated its members'

claims    in     the   underlying     suit   as    general        unsecured    (i.e.,

dischargeable) claims.        The Group argued that its members' claims

were nondischargeable under sections 7, 204(d), and 304(h) of

PROMESA.       See 48 U.S.C. §§ 2106, 2144(d), 2164(h).                   The Group

"maintain[ed]       that,   because    their      work    and     compensation    was

indispensable to [PR]HTA's compliance with certain federal health

and safety regulations, these sections bar the discharge of claims

related to their compensation."              In re Fin. Oversight and Mgmt.

Bd. for P.R., 2022 WL 6949992, at *22 n.14.

               On October 12, 2022, the Title III court entered an order

and judgment confirming the Plan, In re Fin. Oversight and Mgmt.

Bd. for P.R., 645 B.R. 328 (D.P.R. 2022), and issued its findings

                                       - 5 -
of fact and conclusions of law in connection with its confirmation

of the Plan of Adjustment, In re Fin. Oversight and Mgmt. Bd. for

P.R., 2022 WL 6949992.          The Title III court found that the Plan

represented "a further step in the effort to achieve fiscal

responsibility     of    the    Commonwealth    of    Puerto   Rico   and   its

instrumentalities." Id. at *2. And without the Plan, the "[PR]HTA

would   face     great    uncertainty,       financial      instability,    and

significant lawsuits."         Id. at *28.   In footnote 14, the Title III

court also rejected the Group's contention that its members' claims

were nondischargeable. The Title III court reasoned that, assuming

that sections 7, 204(d), or 304(h) of PROMESA "could serve as a

vehicle for an exception to discharge, the nature of the . . .

Group's claim[s] do[] not fall with the scope of the purported

exceptions."     Id. at *22 n.14.        The Title III court emphasized

that the Group's claims "do[] not fall squarely within the language

of sections 7, 204(d), or 304(h) of PROMESA"; that the compensation

"was not required under any federal law, regulation, or program";

and that while the "[PR]HTA's ongoing compliance with federal laws

and regulations is no doubt implemented through the diligent work

of its employees, . . . the purported exceptions cannot be credibly

construed so broadly as to require that all compensation related

to such work is exempt from discharge."              Id.   Such a construction

of   PROMESA's   exceptions,      the   Title   III    court   warned,   "would

                                     - 6 -
severely undermine the ability of Puerto Rico to restructure and

discharge its debts and achieve fiscal responsibility."          Id.

                                  II.

            We review a Title III court's legal conclusions de novo

and factual findings for clear error.      See In re Fin. Oversight &

Mgmt. Bd., 41 F.4th 29, 39 (1st Cir. 2022).        The Title III court

committed neither error of law nor error of fact.

            The Group argues on appeal that its members' claims are

nondischargeable based on sections 7, 204(d), or 304(h) of PROMESA

because "the work and compensation that was given to their group

was indispensable for the compliance with safety as required by

federal regulations."     See 23 C.F.R. §§ 635.103, 635.105, 635.108.

We bear in mind that the Bankruptcy Code's "fresh start" policy

instructs   that   "the   '[e]xceptions   to   discharge   are   narrowly

construed.'"   Dewitt v. Stewart (In re Stewart), 948 F.3d 509, 520

(1st Cir. 2020) (alteration in original) (quoting Palmacci v.

Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997)); see also Warchol v.

Barry (In re Barry), 451 B.R. 654, 659 (B.A.P. 1st Cir. 2011)

("Given the serious nature of a discharge denial, the reasons for

denying a discharge must be real and substantial, not merely

technical and conjectural." (quoting Annino, Draper & Moore, P.C.

v. Lang (In re Lang), 246 B.R. 463, 468 (Bankr. D. Mass. 2000))).

            Even were we to assume, favorably to the Group, that the

underlying claims are valid federal constitutional claims and that

                                 - 7 -
sections 7, 204(d), and 304(h) of PROMESA create an exception to

discharge as the Group argues, the Group's claims would nonetheless

fall outside the scope of those provisions.

          Even taking the assumptions arguendo in favor of the

Group's claims, the claims for additional compensation still are

not exempt from discharge.   The claims in the underlying suit are

not based on any federal requirements or obligations, but only on

PRHTA Regulation 02-017, which does not implement a federal health

or safety program.    The federal regulations that the Group does

invoke are of no help because none include an obligation to pay

the Group additional compensation.       See 23 C.F.R. §§ 635.103,

635.105, 635.108.    Further, as the Title III court noted, "there

has been no suggestion that, by discharging the . . . Group's

claim[s], [PR]HTA will be discharging or [forgoing] any of its

current or future responsibilities under federal law."   In re Fin.

Oversight and Mgmt. Bd. for P.R., 2022 WL 6949992, at *22 n.14.

We cannot read these sections of PROMESA to sweep so broadly as

the Group suggests.    Such a reading would ultimately undermine

Puerto Rico's ability to restructure and discharge its debts and

achieve fiscal responsibility.

          For the foregoing reasons, we affirm the Title III

court's order.

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