Fin. Oversight & Mgmt. Bd. for P.R. v. Ad Hoc Grp. of PREPA Bondholders (In re Fin. Oversight & Mgmt. Bd. for P.R.)

• Decision Date: 08 August 2018
• Docket Number: No. 17-2079,17-2079
• Citation: 899 F.3d 13
• Parties: IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of Puerto Rico Electric Power Authority (PREPA), Debtor. The Financial Oversight and Management Board for Puerto Rico, as representative of Puerto Rico Electric Power Authority (PREPA), Debtor, Appellee, Financial Oversight and Management Board for Puerto Rico; Puerto Rico Fiscal Agency and Financial Advisory Authority, Objectors, Appellees, v. Ad Hoc Group of PREPA Bondholders; Assured Guaranty Corporation; Assured Guaranty Municipal Corporation; National Public Finance Guarantee Corporation ; Syncora Guarantee, Inc., Movants, Appellants.
• Court: U.S. Court of Appeals — First Circuit

899 F.3d 13

IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of Puerto Rico Electric Power Authority (PREPA), Debtor.

The Financial Oversight and Management Board for Puerto Rico, as representative of Puerto Rico Electric Power Authority (PREPA), Debtor, Appellee,

Financial Oversight and Management Board for Puerto Rico; Puerto Rico Fiscal Agency and Financial Advisory Authority, Objectors, Appellees,

v.Ad Hoc Group of PREPA Bondholders; Assured Guaranty Corporation; Assured Guaranty Municipal Corporation; National Public Finance Guarantee Corporation ; Syncora Guarantee, Inc., Movants, Appellants.

No. 17-2079

United States Court of Appeals, First Circuit.

August 8, 2018

Martin J. Bienenstock, New York, NY, with whom Timothy W. Mungovan, Boston, MA, Stephen L. Ratner, Mark D. Harris, Chantel L. Febus, and Proskauer Rose LLP, New York, NY, were on brief, for appellee Financial Oversight and Management Board for Puerto Rico as representative of Puerto Rico Electric Power Authority.

Thomas Moers Mayer, with whom Amy Caton, Gregory A. Horowitz, Alice J. Byowitz, Douglas Buckley, Kramer Levin Naftalis & Frankel LLP, New York, NY, Manuel Fernández-Bared, Linette Figueroa-Torres, Nayda Pérez-Román, and Toro Colón Mullet P.S.C., San Juan, PR, were on brief, for appellants Ad Hoc Group of PREPA Bondholders.

Heriberto Burgos Pérez, Ricardo F. Casellas-Sánchez, Diana Pérez-Seda, Casellas Alcover & Burgos P.S.C., San Juan, PR, Howard R. Hawkins, New York, NY, Mark C. Ellenberg, Washington, DC, Ellen Halstead, and Cadwalader, Wickersham & Taft LLP, New York, NY, on brief for appellants Assured Guaranty Corp. and Assured Guaranty Municipal Corp.

Gregory Silbert, Marcia Goldstein, Jonathan Polkes, Kelly DiBlasi, Gabriel A. Morgan, Weil, Gotshal & Manges LLP, New York, NY, Eric Pérez-Ochoa, San Juan, PR; Alexandra Casellas-Cabrera Lourdes; Arroyo Portela, and Adsuar Muñiz Goyco Seda & Pérez-Ochoa, P.S.C., San Juan, PR, on brief for appellant National Public Finance Guarantee Corp.

Carlos A. Rodríguez-Vidal, Solymar Castillo-Morales, Goldman Antonetti & Cordova, LLC, San Juan, PR, My Chi To, Elie J. Worenklein, and Debevoise & Plimpton LLP, New York, NY, on brief for appellant Syncora Guarantee, Inc.

Before Howard, Chief Judge, Kayatta, Circuit Judge, and Torresen, Chief U.S. District Judge.^**

KAYATTA, Circuit Judge.

We consider again the application of PROMESA,¹ a statute Congress enacted to address Puerto Rico's financial crisis. In this instance, holders of revenue bonds issued by the Puerto Rico Electric Power Authority, known as PREPA, sought relief from a stay of actions against PREPA to petition another court to place PREPA in receivership. The district court concluded that PROMESA sections 305 and 306, 48 U.S.C. §§ 2165, 2166, precluded it from granting such relief. For the following reasons, we conclude otherwise. Whether the district court should in its discretion grant the requested relief, and on what terms and conditions, is a matter we leave to the able district court to decide on remand in accordance with this opinion and based on circumstances as they then exist.

I.

Title III of PROMESA authorizes Puerto Rican governmental entities (such as PREPA) to restructure their debts in a manner akin to municipal debt restructuring under Chapter 9 of the bankruptcy code. Compare 48 U.S.C. §§ 2161 – 2177 with 11 U.S.C. §§ 901 – 946. PROMESA also created the Financial Oversight and Management Board (the "Oversight Board") and vested it with powers to assist Puerto Rico and its instrumentalities in achieving fiscal responsibility and accessing capital markets. See 48 U.S.C. §§ 2121, 2141. These powers include the authority to designate governmental instrumentalities as eligible to petition for court-supervised debt restructuring under Title III of PROMESA and to act as the debtor's representative in such proceedings. 48 U.S.C. §§ 2121(d), 2162, 2175(b). With the Oversight Board's permission, PREPA filed for bankruptcy under Title III of PROMESA on July 2, 2017. As is customary in most types of bankruptcy proceedings, that filing triggered an automatic stay of most actions by creditors against PREPA. Id. § 2161(a) (incorporating 11 U.S.C. § 362(a) ).

