Aurelius Capital Master, Ltd. v. Commonwealth (In re Fin. Oversight & Mgmt. Bd. for Puerto Rico)

• Decision Date: 26 March 2019
• Docket Number: No. 18-1108,18-1108
• Citation: Aurelius Capital Master, Ltd. v. Commonwealth (In re Fin. Oversight & Mgmt. Bd. for Puerto Rico), 919 F.3d 638 (1st Cir. 2019)
• Parties: IN RE: the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as Representative for the Commonwealth of Puerto Rico, Debtor. Aurelius Capital Master, Ltd.; ACP Master, Ltd.; Aurelius Convergence Master, Ltd.; Aurelius Investment, LLC; Aurelius Opportunities Fund, LLC ; Autonomy Master Fund Limited ; Corbin Opportunity Fund, L.P. ; FCO Special Opportunities (A1) LP ; FCO Special Opportunities (D1) LP ; FCO Special Opportunities (E1) LLC - Master Series 1 ; Fundamental Credit Opportunities Master Fund, LP ; Jacana Holdings I, LLC; Jacana Holdings II, LLC; Jacana Holdings III, LLC; Jacana Holdings IV, LLC; Jacana Holdings V, LLC; Lex Claims, LLC ; LMAP 903 Limited ; MCP Holdings Master LP ; Monarch Alternative Solutions Master Fund Ltd ; Monarch Capital Master Partners II LP ; Monarch Capital Master Partners III LP ; Monarch Capital Master Partners IV LP; Monarch Debt Recovery Master Fund Ltd. ; Monarch Special Opportunies Master Fund Ltd.; MPR Investors, LLC ; P Monarchy Recovery Ltd.; Pinehurst Partners, LP ; Prisma SPC Holdings Ltd - Segregated Portfolio AG; RRW I LLC, Plaintiffs, Appellants, P Stone Lion IE, A Fund of Permal Managed Account Platform ICAV ; Permal Stone Lion Fund ; Senator Global Opportunity Master Fund LP ; SL Liquidation Fund LP ; SL Puerto Rico Fund II, L.P.; SL Puerto Rico Fund LP, Plaintiffs, v. Commonwealth of Puerto Rico; the Financial Oversight and Management Board for Puerto Rico, Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

919 F.3d 638

IN RE: the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as Representative for the Commonwealth of Puerto Rico, Debtor.

Aurelius Capital Master, Ltd.; ACP Master, Ltd.; Aurelius Convergence Master, Ltd.; Aurelius Investment, LLC; Aurelius Opportunities Fund, LLC ; Autonomy Master Fund Limited ; Corbin Opportunity Fund, L.P. ; FCO Special Opportunities (A1) LP ; FCO Special Opportunities (D1) LP ; FCO Special Opportunities (E1) LLC - Master Series 1 ; Fundamental Credit Opportunities Master Fund, LP ; Jacana Holdings I, LLC; Jacana Holdings II, LLC; Jacana Holdings III, LLC; Jacana Holdings IV, LLC; Jacana Holdings V, LLC; Lex Claims, LLC ; LMAP 903 Limited ; MCP Holdings Master LP ; Monarch Alternative Solutions Master Fund Ltd ; Monarch Capital Master Partners II LP ; Monarch Capital Master Partners III LP ; Monarch Capital Master Partners IV LP; Monarch Debt Recovery Master Fund Ltd. ; Monarch Special Opportunies Master Fund Ltd.; MPR Investors, LLC ; P Monarchy Recovery Ltd.; Pinehurst Partners, LP ; Prisma SPC Holdings Ltd - Segregated Portfolio AG; RRW I LLC, Plaintiffs, Appellants,

P Stone Lion IE, A Fund of Permal Managed Account Platform ICAV ; Permal Stone Lion Fund ; Senator Global Opportunity Master Fund LP ; SL Liquidation Fund LP ; SL Puerto Rico Fund II, L.P.; SL Puerto Rico Fund LP, Plaintiffs,

v.Commonwealth of Puerto Rico; the Financial Oversight and Management Board for Puerto Rico, Defendants, Appellees.

