AMP v. Commonwealth of Puerto Rico ( 2019 )

United States Court of Appeals
For the First Circuit
No. 18-2194
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 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 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,
Debtors,
AUTONOMOUS MUNICIPALITY OF PONCE (AMP),
Movant, Appellant,
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 HIGHWAYS AND TRANSPORTATION
AUTHORITY; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR
PUERTO RICO, AS REPRESENTATIVE FOR THE PUERTO RICO ELECTRIC
POWER AUTHORITY (PREPA),
Debtors, Appellees,
THE PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY,
Movant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Laura Taylor Swain,* U.S. District Judge]
Before
Lynch, Lipez, and Thompson,
Circuit Judges.
Carlos Fernandez-Nadal for appellant Autonomous Municipality
of Ponce (AMP).
John E. Roberts, with whom Timothy W. Mungovan, Martin J.
Bienenstock, Steven L. Ratner, Jeffrey W. Levitan, Mark D. Harris,
and Proskauer Rose LLP were on brief for 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 and Transportation Authority; the Financial
Oversight and Management Board for Puerto Rico, as Representative
for the Puerto Rico Electric Power Authority (PREPA).
September 25, 2019
* Of the Southern District of New York, sitting by
designation.
LYNCH, Circuit Judge. This appeal primarily concerns
whether the Title III court abused its discretion in refusing to
lift the automatic stay in PROMESA, 48 U.S.C. § 2161(a)
(incorporating 11 U.S.C. § 362), to allow the Municipality of Ponce
to secure specific performance by the Commonwealth of Puerto Rico
of public works projects required under a Puerto Rico Commonwealth
court judgment. The Title III court plainly did not abuse its
discretion. In essence, Ponce seeks priority over the claims of
other communities and creditors of the Commonwealth. Ponce has
not shown cause why its claim warrants this priority. We affirm.
I.
We describe the relevant statutory context, the events
surrounding Ponce's prepetition judgment, and facts of the instant
case.
A. PROMESA's Automatic Stay
The Puerto Rico Oversight, Management, and Economic
Stability Act ("PROMESA"), 48 U.S.C. §§ 2101–2241, created the
Financial Oversight and Management Board ("FOMB") and, under its
Title III, empowered the Board to restructure the debt of the
Commonwealth of Puerto Rico through "quasi-bankruptcy
proceedings." Assured Guaranty Corp. v. Fin. Oversight Mgmt. Bd.
for P.R., 872 F.3d 57, 59 (1st Cir. 2017). PROMESA automatically
stays any action to recover on a prepetition claim or "the
enforcement, against the debtor or against property of the estate,
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of a judgment obtained before the commencement of the [Title III
case]." 48 U.S.C. § 2161(a) (incorporating 11 U.S.C. § 362(a)(1),
(2)). PROMESA defines a "claim" in several ways, including as a
"right to payment" and separately as a "right to an equitable
remedy for breach of performance if such breach gives rise to a
right to payment." Id. (incorporating 11 U.S.C. § 101(5)).
B. Ponce's Prepetition Judgment It Now Seeks To Enforce
On October 28, 1992, Ponce, the Commonwealth, the Puerto
Rico Electric Power Authority ("PREPA"), and the Puerto Rico
Highways and Transportation Authority ("PRHTA") agreed to develop
municipal projects in Ponce. These projects included installing
sewer and transmission lines, building various medical, police,
and educational facilities, modernizing local housing, and
improving several highways. Within a year, the Commonwealth,
PREPA, and PRHTA ("the debtors") withdrew from the agreement. In
response, Ponce brought suit in Commonwealth court on October 28,
1993. The suit resulted in a June 24, 1996 judgment that required
the debtors to fulfill their commitments under the original
agreement and deferred determining monetary damages until after
they completed the municipal projects. The Commonwealth court
also appointed a monitor to supervise and audit the projects'
progress. In December 2004, Ponce and the debtors settled the
issue of damages for $34 million, of which a significant portion
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remains unpaid. That portion is not at issue: The parties agree
the stay applies to it.
On May 3, 2017, the Commonwealth filed a petition for
debt adjustment relief under Title III of PROMESA.1 PRHTA and
PREPA filed similar Title III petitions on May 21 and July 3, 2017,
respectively. Filing these petitions initiated the automatic stay
at issue here, see 11 U.S.C. § 362(a), and transferred exclusive
jurisdiction over the debtors' property to the Title III court,
see 48 U.S.C. § 2166(b).
