In re Financial Oversight and Management Board for Puerto Rico, 080818 FED1, 17-2079

Docket Nº:17-2079
Opinion Judge:KAYATTA, Circuit Judge.
Party Name:IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of Puerto Rico Electric Power Authority (PREPA), Debtor. v. AD HOC GROUP OF PREPA BONDHOLDERS; ASSURED GUARANTY CORPORATION; ASSURED GUARANTY MUNICIPAL CORPORATION; NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION; SYNCORA GUARANTEE, INC., Movants, Appellants. T...
Attorney:Martin J. Bienenstock, with whom Timothy W. Mungovan, Stephen L. Ratner, Mark D. Harris, Chantel L. Febus, and Proskauer Rose LLP were on brief, for appellee Financial Oversight and Management Board for Puerto Rico as representative of Puerto Rico Electric Power Authority. Thomas Moers Mayer, wit...
Judge Panel:Before Howard, Chief Judge, Kayatta, Circuit Judge, and Torresen, Chief U.S. District Judge.
Case Date:August 08, 2018
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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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

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO [Hon. Laura Taylor Swain, U.S. District Judge] [*]

Martin J. Bienenstock, with whom Timothy W. Mungovan, Stephen L. Ratner, Mark D. Harris, Chantel L. Febus, and Proskauer Rose LLP 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, Manuel Fernández-Bared, Linette Figueroa-Torres, Nayda Pérez-Román, and Toro Colón Mullet P.S.C. 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., Howard R. Hawkins, Mark C. Ellenberg, Ellen Halstead, and Cadwalader, Wickersham & Taft LLP, 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, Eric Pérez-Ochoa; Alexandra Casellas-Cabrera Lourdes; Arroyo Portela, and Adsuar Muñiz Goyco Seda & Pérez-Ochoa, P.S.C., on brief for appellant National Public Finance Guarantee Corp.

Carlos A. Rodríguez-Vidal, Solymar Castillo-Morales, Goldman Antonetti & Cordova, LLC, My Chi To, Elie J. Worenklein, and Debevoise & Plimpton LLP, 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...

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