No. 18-1108

United States Court of Appeals, First Circuit.

March 26, 2019

Lawrence S. Robbins, with whom Mark T. Stancil, Donald Burke, Peter B. Siegal, and Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, were on brief, for appellants.

Martin J. Bienenstock, with whom Stephen L. Ratner, New York, NY, Timothy W. Mungovan, Boston, MA, Mark D. Harris, Jonathan E. Richman, Jeffrey W. Levitan, New York, NY, and Proskauer Rose LLP, were on brief, for appellees.

Ian Heath Gershengorn, with whom Lindsay C. Harrison, Washington, DC, Robert Gordon, Richard Levin, New York, NY, Catherine Steege, and Melissa Root, Chicago, IL, were on brief, for intervenor The Official Committee of Retired Employees of the Commonwealth of Puerto Rico.

Beth Heifetz, Washington, DC, with whom Benjamin Rosenblum, Bruce Bennett, Los Angeles, CA, Geoffrey S. Stewart, Victoria Dorfman, Christopher DiPompeo, Sparkle L. Sooknanan, Parker Rider-Longmaid, Washington, DC, Jones Day, Alfredo Hernández-Martínez, Delgado & Fernández, LLC, on brief, for amici curiae Altair Global Credit Opportunies Fund (A), LLC, et al.

Before Howard, Chief Judge, Torruella, and Thompson, Circuit Judges.

TORRUELLA, Circuit Judge.

We are once again required to consider an appeal arising from the restructuring of Puerto Rico's public debt under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act of 2016 ("PROMESA"). See generally Aurelius Inv., LLC v. Commonwealth of P.R., 915 F.3d 838, 844-47 (1st Cir. 2019) (discussing PROMESA and the capabilities of the Board it created). Appellants are Puerto Rico general obligation ("GO") bondholders ("Bondholders"). On June 27, 2017, they filed suit seeking injunctive and declaratory relief claiming that they possess a priority and property interest over certain revenues of the Puerto Rico government. Specifically, the Bondholders sought declarations to confirm their property rights to the revenues; determine that the diversion of the revenues constitutes an unconstitutional taking; and specify permissible uses for these revenues. Appellee, the Financial Oversight and Management Board for Puerto Rico ("Board")¹ , thereafter filed -- as sole representative of the Commonwealth in the Title III proceedings -- a motion to dismiss for lack of subject matter jurisdiction and failure to state a claim. The district court granted the Board's motion on January 30, 2018, and the instant appeal ensued.

Before us, the Bondholders challenge the district court's decision to dismiss Counts 3 to 6 of their complaint as seeking improper advisory opinions; Count 8, presenting a Takings Claim, as unripe; and Counts 1, 2, 9, and 10 as barred under Section 305 of PROMESA. We affirm.

I.

In reviewing a district court's dismissal pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6), "we consider only ‘the facts alleged in the complaint, and exhibits attached thereto.’ " Newman v. Lehman Bros. Holdings Inc., 901 F.3d 19, 25 (1st Cir. 2018) (quoting Freeman v. Town of Hudson, 714 F.3d 29, 35 (1st Cir. 2013) ). We accordingly derive the details that follow from the Bondholders' complaint.

