Puerto Rico Elec. Power Auth. v. Ad Hoc Group-PREPA Bondholders , 899 F.3d 13 ( 2018 )

United States Court of Appeals
For the First Circuit
No. 17-2079
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.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Laura Taylor Swain, U.S. District Judge]
Before
Howard, Chief Judge,
Kayatta, Circuit Judge,
and Torresen, Chief U.S. District Judge.

Of the Southern District of New York, sitting by designation.

Of the District of Maine, sitting by designation.
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.
August 8, 2018
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.
1 The Puerto Rico Oversight, Management, and Economic
Stability Act, 48 U.S.C. §§ 2101–2241.
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§§ 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
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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 court
concluded that "cause" did not exist under 11 U.S.C. § 362(d)(1)
to lift the stay because the balance of harms cut against the
relief requested.
II.
We address first the limitation imposed by Section 305.
That section provides:
[N]otwithstanding any power of the court,
unless the Oversight Board consents or the
plan so provides, the court may not, by any
stay, order, or decree, in the case or
otherwise, interfere with-- (1) any of the
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political or governmental powers of the
debtor; (2) any of the property or revenues of
the debtor; or (3) the use or enjoyment by the
debtor of any income-producing property.
48 U.S.C. § 2165. In an effort to dispose quickly of that
limitation, the bondholders cite two California municipal
bankruptcy cases for the proposition that by allowing the debtor
to file a Title III petition, the Oversight Board consented carte
blanche to the full exercise of the Title III court's powers. See
Alliance Capital Mgmt. L.P. v. Cty. Of Orange (In re Cty. of
Orange), 179 B.R. 185, 190 (Bankr. C.D. Cal. 1995) (noting that
county had consented to court's jurisdiction to order adequate
protection, without clarifying the nature of that consent); Ass'n
of Retired Emps. of Stockton v. City of Stockton (In re City of
Stockton), 478 B.R. 8, 22 (Bankr. E.D. Cal. 2012) (characterizing
the consent in Cty. of Orange as consent under 11 U.S.C. § 904 by
virtue of having filed the bankruptcy petition). We reject this
approach because it would render Section 305 a nullity; consent
would always exist because Section 305 only applies in Title III
cases, and in those cases, the Oversight Board must approve the
debtor's filing. See 48 U.S.C. § 2164(a); see also id. § 2124(j).
Anticipating the possibility that this "consent" argument
would fail, the bondholders also urge a more nuanced reading of
Section 305 as limiting only what the Title III court can itself
directly order. The Title III court disagreed. It read
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Section 305 as not only preventing the Title III court from
directly interfering with the listed powers and properties of
PREPA, but also from indirectly interfering by issuing an order
for the purpose of allowing another court to engage in any such
interference, at least when the relief sought is the appointment
of a receiver. The Title III court reasoned that Section 305 and
other PROMESA provisions create a structure that is "protective of
the autonomy of public entities engaged in debt adjustment
proceedings." It also read the word "otherwise" in Section 305 as
prohibiting the Title III court from indirectly doing (i.e.,
allowing others to do) what it could not directly do.2
We agree with the bondholders that Section 305 does not
tie the Title III court's hands quite so much as that court found
it did. Our reasoning begins with the statutory text. The text
of Section 305 trains on the powers of "the court," plainly the
Title III court. It states specifically what that court may not
do: "interfere with" certain powers and assets of the debtor "by
any stay, order, or decree." The bondholders' principal request
for relief does not ask the Title III court to issue any such stay,
order, or decree that itself interferes with the debtor's powers
or assets. Rather, the bondholders ask the Title III court to
2 As the Title III court noted, 11 U.S.C. § 105(b),
incorporated by PROMESA section 301, 48 U.S.C. § 2161(a), contains
language prohibiting the Title III court from appointing a
receiver directly.
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stand aside -- by lifting the stay -- to allow another court under
Commonwealth law to decide whether to do what the Title III court
is assumed not to be able to do. Nothing in that text plainly
calls for us to read a prohibition on interference by the Title III
court so broadly as to encompass an action that might allow another
court to decide whether to interfere with the powers or properties
of the debtors.
The statute's use of the word "otherwise" does not alter
our reading. The word "otherwise" serves not as a catchall for
broadly defining what the Title III court cannot do. Rather, it
broadly defines where the Title III court may not interfere: "in
the case or otherwise." In this manner, it makes clear that the
Title III court cannot issue an order of interference, for example,
when deciding disputes under its "related to" jurisdiction. See
48 U.S.C. § 2166(a)(2) (Title III court has original but not
exclusive jurisdiction over civil proceedings "arising in or
related to cases under" PROMESA); see also Celotex Corp. v.
Edwards, 514 U.S. 300, 307–08 & 307 n.5 (1995) (identical provision
