Altair Glob. Credit Opportunities Fund (A), LLC v. United States
| Decision Date | 23 November 2020 |
| Docket Number | No. 17-970C,17-970C |
| Parties | ALTAIR GLOBAL CREDIT OPPORTUNITIES FUND (A), LLC, ANDALUSIAN GLOBAL DESIGNATED ACTIVITY COMPANY, CROWN MANAGED ACCOUNTS FOR AND ON BEHALF OF CROWN/PW SP, GLENDON OPPORTUNITIES FUND, L.P., LMA SPC FOR AND ON BEHALF OF MAP 98 SEGREGATED PORTFOLIO, MASON CAPITAL MASTER FUND LP, NOKOTA CAPITAL MASTER FUND, L.P., OAKTREE-FORREST MULTI-STRATEGY, LLC (SERIES B), OAKTREE OPPORTUNITIES FUND IX, L.P., OAKTREE OPPORTUNITIES FUND IX (PARALLEL 2), L.P., OAKTREE VALUE OPPORTUNITIES FUND, L.P., OCEANA MASTER FUND LTD, OCHER ROSE, L.L.C., PENTWATER MERGER ARBITRAGE MASTER FUND LTD., PWCM MASTER FUND LTD, AND SV CREDIT, L.P., Plaintiffs, v. UNITED STATES, Defendant. |
| Court | U.S. Claims Court |
FOR PUBLICATION
Keywords: Jurisdiction; Failure to State a Claim; Rule 12(b)(1); Rule 12(b)(6); Fifth Amendment Takings Claim; PROMESA; 48 U.S.C. § 2121; 11 U.S.C. § 552; collateral estoppel; Puerto Rico
Sparkle L. Sooknanan, Geoffrey S. Stewart, Beth Heifetz, Parker A. Rider-Longmaid, Ariel N. Volpe, Jones Day, Washington, D.C., for the plaintiffs, with Bruce Bennett and Benjamin Rosenblum, of counsel.
Christopher J. Carney, Commercial Litigation Branch, Civil Division, U.S. Department of Justice, Washington, D.C., for the defendant, with L. Misha Preheim, and Alison S. Vicks, U.S. Department of Justice, and Jason E. Morrow, U.S. Department of the Treasury, of counsel.
The plaintiffs are current or former owners of secured bonds issued by the Employers Retirement System of the Government of the Commonwealth of Puerto Rico ("ERS"). The bonds, issued in 2008, were secured, in part, by anticipated future employer contributions to the ERS. In 2016, Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") to address the fiscal calamity confronting the Commonwealth of Puerto Rico. PROMESA created the Financial Oversight and Management Board for Puerto Rico ("the Board") and provided that the Board could seek to pursue under the Bankruptcy Code a judicially supervised financial-restructuring process for Puerto Rico and its instrumentalities. The plaintiffs seek just compensation for an alleged taking under the fifth amendment based on PROMESA's impact on their ERS bonds.
The plaintiffs initially alleged (1) that the Board drafted legislation and mandated that the Puerto Rico Legislature enact that legislation to transfer the plaintiffs' collateral to Puerto Rico without compensation. Following the Supreme Court's decision in Fin. Oversight & Mgmt. Bd. for P.R. v. Aurelius Inv., LLC, 140 S. Ct. 1649 (2020), the plaintiffs moved to file a second amended complaint, which seeks to add two additional claims: (2) that the ERS's Title III petition—filed pursuant to Title III of PROMESA and its incorporated provisions of the U.S. Bankruptcy Code—abolished, and thereby took, their security interest in future employer contributions that would become owed to the ERS after the petition date; and (3) that the ERS's Title III petition also took their contractual right to post-petition employer contributions.
The defendant, the United States, opposes the motion to file an amended complaint and, in the alternative, moves to dismiss all of the plaintiffs' claims under Rules 12(b)(1) and 12(b)(6) of the Rules of the Court of Federal Claims ("RCFC") for lack of subject-matter jurisdiction and failure to state a claim upon which relief can be granted.
The Court grants the defendant's motion to dismiss.1 Because the Board is not a federal entity, the Court dismisses the plaintiffs' first claim for lack of jurisdiction under RCFC 12(b)(1) and 12(h)(3). The plaintiffs do not have a property interest in post-petition employer contributions, and the impairment of the plaintiffs' contractual right is insufficient to constitute a taking. Accordingly, the Court dismisses the plaintiffs' second and third claims for failure to state a claim upon which relief can be granted under RCFC 12(b)(6).
The ERS, created by the Puerto Rico Legislature in 1951, was originally funded by employer contributions, employee contributions, and investment earnings on its undistributed funds. (ECF 76, ¶ 33.) The ERS had a statutory right to receive employer contributions, which were the largest component of its income stream. (Id.)