The parties agree that most of the projects required by
the 1992 Agreement have been completed and this case concerns a
subset of uncompleted projects. As of September 2019, the two
highway projects required by the judgment and funded by the Federal
Highway Administration's Puerto Rico Highway Program, 23 U.S.C.
§ 165(b), continued to progress, as they did not involve use of
the debtors' property. Due to the stay however, the court-
appointed monitor, who is paid out of the debtors' property, is
not auditing these projects. So the projects are proceeding and
Ponce is complaining only that its monitor is not monitoring the
progress on these two projects.2 Ponce conceded that funding the
1 We note that the Title III court's order denying relief
from the stay states that the Commonwealth filed for debt
adjustment relief on May 9, 2017, but the correct date is May 3,
2017. See Title III Petition, In re Commonwealth of P.R.,
Bankruptcy Case No. 17-BK-3283 (LTS) (D.P.R. May 3, 2017).
2 This monitoring by the master would be in addition to
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monitor for the two highway projects would cost the PRHTA between
$90,000 and $150,000 per year.
As to another project, Ponce alleges PREPA could
complete an outstanding project to replace overhead electrical
lines with underground alternatives for only $700,000. PREPA has
stated that its "resources are both extremely limited and fully
committed to the restoration and repairs of its electric system."
It further stated that its efforts focus on preparing the
Commonwealth "for the uncertainty for another hurricane season."3
Other outstanding projects covered by Ponce's request to
lift the stay include channeling the Río Matilde in Ponce and
rehabilitating a lighthouse -- a project which does not affect the
safety of the surrounding navigable waters.
federal oversight of highway funds. See 23 U.S.C. § 106(g)
(requiring the Secretary of Transportation to establish oversight
programs to monitor the use federal highway funds); 23 C.F.R.
§ 1.36 (authorizing the Federal Highway Administrator to withhold
federal funds, withhold project approval, or take other action if
the recipient fails to comply with federal laws or Department of
Transportation regulations).
3 Over the past ten years, PREPA has faced issues stemming
from a declining population, economic downturn, multiple
hurricanes devastating its already underperforming electrical
system, and, as of May 2017, $9.25 billion in unsustainable debt
obligations ($4.5 billion of which PREPA must service over the
next five years). Puerto Rico Electric Power Authority, 2019
Fiscal Plan for the Puerto Rico Electric Power Authority 5, 103
(2019).
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C. Procedural History of Ponce's Motion
On May 4, 2018, Ponce moved for relief from the automatic
stay to compel the debtors to complete the municipal projects and
to allow the Commonwealth court to assess their compliance with
its judgment. Ponce argued that continuing the projects would not
entail further litigation, and so it would not interfere with the
Title III cases. Ponce also argued that the projects were close
to completion and the litigants could complete them under the
monitor's supervision, without significantly siphoning off time or
resources from the Title III cases.
The Commonwealth objected to this motion on July 5, 2018.
The Puerto Rico Fiscal Agency and Financial Authority ("AAFAF")
then filed joinders to the objection for PREPA and PRHTA on July
5 and July 20, 2018, respectively.
On August 3, 2018, Ponce moved for an evidentiary hearing
to support its motion to lift the stay, which the debtors opposed.
The parties submitted an October 4, 2018 joint report detailing
their disputed and undisputed facts: Ponce asserted that
completing the projects would cost only certain sums; the debtors
said the figures were much higher. The details of the dispute are
immaterial to our resolution given the Title III court's
acceptance, arguendo, of Ponce's sums. On November 2, 2018, the
Title III court denied Ponce's motions for the hearing and relief
from the stay. This appeal followed.
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II.
Ponce's first argument -- that the prepetition judgment
is not a "claim" and so was never subject to the automatic
stay -- turns on an interpretation of law, which we review de novo.
Municipality of San Juan v. Puerto Rico, 919 F.3d 565, 576 (1st
Cir. 2019). By contrast, review of the denial of motions for
relief from an automatic stay and from the denial of an evidentiary
hearing is for abuse of discretion. Mitsubishi Motors Corp. v.
Soler Chrysler-Plymouth, Inc., 814 F.2d 844, 847 (1st Cir. 1987).
The Title III court treated Ponce's version of alleged facts as
undisputed and we do as well.
We first address Ponce's newly raised argument that the
prepetition judgment is not a "claim" subject to the automatic
stay. We then turn to whether the Title III court abused its
discretion both in denying stay relief and in doing so without
holding an evidentiary hearing.