Appellants, to whom we will refer as "the bondholders," are holders and insurers of debt issued by PREPA and governed by a 1974 Trust Agreement. Under that Trust Agreement, PREPA pledged to the bondholders its revenues to repay over time the money PREPA acquired by issuing the bonds, plus interest. On July 3, 2017, PREPA defaulted on its payments. The bondholders accuse PREPA of breaching a promise to seek a rate increase sufficient to cover debt payments, of failing to collect on customer accounts, and of mismanaging operations. For these reasons, the bondholders asked the district court overseeing the Title III bankruptcy (the "Title III court") for relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(1), incorporated into PROMESA by 48 U.S.C. § 2161(a), so that they could file suit to vindicate their right under territorial law to have a receiver appointed to manage PREPA and seek a rate increase sufficient to cover debt servicing. See P.R. Laws Ann. tit. 22, § 207(a) (establishing right of PREPA bondholders to a receiver in the event of default).

The Title III court denied the bondholders' request for relief from the automatic stay. It reasoned, first, that PROMESA section 305 ("Section 305"), codified at 48 U.S.C. § 2165 and modeled after section 904 of the municipal bankruptcy code, 11 U.S.C. § 904, prohibited the Title III court "from transferring control of PREPA's management and property to a receiver without the Oversight Board's consent." Second, it concluded that PROMESA section 306 ("Section 306"), codified at 48 U.S.C. § 2166, which gives the Title III court exclusive jurisdiction over the debtor's property, also prevented it from "ced[ing] jurisdiction of PREPA's property in the form of operating assets and revenues to another court." Third, and in the alternative, the Title III court concluded that "cause" did not exist under 11 U.S.C. § 362(d)(1) to lift the stay because the balance of harms cut against the relief requested.

II.

We address first the limitation imposed by Section 305. That section provides:

[N]otwithstanding any power of the court, unless the Oversight Board consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with—(1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the use or enjoyment by the debtor of any income-producing property.

48 U.S.C. § 2165. In an effort to dispose quickly of that limitation, the bondholders cite two California municipal bankruptcy cases for the proposition that by allowing the debtor to file a Title III petition, the Oversight Board consented carte blanche to the full exercise of the Title III court's powers. See Alliance Capital Mgmt. L.P. v. Cty. Of Orange (In re Cty. of Orange), 179 B.R. 185, 190 (Bankr. C.D. Cal. 1995) (noting that county had consented to court's jurisdiction to order adequate protection, without clarifying the nature of that consent); Ass'n of Retired Emps. of Stockton v. City of Stockton (In re City of Stockton), 478 B.R. 8, 22 (Bankr. E.D. Cal. 2012) (characterizing the consent in Cty. of Orange as consent under 11 U.S.C. § 904 by virtue of having filed the bankruptcy petition). We reject this approach because it would render Section 305 a nullity; consent would always exist because Section 305 only applies in Title III cases, and in those cases, the Oversight Board must approve the debtor's filing. See 48 U.S.C. § 2164(a) ; see also id. § 2124(j).

Anticipating the possibility that this "consent" argument would fail, the bondholders also urge a more nuanced reading of Section 305 as limiting only what the Title III court can itself directly order. The Title III court disagreed. It read Section 305 as not only preventing the Title III court from directly interfering with the listed powers and properties of PREPA, but also from indirectly interfering by issuing an order for the purpose of allowing another court to engage in any such interference, at least when the relief sought is the appointment of a receiver. The Title III court reasoned that Section 305 and other PROMESA provisions create a structure that is "protective of the autonomy of public entities engaged in debt adjustment proceedings." It also read the word "otherwise" in Section 305 as prohibiting the Title III court from indirectly doing (i.e., allowing others to do) what it could not directly do.²

We agree with the bondholders that Section 305 does not tie the Title III court's hands quite so much as that court found it did. Our reasoning begins with the statutory text. The text of Section 305 trains on the powers of "the court," plainly the Title III court. It states specifically what that court may not do: "interfere with" certain powers and assets of the debtor "by any stay, order, or decree." The bondholders' principal request for relief does not ask the Title III court to issue any such stay, order, or decree that itself interferes with the debtor's powers or assets. Rather, the bondholders ask the Title III court to stand aside—by lifting the stay—to allow another court under Commonwealth law to decide whether to do what the Title III court is assumed not to be able to do. Nothing in that text plainly calls for us to read a prohibition on interference by the Title III court so broadly as to encompass an action that might allow another court to decide whether to interfere with the powers or properties of the debtors.

The statute's use of the word "otherwise" does not alter our reading. The word "otherwise" serves not as a catchall for broadly defining what the Title III court cannot do. Rather, it broadly defines where the Title III court may not interfere: ...