In 2008, the ERS adopted a resolution authorizing it to issue secured bonds. (Id. ¶ 38.) The bond resolution governs the contractual relationship between the ERS and the plaintiffs with respect to the ERS bonds. (Id. ¶ 39.) The bond resolution provided a security package to protect the investment made by holders of the ERS bonds. (Id. ¶ 46.) The security package was supported by collateral referred to as the "Pledged Property." (Id. ¶ 47.) The Pledged Property included, among other assets, employer contributions calculated and owed to the ERS. (Id. ¶ 52.)
In 2016, Congress passed PROMESA. Pub. L. No. 114-187, 130 Stat. 549 (2016) (). PROMESA established the Board, which is authorized to file a petition in a designated federal court to restructure the debts of Puerto Rico or any of its instrumentalities in a court-supervised adjustment process. (ECF 76, ¶ 57.) To govern this restructuring process, Title III of PROMESA incorporated provisions of Chapters 9 and 11 of the U.S. Bankruptcy Code. See 48 U.S.C. § 2161(a).
Congress declared that it created the Board pursuant to its authority under article IV, section 3 of the U.S. Constitution. Id. § 2121(b)(2). The codified purpose of establishing the Board was "to provide a method for [Puerto Rico] to achieve fiscal responsibility and access to the capital markets." Id. § 2121(a). Congress explicitly provided that the Board "shall be created as an entity within the territorial government" and "shall not be considered to be a department, agency, establishment, or instrumentality of the Federal Government." Id. § 2121(c)(1)-(2). The Board consists of seven members appointed by the President. Id. § 2121(e)(1)(A).
PROMESA requires the Governor of Puerto Rico to submit an annual fiscal plan to the Board for its approval. Id. § 2141. The Governor may not submit a budget to the Puerto Rico Legislature unless the Board has certified the fiscal plan for that fiscal year. Id. § 2141(c)(1). If the Governor does not submit a fiscal plan that meets PROMESA's requirements, the statute provides that the Board shall develop and submit its own fiscal plan to the Governor and Legislature. Id. § 2141(d)(2).
Exercising its statutory authority, the Board rejected the Governor's October 14, 2016, proposed fiscal plan that would not have affected the ERS or its financial obligations. (ECF 76, ¶ 79.) The Board identified changes it would require before it would certify the plan. (Id.) Among these changes demanded by the Board were reforms to address the ERS's unfunded pension liabilities. After a public hearing, the Board certified an amended fiscal plan. (Id. ¶ 80.)
The fiscal plan certified by the Board required the Puerto Rico Legislature to enact measures to compel the ERS to liquidate its assets and transfer all the proceeds to the Puerto Rico general fund without providing compensation to the bondholders. (Id. ¶ 81.) The legislation was also to divert payment of future employer contributions from the ERS to the Puerto Rico general fund. (Id.)
In 2017, the Puerto Rico Legislature passed Joint Resolution 188 pursuant to and consistent with the fiscal plan approved and certified by the Board. (Id. ¶ 98.) The Legislature then passed Act 106-2017 to implement the changes required by the fiscal plan. (Id. ¶ 99.) Joint Resolution 188 and Act 106-2017, in accordance with the fiscal plan, liquidated the ERS and diverted its future employer contributions to Puerto Rico's general fund. (Id. ¶¶ 95-96, 102.)
Title III of PROMESA incorporated § 552 of the U.S. Bankruptcy Code. 48 U.S.C. § 2161(a). Section 552 provides, in relevant part, that "property acquired . . . by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case." 11 U.S.C. § 552(a). Before the enactment of PROMESA, § 552 did not apply to the liens granted by the ERS. (ECF 76, ¶ 76.)
In 2017, the Board approved and certified the filing of a PROMESA Title III petition for the ERS. (Id. ¶ 85.) Given PROMESA's incorporation of § 552, the ERS's petition raised the issue of whether the plaintiffs' alleged security interest in future employer contributions to the ERS survived the Title III petition. The ERS sought declaratory relief in the United States District Court for the District of Puerto Rico to determine the "'validity, priority, extent and enforceability'" of the plaintiffs' asserted security interest in the ERS's post-petition assets, including employer contributions the ERS would receive post-petition. In re Fin. Oversight & Mgmt. Bd. for P.R., 385 F. Supp. 3d 138, 143 (D.P.R. 2019) (quoting D.P.R. Docket Entry No. 40 in Adversary Proceeding No. 17-00213, Ex. B). The district court held: (1) that the plaintiffs' security interest neither fit within the exceptions under § 552 nor were entitled to protection under the "special revenues" provisions of the Bankruptcy Code; and (2) that the plaintiffs could not invoke the canon of constitutional avoidance to avoid the retroactive application of § 552 to their liens. Id. at 152, 154-55.
On the plaintiffs' appeal, the Court of Appeals for the First Circuit affirmed. The First Circuit held that: (1) § 552 prevented the plaintiffs' security interest from attaching to post-petition employer contributions; (2) the plaintiffs did not have special revenue bonds under another provision of the Bankruptcy Code; and (3) § 552 applied retroactively to the security agreement. In re Fin. Oversight & Mgmt. Bd. for P.R., 948 F.3d 457, 462 (1st Cir. 2020...
To continue reading
Request your trial