A. Applicability of the Automatic Stay
Ponce argues that the prepetition judgment for specific
performance, as an equitable remedy, is not a "claim" subject to
the automatic stay under § 362 of the Bankruptcy Code. But Ponce
failed to raise this argument in its motion for relief from the
stay. And in doing so, Ponce has waived this argument on appeal.
Alicea v. Machete Music, 744 F.3d 773, 780 (1st Cir. 2014).
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Because the issue may arise again, we put aside Ponce's waivers4
and also hold that there is no merit to Ponce's argument, even if
it had been properly raised, for at least two reasons.
1. Ponce Seeks the Enforcement of a Judgment Obtained
Before the Title III Case Commenced, Which Is Subject to
the Automatic Stay
Under 11 U.S.C. § 362(a)(2), an automatic stay applies
to "the enforcement, against the debtor or against property of the
estate, of a judgment obtained before the commencement of the
[bankruptcy] case." The judgment at issue was obtained before the
commencement of the Title III case. The plain meaning of § 362
covers this prepetition Commonwealth court judgment against the
debtors and their property for specific performance of the
municipal projects. See Municipality of San Juan, 919 F.3d at 577
(applying the automatic stay to an injunction and collecting cases
that do the same).
2. Even if § 362(a)(2) Does Not Apply, Ponce's Prepetition
Judgment Is a Claim Subject to the Automatic Stay
Even if we concluded that § 362(a)(2) does not apply
here, the prepetition judgment is also a "claim" subject to the
automatic stay under a different provision, 11 U.S.C. § 362(a)(1).
A § 362(a)(1) "claim" comprises rights to equitable remedies for
4 Ponce also failed to address the issue of an exception
to waiver in its initial appellate brief and so has waived any
argument as to exceptions to waivers for that reason. See Pignons
S.A. de Mecanique v. Polaroid Corp., 701 F.2d 1, 3 (1st Cir. 1983).
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breach of performance that "give[] rise to a right of payment,"
11 U.S.C. § 101(5)(B) -- i.e., "if a monetary payment is an
alternative for the equitable remedy," Rederford v. U.S. Airways,
Inc., 589 F.3d 30, 36 (1st Cir. 2009).
The parties agree that Ponce's judgment is an equitable
remedy and is for breach of performance, but dispute whether it
"gives rise to a right of payment." Ponce argues that its
equitable remedy cannot be reduced to a monetary award because,
even if Ponce recovered the cost of completing the projects, it
lacks the debtors' expertise and authorization to "wire . . .
underground power distributions" for a specific project. Ponce
does not say whether these, or similar, impediments also affect
the remaining projects.
Regardless of whether and to what extent Ponce requires
the debtors' assistance, its argument fails. Ponce assumes that
monetary damages would only be the amount necessary to complete
the projects and, without the debtors' assistance, it could not be
made whole. But if the Commonwealth court could reduce the delay
in project completion to monetary damages, then the Title III court
could similarly reduce the projects' further delay or cancellation
to monetary damages.
This court, and others, have reduced other equitable
judgments to money damages, despite the asserted inability of a
damages remedy to "purchase" the performance of the underlying
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contract. See Rederford, 589 F.3d at 37 (concluding that
reinstatement following termination was a "claim," as money
damages served as an alternate remedy); In re Nickels Midway Pier,
LLC, 255 F. App'x 633, 637–38 (3d Cir. 2007) (reducing an action
for specific performance of a contract for real property to money
damages and classifying it as a "claim"); Vil v. Poteau, No. 11–
cv–11622–DJC, 2013 WL 3878741, at *8–9 (D. Mass. July 26, 2013)
(classifying as a "claim" an injunction to cease copyright
infringement); see also In re The Ground Round, Inc., 482 F.3d 15,
20 (1st Cir. 2007) (dictum) (stating that 11 U.S.C. § 101(5) would
classify as a claim a specific performance remedy for which money
damages could substitute -- were the remedy not for the "return of
specific property"); 2 Collier on Bankruptcy ¶ 101.05 [5] (16th
ed. 2009) (stating that when a right to payment may satisfy a
judgment for specific performance, the judgment is a "claim"). We
add that the fact that the costs of compliance with the prepetition
judgment may be difficult to estimate does not prevent the
enforcement action from being a "claim." See Woburn Assocs. v.
