Cooperativa de Ahorro y Credito Abraham Rosa v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.)

• Citation: 54 F.4th 42
• Decision Date: 23 November 2022
• Docket Number: 22-1048
• Parties: 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, Cooperativa de Ahorro y Credito Abraham Rosa ; Cooperativa de Ahorro y Credito de Ciales ; Cooperativa de Ahorro y Credito de Juana Diaz ; Cooperativa de Ahorro y Credito de Rincon; Cooperativa de Ahorro y Credito de Vega Alta; Cooperativa de Ahorro y Credito Dr. Manuel Zeno Gandia, Plaintiffs, Appellants, Cooperativa de Ahorro y Credito de Lares y Region Central, Plaintiff, v. 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; the Financial Oversight and Management Board for Puerto Rico; Corporación Pública para la Supervisión y Seguro de Cooperativas de Puerto Rico; Government Development Bank of Puerto Rico; GDB Debt Recovery Authority ; Jorge L. Padilla, Nominal Defendant; Matthew Karp, Nominal Defendant; David Pauker, Nominal Defendant; GDB Public Entity Trust; Puerto Rico Fiscal Agency and Financial Advisory Authority; Jose B. Carrion, III; Andrew G. Biggs; Arthur J. Gonzalez; Carlos M. Garcia; Jose R. Gonzalez; Ana J. Matosantos; David A. Skeel, Jr.; Eli Diaz Atienza; Securities Firms A-Z; Law Firms and Counsel; Accounting and/or Auditing Firms; Insurance Companies A-Z, Defendants, Appellees, Christian Sobrino, Defendant.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

54 F.4th 42

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,Cooperativa de Ahorro y Credito Abraham Rosa ; Cooperativa de Ahorro y Credito de Ciales ; Cooperativa de Ahorro y Credito de Juana Diaz ; Cooperativa de Ahorro y Credito de Rincon; Cooperativa de Ahorro y Credito de Vega Alta; Cooperativa de Ahorro y Credito Dr. Manuel Zeno Gandia, Plaintiffs, Appellants,Cooperativa de Ahorro y Credito de Lares y Region Central, Plaintiff,

v. 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; the Financial Oversight and Management Board for Puerto Rico; Corporación Pública para la Supervisión y Seguro de Cooperativas de Puerto Rico; Government Development Bank of Puerto Rico; GDB Debt Recovery Authority ; Jorge L. Padilla, Nominal Defendant; Matthew Karp, Nominal Defendant; David Pauker, Nominal Defendant; GDB Public Entity Trust; Puerto Rico Fiscal Agency and Financial Advisory Authority; Jose B. Carrion, III; Andrew G. Biggs; Arthur J. Gonzalez; Carlos M. Garcia; Jose R. Gonzalez; Ana J. Matosantos; David A. Skeel, Jr.; Eli Diaz Atienza; Securities Firms A-Z; Law Firms and Counsel; Accounting and/or Auditing Firms; Insurance Companies A-Z, Defendants, Appellees,Christian Sobrino, Defendant.

No. 22-1048

United States Court of Appeals, First Circuit.

November 23, 2022

Guillermo J. Ramos-Luiña for appellants.

Arthur Steinberg, with whom Scott I. Davidson, King & Spalding LLP, Ileana M. Oliver-Falero, Charles E. Vilaró-Valderrábano, and Cancio Covas & Santiago, LLP were on brief, for appellees the GDB Debt Recovery Authority, Jorge L. Padilla, Matthew Karp, and David Pauker.

Juan Carlos Deliz, with whom DBPR Legal, LLC was on brief, for appellee Corporación Pública para la Supervision y Seguro de Cooperativas de Puerto Rico.

John E. Roberts, with whom Timothy W. Mungovan, Adam L. Deming, Martin J. Bienenstock, Mark D. Harris, Jonathan E. Richman, Julia D. Alonzo, Shiloh A. Rainwater, and Proskauer Rose LLP were on brief, for appellee the Financial Oversight and Management Board for Puerto Rico, for itself and as representative of the debtors, and the Board's individual members.

Luis C. Marini-Biaggi, Carolina Velaz Rivero, Ignacio J. Labarca-Morales, and Marini Pietrantoni Muñiz LLC for appellees the Puerto Rico Fiscal Agency and Financial Advisory Authority and the Government Development Bank of Puerto Rico.

Before Kayatta, Howard, and Thompson, Circuit Judges.

THOMPSON, Circuit Judge.

