Peaje Invs. LLC v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.)

• Citation: 899 F.3d 1
• Decision Date: 08 August 2018
• Docket Number: Nos. 17-2165,17-2166,17-2167,s. 17-2165
• 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 Highways & Transportation Authority, Debtors. Peaje Investments LLC, Plaintiff, Appellant, v. The Financial Oversight and Management Board for Puerto Rico, as representative for the Puerto Rico Highways & Transportation Authority ; Hon. Carlos Contreras–Aponte, in his official capacity as Executive Director of Puerto Rico Highways & Transportation Authority ; The Financial Oversight and Management Board for Puerto Rico, as representative for the Commonwealth of Puerto Rico ; Hon. Ricardo Rossello Nevares, in his official capacity as Governor of the Commonwealth of Puerto Rico ; Hon. Raul Maldonado Gautier, in his official capacity as Secretary of Treasury of the Commonwealth of Puerto Rico; Hon. Jose Ivan Marrero Rosado, in his official capacity as Executive Director of the Office of Management & Budget; Puerto Rico Fiscal Agency and Financial Advisory Authority ; Hon. Gerardo Jose Portela Franco, in his official capacity as Executive Director of the Puerto Rico Fiscal Agency and Financial Advisory Authority, Defendants, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

899 F.3d 1

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 Highways & Transportation Authority, Debtors.

Peaje Investments LLC, Plaintiff, Appellant,

v.The Financial Oversight and Management Board for Puerto Rico, as representative for the Puerto Rico Highways & Transportation Authority ; Hon. Carlos Contreras–Aponte, in his official capacity as Executive Director of Puerto Rico Highways & Transportation Authority ; The Financial Oversight and Management Board for Puerto Rico, as representative for the Commonwealth of Puerto Rico ; Hon. Ricardo Rossello Nevares, in his official capacity as Governor of the Commonwealth of Puerto Rico ; Hon. Raul Maldonado Gautier, in his official capacity as Secretary of Treasury of the Commonwealth of Puerto Rico; Hon. Jose Ivan Marrero Rosado, in his official capacity as Executive Director of the Office of Management & Budget; Puerto Rico Fiscal Agency and Financial Advisory Authority ; Hon. Gerardo Jose Portela Franco, in his official capacity as Executive Director of the Puerto Rico Fiscal Agency and Financial Advisory Authority, Defendants, Appellees.

Nos. 17-2165

17-2166

17-2167

United States Court of Appeals, First Circuit.

August 8, 2018

G. Eric Brunstad, Jr., Hartford, CT, with whom Allan S. Brilliant, Robert J. Jossen, Andrew C. Harmeyer, Dechert LLP, New York, NY, Dora L. Monserrate Peñagarícano, and Monserrate Simonet & Gierbolini, LLC, Guaynabo, PR, were on brief, for appellant.

Jeffrey W. Levitan, New York, NY, with whom Timothy W. Mungovan, Boston, MA, Martin J. Bienenstock, Stephen L. Ratner, Mark D. Harris, New York, NY, Michael A. Firestein, Lary A. Rappaport, Los Angeles, CA, John E. Roberts, Proskauer Rose LLP, Hermann D. Bauer, and O'Neill & Borges LLC, San Juan, PR, were on brief, for appellees The Financial Oversight and Management Board for Puerto Rico, as representative of the Commonwealth of Puerto Rico and the Puerto Rico Highways and Transportation Authority.

John J. Rapisardi, New York, NY, Peter Friedman, Elizabeth L. McKeen, and O'Melveney & Myers LLP, Newport Beach, CA, on brief for appellees Puerto Rico Fiscal Agency and Financial Advisory Authority and Hon. Gerardo Jose Portela Franco.

Raul Castellanos and Development & Construction Law Group LLC on brief for appellee Hon. Carlos Contreras Aponte.

Wanda Vázquez Garced, Secretary of Justice, Luis R. Román Negrón, Solicitor General of Puerto Rico, Department of Justice, on brief for appellees Hon. Ricardo Antonio Roselló Nevares, Hon. Raúl Maldonado Gautier, and Hon. José Iván Marrero Rosado.

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

KAYATTA, Circuit Judge.

We are asked for the second time to weigh in on Peaje Investments LLC's claim that what it characterizes as its "collateral" is being permanently impaired. Peaje is the beneficial owner of $65 million of uninsured bonds issued by the Puerto Rico Highways and Transportation Authority ("Authority"). Peaje alleges that its bonds are secured by a lien on certain toll revenues of the Authority and that, in response to Puerto Rico's financial crisis, the Authority and the Commonwealth of Puerto Rico ("Commonwealth") are diverting funds to which Peaje believes it is entitled under the lien and using them for purposes other than paying the bonds. Because both the Authority and the Commonwealth have commenced bankruptcy cases under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"), 48 U.S.C. §§ 2101 – 2241, Peaje instituted the adversary proceedings now on consolidated appeal to challenge this diversion. Despite the novelty and complexity of the bankruptcies from which this case arose, three narrow rulings dispose of the appeal now before us: First, the district court did not abuse its discretion in limiting Peaje to its argument that it holds a statutory lien on certain toll revenues of the Authority. Second, Peaje does not hold such a lien. And third, we vacate the district court's alternative reasons for denying relief so that they may be reconsidered de novo on a comprehensive, updated record now that it is clear that Peaje has no statutory lien.