Kahn (In re Hemingway Transp., Inc.), 954 F.2d 1, 8 (1st Cir. 1992)
(holding a "contingent, unliquidated, and unmatured" right to
indemnification to be a "claim"). We conclude that the right to
equitable remedies here gives rise to money damages under the
meaning of § 362(a)(1). Independently, the stay applies for that
reason.
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B. Denial of Relief from the Automatic Stay
The Title III court properly looked to the Sonnax factors
outlined by the Second Circuit as a helpful guide to granting or
denying relief from a stay. See In re Fin. Oversight & Mgmt. Bd.
for P.R., 899 F.3d 13, 23 (1st Cir. 2018) (citing Sonnax Indus. v.
Tri Component Prods. Corp. (In re Sonnax Indus.), 907 F.2d 1280,
1286 (2d Cir. 1990)). Of Sonnax's relevant factors under PROMESA,5
the Title III court analyzed the following factors, and found them
to favor maintaining the stay: (1) "whether relief would result in
a partial or complete resolution of the issues"; (2) "lack of any
connection with or interference with the bankruptcy case"; (3)
"whether litigation in another forum would prejudice the other
creditors"; (4) "the interests of judicial economy and the
expeditious and economical resolution of litigation"; and (5) the
"impact of the stay on the parties and the balance of harms."
Sonnax, 907 F.2d at 1286. The Title III court did not abuse its
discretion in finding the factors favor maintaining the stay.
5 We reject Ponce's argument that the court-appointed
monitor is a "special tribunal" that implicates the fourth Sonnax
factor: "whether a specialized tribunal with the necessary
expertise has been established to hear the cause of action." See
Sonnax, 907 F.2d at 1286. The monitor can only "supervis[e] and
audit[]"; he cannot "hear the cause of action" and so this factor
is not at issue. See id.- 12 -
1. Partial or Complete Resolution of the Issues and the
Interests of Judicial Economy (Sonnax Factors 1 and 10)
The Title III court may lift the stay when it would
resolve "significant open issues in the [debtors'] bankruptcy
case" efficiently -- not issues in Ponce's separate enforcement
action. See In re Taub, 413 B.R. 55, 62 (Bankr. E.D.N.Y. 2009)
(emphasis added). The Title III court found that relief would not
efficiently resolve any open issues that would aid the Title III
cases; rather, it would divert the debtors' resources to Ponce's
projects and give Ponce an advantage. We agree.
Further, to allow separate litigation over the debtors'
compliance with the judgment, as Ponce seeks, would conflict with
one of PROMESA's core purposes: "centraliz[ing] all disputes
concerning property of the [Commonwealth's] estate so that
reorganization can proceed efficiently, unimpeded by uncoordinated
proceedings." Municipality of San Juan, 919 F.3d at 577 (applying
the purposes of the Bankruptcy Code to PROMESA). To give one
example, lifting the stay to allow the monitor to begin to oversee
the federally financed highway projects could, as the Title III
court stated, lead to "costly litigation in the Commonwealth Court
concerning . . . the extent or quality of the work." Ponce has
not shown that lifting the stay would allow the Commonwealth court
to resolve significant open issues in the Title III case more
efficiently than the Title III court could resolve them.
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2. Interference with the Bankruptcy Case and Prejudice to
Other Creditors (Sonnax Factors 2 and 7)
The Title III court found that diverting funds from the
debtors to Ponce and to potential litigation over compliance with
the judgment would interfere with the bankruptcy cases and cause
prejudice to the other creditors. Ponce argues that, because its
judgment predates the debtors' bankruptcy, the stay should not
apply (or instead, should be lifted). This argument lacks merit,
as excluding prepetition claims and judgments -- even decades old
ones -- contravenes the purpose of PROMESA's debt restructuring
provisions. See Municipality of San Juan, 919 F.3d at 577 (stating
that PROMESA's automatic stay provision should "protect[] the
debtor's assets from disorderly, piecemeal dismemberment outside
the bankruptcy proceedings" (alteration in original)). Ponce
correctly, and to its credit, does not argue that granting its
request for stay relief would not prejudice other creditors.
Even taking Ponce's alleged facts as to the costs of
compliance as setting a top line as the Title III court did, it is
clear that lifting the stay would compel the debtors to spend at
least $44 million. This sum would impede resolving other Title
III claims and prejudice the other creditors to that amount. See,
e.g., U.S. Bank Tr. Nat'l Ass'n v. AMR Corp. (In re AMR Corp.),
730 F.3d 88, 112 (2d Cir. 2013) (finding no abuse of discretion in
maintaining a stay to prevent diverting funds from other
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creditors). And potential litigation over the debtors' compliance
with project commitments could both interfere with resolving the
Title III case and result in additional expenses to the prejudice
of the other creditors.