In this adversary proceeding,¹ six Credit Unions² claim the Commonwealth of Puerto Rico and several of its agencies and instrumentalities³ induced and forced them to invest in worthless government-issued securities. According to the Credit Unions, the defendants knew -- but did not disclose -- that these would be losing investments given the precarious and dire financial situation in which Puerto Rico found itself at the time. As part of the broader proceedings underway to restructure the Commonwealth's debts pursuant to Title III of the Puerto Rico Oversight, Management, and Stability Act ("PROMESA"),⁴ the Credit Unions filed an adversary complaint alleging the defendants, through conversations, meetings, and presentations held between 2009 and 2015, as well as through written policy guidance issued within the same timeframe, induced them to purchase government bonds by both misrepresenting and withholding information about the risks of the investment. The district court dismissed the Credit Unions' claims, and, for the reasons we explain below, we affirm.

LAYING THE GROUNDWORK

We begin, as we generally do, with a summary of the facts and procedural history of the case. When we review the grant of a motion to dismiss, "[a]ll facts are taken from the complaint and accepted as true ... and we disregard any conclusory allegations." Ponsa-Rabell v. Santander Sec. LLC, 35 F.4th 26, 30 n.2 (1st Cir. 2022) (citing O'Brien v. Deutsche Bank Nat'l Tr. Co., 948 F.3d 31, 35 (1st Cir. 2020) ). We may also consider documents attached to the complaint or incorporated by reference therein. Id. (citing O'Brien, 948 F.3d at 35 ). We start with a brief introduction of the defendants that the Credit Unions (also referred to as the "cooperatives") allege and argue were actively involved in the fraudulent scheme that forms the basis of their claims.

The Corporación Pública para la Supervisión y Seguro de Cooperativas de Puerto Rico ("COSSEC") is the agency through which the Commonwealth of Puerto Rico establishes and implements regulations and supervision over financial depository institutions, including the plaintiff Credit Unions. COSSEC generates what are known as "circular letters" several times per year that address issues such as "[r]egulatory reporting requirements," "[i]ncrease[s] in the allowed amount of investments in Puerto Rico bonds," and "[r]equired insurance coverages." The Credit Unions must comply with the circular letters, which are enforced by COSSEC, or face potential adverse consequences such as an administrative fine, removal of officers or directors, or placement in receivership. The Credit Unions rely on information provided by COSSEC about the Commonwealth's financial situation.

The Government Development Bank ("GDB") is a fiscal agent of the Commonwealth that "designed, oversaw, controlled and was in charge of all bond and debt issued by the Commonwealth and its instrumentalities, including the issuance of the Puerto Rico Debt Securities that were offered and sold to [the Credit Unions]."

The GDB had "specific knowledge" of the details of the Commonwealth's financial situation from 2009 onwards. The GDB Debt Recovery Authority is a separate entity created by a 2017 statute for the purpose of implementing a debt restructuring plan for the GDB's debts.

According to the Credit Unions as alleged in their complaint, the GDB and other governmental agencies "adopted regulatory measures over [the Credit Unions] to implement the taking of their cash and liquid funds" all the while knowing the likely "adverse effects" to the Credit Unions. These measures included using COSSEC to place "excessive amounts of unsustainable, materially diminished and value impaired governmental instruments in [the Credit Unions'] investment portfolios." From 2009 to 2015, through meetings and conversations between agency officials,

[t]he Commonwealth, the GDB and COSSEC abused and misused the governmental regulatory power over credit unions, adopting a regulatory policy of steering credit unions' liquid resources towards Puerto Rico Debt Instruments which the Commonwealth and the GDB knew were unsafe, risky, unsustainable and that lacked adequate sources of repayment. This regulatory policy was implemented through the issuance of circular letters together with coercive and selective examinations and the threat of retaliatory legislative initiatives. As a result of this scheme, the Commonwealth and the GDB took material portions of [the Credit Unions'] cash and liquid assets without providing adequate compensation for them.

The Credit Unions attached two of these circular letters as exhibits to their pleading. In Circular Letter 09-03, issued in 2009, COSSEC "authorized the purchase of ... bonds currently offered by the Commonwealth of Puerto Rico through the [GDB]." The letter stated that "[t]he cooperatives that participate in the purchase of these investment products may benefit from the advantages that these bonds offer," including as payment history because the bonds are "backed by the Government, which guarantees 100% of interest and principal payments" and as collateral because the "bonds are excellent guarantees, which allows investors to apply for loans against their investment." The letter provided that "cooperatives may purchase" the bonds, "as long as they ensure that at the time of purchase" the bonds are rated within a certain range of quality and creditworthiness classifications.⁵ The letter reminded the cooperatives that acquisition of the bonds must be in compliance with the governing regulations about limits of investments but provided that COSSEC will not consider a drop in classification after the date of acquisition or purchase of the investment to be a violation of the governing regulations. Should the bonds' classification drop after purchase, the letter authorized the Credit Unions to "perform an analysis to determine the course of action to take in the best interest of the institution." The...