I.

The Authority was formed in 1965 as a public corporation and instrumentality of the Commonwealth. Pursuant to its enabling act ("Act" or "Enabling Act"), it may borrow money, issue bonds, and secure those bonds with pledges of revenues. P.R. Laws Ann. tit. 9 § 2004(l). In 1968, the Authority adopted Resolution No. 68-18 (the "1968 Resolution" or the "Resolution"). See Puerto Rico Highway Authority, Resolution No. 68-18, available at http://gdb.pr.gov/investors_resources/documents/FIRMDM-12808969-v1-PRHTA1968Resolution.pdf. In order to provide additional funds for the construction of roads, bridges, and other facilities, the 1968 Resolution provided for the issuance of bonds. Id. Art. II, § 201.

The Resolution guaranteed that the Authority would "promptly pay the principal of and the interest on every bond issued," but that it would do so "solely from Revenues and from any funds received by the Authority for that purpose from the Commonwealth which Revenues and funds are hereby pledged to the payment thereof in the manner and to the extent" provided by the Resolution. Id. Art. VI, § 601. The Resolution established a special account called the "Sinking Fund," which itself contains three separate accounts: the Bond Service Account, the Redemption Account, and the Reserve Account. Id. Art. IV, § 401. The revenues (and any other pledged funds) deposited in these accounts were to be held in trust by the "Fiscal Agent," a bank or trust company appointed by the Authority, until, in the case of the Bond Service Account, they were applied to the principal and interest due on the bonds. Id. Art. IV, § 402. Pending the application of these funds, the Resolution provided that the money "shall be subject to a lien and charge in favor of the holders of the bonds ... and for the further security of such holders until paid out or transferred." Id. Art. IV, § 401. Peaje is the beneficial owner of various bonds issued pursuant to the 1968 Resolution, with maturity dates ranging from 2023 to 2036. Peaje's basic position is that it holds, as security for its bonds, a lien on toll revenues generated from three specific highways maintained by the Authority. It further contends that its lien extends not just to toll revenues currently held by the Fiscal Agent, but also to the Authority's toll revenues before they are deposited with the agent.¹

In April 2016, in response to growing economic problems in Puerto Rico, the Commonwealth enacted the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, pursuant to which then-Governor Alejandro García–Padilla issued several executive orders that suspended the Authority's obligation to deposit toll revenues with the Fiscal Agent. Peaje contends that, as a result, the Authority and the Commonwealth began using the toll revenues for purposes other than those allowed by the Resolution, including to pay operating expenses. In July 2016, Peaje filed suit in district court to challenge this diversion of funds. But Congress had just enacted PROMESA, instituting a temporary stay of all proceedings against the Commonwealth and its instrumentalities. See 48 U.S.C. § 2194(b). Peaje therefore requested relief from the temporary stay, pursuant to PROMESA section 405(e)(2), 48 U.S.C. § 2194(e)(2), patterned after section 362(d) of the bankruptcy code ("Code"), 11 U.S.C. § 362(d). The district court denied relief, Peaje Invs. LLC v. Garcia-Padilla, Nos. 16-2384-FAB, 16-2696-FAB, 2016 WL 6562426, at *6 (D.P.R. Nov. 2, 2016), and we affirmed in relevant part, Peaje Invs. LLC v. García-Padilla, 845 F.3d 505, 514, 516 (1st Cir. 2017) ( Peaje I ).

After PROMESA's temporary stay expired, Peaje filed a second action in district court in May 2017 seeking similar relief. But soon afterward, the Authority, acting through the Financial Oversight and Management Board, filed a bankruptcy petition under Title III of PROMESA. (The Commonwealth had already filed its Title III petition.) This petition triggered an automatic stay (this time for the pendency of the bankruptcy case) of all actions against the Authority, including Peaje's second suit. See 11 U.S.C. §§ 362(a), 922(a) ; see also 48 U.S.C. § 2161(a) (incorporating 11 U.S.C. §§ 362(a) and 922(a) into PROMESA).² Peaje then timely exercised its right to file an adversary proceeding seeking declaratory and injunctive relief in the jointly administered bankruptcy cases of the Authority and the Commonwealth.³

Specifically, Peaje asserted the following claims in two identical verified complaints, filed in the respective Title III cases of the Authority and the Commonwealth: (1) a declaration that the Authority's toll revenues qualify as "pledged special revenues" under Code section 922(d) ; (2) adequate protection or, in the alternative, relief from the stay; (3) a declaration that Code section 922(d) preempts fiscal plan implementation; (4) a declaration that Code section 922(d) requires the Authority to deposit toll revenues with the Fiscal Agent; (5) a declaration that neither Code section 552 nor 928(b) apply to its bonds; (6) a declaration that to the extent Code section 928(b) applies to its bonds, netting out "necessary operating expenses" would constitute a taking in violation of the Constitution; (7) relief from the stay so that it can challenge, on constitutional grounds, the diversion of toll revenues; and (8) injunctive relief requiring the Authority to resume depositing the toll revenues with the Fiscal Agent.

Along with its complaints, Peaje filed a motion for a temporary restraining order ("TRO") enjoining the Authority from continuing to divert the toll revenues.⁴ The motion also...