3. The Impact of the Stay on the Parties and the Balance of
Harms (Sonnax Factor 12)
For the final factor, the Title III court explicitly
weighed how stay relief would lead to improvement for the people
of Ponce's quality of life against how it would impact the debtors'
overall fiscal health and ability to repair critical
infrastructure throughout the Commonwealth. The Title III court
expressed sympathy toward the people of Ponce and noted their long
battle to compel the debtors to complete the projects, but in
weighing the equities, the Title III court found that they favored
maintaining the stay. The Title III court also noted that Ponce
failed to show that any of the municipal projects "were related to
any federally authorized or delegated program for the protection
of health, safety, or the environment." (Emphasis added.)
Despite its own expert witness assessing the projects'
cost to the debtors at around $44 million, Ponce argues that
lifting the stay would not "affect [the] debtors['] budgets" and
we should not consider the Commonwealth's financial crisis. So,
Ponce concludes, the balance of harms favor relief. We disagree.
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The cost of the local projects and of likely attendant litigation
weigh strongly against stay relief.
At oral argument, Ponce focused on lifting the stay for
the $700,000 electrification project and funding for the monitor
to oversee the highway projects, arguing that the benefits of each
dwarfed the costs to the Commonwealth. We reject characterizing
these projects in this manner. Even if we were to consider the
remaining cost of the electrification project to be relatively
small, the Board and PREPA opposed stay relief noting PREPA's
extremely limited resources and their view that at present those
resources are best spent elsewhere. The record shows the rest of
the cities and towns in the Commonwealth use the same above-ground
electrical system that this project would replace. Given the
critical infrastructure issues from which the Commonwealth suffers
and the importance of prioritizing the most pressing issues, the
debtors are correct that there is no basis to disturb the judgment
of the Title III court. In effect, Ponce requests priority for
its projects over the countless other projects needed by other
communities in the Commonwealth. The Title III court clearly did
not abuse its discretion in declining to give Ponce this priority.6
Cf. Begier v. IRS, 496 U.S. 53, 58 (1990) ("Equality of
6 We note that denying relief from the stay does not deny
Ponce the opportunity to press its claim for the projects in the
future. Ponce may still later seek relief in the Title III
proceedings.
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distribution among creditors is a central policy of the Bankruptcy
Code.").
C. Declining to Hold an Evidentiary Hearing
After moving for stay relief, Ponce requested an
"evidentiary hearing to submit evidence even by testimonial of
Monitor [sic] or documents of the reports made by the debtor[s']
attorneys." Ponce did not request the hearing for any non-
evidentiary purpose. The Title III court accepted the costs
alleged by Ponce as true and consequently found holding an
evidentiary hearing unnecessary. Ponce does not allege that there
is any additional material evidence that it would have submitted
in the requested hearing. Without any disputed, material facts,
the Title III court concluded that an evidentiary hearing was
unnecessary. We agree. A Title III court need not always hold a
hearing before granting or denying relief from a stay. Peaje Invs.
LLC v. García-Padilla, 845 F.3d 505, 512 (1st Cir. 2017). A Title
III court may proceed without an evidentiary hearing when the
parties do not dispute any material facts. Id.In its brief on appeal, Ponce for the first time asserts
that it would have argued at the hearing that the prepetition
judgment, as an equitable remedy, was not a "claim" subject to the
automatic stay (an argument we rejected earlier). Ponce did not
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argue this in its motion to the Title III court.7 Regardless, the
Title III court, having considered the parties' written arguments,
reasonably concluded that Ponce had not shown cause to lift the
stay and a hearing would provide no additional benefit. Cf.
Mitsubishi Motors, 814 F.2d at 847 (affirming decision lifting
stay without hearing when the court reviewed briefing by both
parties and the debtor did not show "viable reasons for maintaining
the stay"). Consequently, we hold that the Title III court did
not abuse its discretion in declining to hold a hearing.
III.
We affirm the judgment of the Title III court.
7 Had Ponce wished to make this argument to the Title III
court, it should have briefed the issue in its motion, requested
a non-evidentiary hearing to argue the issue, or moved for
reconsideration. See, e.g., 48 U.S.C. § 2170 (incorporating the
Federal Rules of Bankruptcy Procedure into PROMESA Title III cases,
including Fed. R. Bankr. P. 9024, which allows for a motion for
reconsideration).
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