Appellants -- the Bondholders -- own a substantial amount of GO bonds and other debt issued by Commonwealth entities. The Bondholders characterize the GO bonds as "Constitutional Debt" because it is "secured by an absolute and enforceable first claim and lien on all of the Commonwealth's ‘available resources,’ in addition to, and complemented by, a pledge of the Commonwealth's good faith, credit, and taxing power" under the Puerto Rico Constitution. Along with this priority claim, the Bondholders allege a property interest in revenues "that, although conditionally earmarked for payment of certain obligations of Commonwealth instrumentalities, are required by Puerto Rico law to be ‘clawed back’ for the express and sole purpose of paying Constitutional Debt when other available resources are insufficient to do so." They refer to these revenues as the "Clawback Revenues." Lastly, the Bondholders assert a claim over "certain proceeds of property taxes that Puerto Rico statutory law requires be levied and collected for the benefit of Constitutional Debtholders and segregated in a trust for the express and sole purpose of paying Constitutional Debt." The Bondholders refer to these as the "Special Property Tax Revenues," which together with the "Clawback Revenues" make up what they anoint as the "Restricted Revenues" that the Commonwealth must set aside to repay the "Constitutional Debt" that they own. According to the Bondholders, in 2017, the Commonwealth collected approximately $940 million in "Restricted Revenues," and it will collect an equal or greater amount in upcoming years.

The Bondholders base their priority claims on several authorities. First, they point to the Puerto Rico Constitution, which provides in relevant part that when "the available resources ... are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall be first paid."² P.R. Const. art. VI, § 8. The Bondholders also claim that Section 4(c) of the Office of Management and Budget Organic Act, P.R. Laws Ann. tit. 23, § 104(c)(1), establishes the same priority. Finally, the Bondholders note that the 2014 GO Bond Resolution and the Official Statement for the 2006 Puerto Rico Infrastructure Financing Authority bonds establish that the "[t]he Constitution of Puerto Rico provides that public debt ... constitutes a first lien on available Commonwealth taxes and revenues." In support of their alleged property interest in the "Restricted Revenues," the Bondholders rely again on provisions of the Commonwealth Constitution, as well as on several local laws and executive orders that they describe as creating the "Restricted Revenues."

The Bondholders aver that, since 2015, the Commonwealth government, "first through its elected leaders and now through the Oversight Board[,] has engaged in a consistent pattern of unlawful conduct designed to avoid their obligations to Constitutional Debtholders for the benefit of more politically favored causes and creditors." Specifically, they claim that in fiscal year 2016 the Commonwealth clawed back around $289 million in "Clawback Revenues," yet failed to apply any of these to the repayment of "Constitutional Debt." The Bondholders insist that this conduct has continued since 2016. As an example, they note that neither the Fiscal Plan the Board certified in March 2017 nor the 2018 fiscal year budget provide for the setting aside of "Clawback Revenues" to service the "Constitutional Debt."

Based on the foregoing allegations, the Bondholders' complaint sought the following:

[I]n Counts One and Two ... declaratory judgments that under Puerto Rico law, the Restricted Revenues are restricted by law and cannot be used by the Commonwealth for any purpose except to satisfy the Commonwealth's payment obligations with respect to outstanding Constitutional Debt.

In Counts Three and Four ... declaratory judgments that the Commonwealth lacks any equitable or beneficial property interest in the Restricted Revenues, and [Bondholders], as Constitutional Debtholders, have equitable and beneficial property interests in the Restricted Revenues.

In Counts Five and Six ... declaratory judgments that [Bondholders], as Constitutional Debtholders, have a statutory lien on the Restricted Revenues.

In Count Seven ... a declaratory judgment that the Clawback Revenues are special revenues as defined in the Bankruptcy Code.

In Count Eight ... a declaratory judgment that the [Commonwealth]'s diversion of the Restricted Revenues without just compensation is an unlawful taking under the Fifth Amendment of the United States Constitution.

In Counts Nine and Ten ... declaratory judgments that, under Puerto Rico law, the Restricted Revenues must be segregated and deposited into a designated account for the exclusive benefit of Constitutional Debtholders and not commingled with other funds of the Commonwealth or used for any purpose other than repayment of Constitutional Debt.

In Count Eleven ... injunctive relief enjoining [the Commonwealth] from continuing to divert the Restricted Revenues, and directing [the Commonwealth] to segregate and preserve the Restricted Revenues for payment of the Constitutional Debt.

The Bondholders filed their complaint as an adversary proceeding under Section 310 of PROMESA on June 27, 2017. The Board moved to dismiss on August 21, 2017 for lack of...