for bankruptcy code gives bankruptcy court broad "related to"
jurisdiction over suits between third parties that have an effect
on the debtor's property).
Our interpretation of the text of Section 305 secures
even firmer footing when grounded in context because Title III of
PROMESA also incorporates section 362(d)(1) of the bankruptcy
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code. 48 U.S.C. § 2161(a) (incorporating 11 U.S.C. § 362). That
section says that the court "shall" provide relief from the
automatic stay "for cause, including the lack of adequate
protection of [a creditor's] interest in property." 11 U.S.C.
§ 362(d)(1). In so providing, section 362(d)(1) guards against
the possibility that the automatic stay could deprive a creditor
of its property interest by precluding the creditor from exercising
any rights it possesses to protect that interest from destruction.
See Note Holders v. Large Private Beneficial Owners (In re Tribune
Co. Fraudulent Conveyance Litig.), 818 F.3d 98, 108–09 (2d Cir.
2016).
If we were nevertheless to read Section 305 broadly as
barring the Title III court from lifting the automatic stay as
otherwise allowed by section 362(d)(1) to enable another court to
take action interfering with the debtor's property, we would
effectively wipe out section 362(d)(1) whenever the creditor
needed protection of its interest in that property.3 The creditor
would be left to stand by helplessly as the debtor spent the
creditor's collateral, leaving the debtor entirely unsecured. As
we have previously said, we would "doubt the constitutionality of"
a rule that would allow a debtor to "expend every penny of the
Movants' collateral, leaving the debt entirely unsecured." Peaje
3
So, too, would we effectively eliminate subsections (3) and
(4), and potentially (2), of 11 U.S.C. § 362(d).
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Investments LLC v. García-Padilla, 845 F.3d 505, 511–12 (1st Cir.
2017) ("Peaje I"). Such a marked change in the status quo ante
undercutting creditor rights, see United States v. Whiting Pools,
Inc., 462 U.S. 198, 207 (1983) (describing rights and treatment of
secured creditors in bankruptcy, including right to adequate
protection), would be an ambitious undertaking unlikely to have
been implemented by Congress without some discussion and
expression of awareness.
The Title III court did try to deflect these problems by
stating that its refusal to lift the stay arose in the context of
a request for a receiver, certainly a robust form of interference
with the debtor's finances and property. The implication -- which
the debtor's brief makes express -- is that perhaps the Title III
court would lift the stay to allow another court to provide some
other type of protection of collateral. But neither the Title III
court nor the debtor points to any toehold in the language of
Section 305 that would accommodate a distinction allowing the
Title III court to lift the stay to allow another court to
interfere with the debtor's property sometimes but not others.
Either Section 305 only bars the Title III court itself from
interfering, or it bars that court also from lifting the stay to
allow another court to do that which it cannot do. And it is only
the latter, broader possibility that creates a situation in which
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the creditor is deprived of any means of protecting its property
interest.
The Title III court also pointed out that Section 305
would not bar section 362(d) relief when the Oversight Board
consents to the requested relief. But the principal aim of
section 362(d)(1) is to protect the creditor when protection is
needed, which is customarily when the debtor is not obliging. In
short, saying that a creditor can get relief from the stay when
the debtor's representative consents effectively wipes out
section 362(d)(1) precisely when it is most likely needed.
We also find no inconsistency between the apparent
purpose served by Section 305 and a reading of that section as
only barring the Title III court itself from directly interfering
with the debtor's powers or property. Like the Title III court,
we read Section 305 as respectful and protective of the status of
the Commonwealth and its instrumentalities as governments, much
like section 904 of the municipal bankruptcy code respects and
protects the autonomy of states and their political subdivisions.
See 11 U.S.C. § 904. When a bankruptcy or Title III court acts
directly, it impinges on that autonomy. But when it merely stands
aside by lifting the automatic stay, it allows the processes of
state or territorial law to operate in normal course as if there
were no bankruptcy.
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Finally, the limited case law on this subject provides
no holdings or reasoning that call for a contrary interpretation
of Section 305. Other courts have had occasion to pass on the
plain meaning of 11 U.S.C. § 904, but only in the context of
considering the bankruptcy court's ability to interfere directly
with the powers, property, and revenues of the debtor. In
Detroit's recent bankruptcy case, the Sixth Circuit held that the
"plain language [of section 904] expressly prohibits the
bankruptcy court from" ordering the city's water department to
restore service or institute a water affordability plan for
residents. Lyda v. City of Detroit (In re City of Detroit), 841
F.3d 684, 696 (6th Cir. 2016). Likewise, in municipal bankruptcy
proceedings for the city of Stockton, California, the bankruptcy
court determined that section 904 prevented it from ordering the
city to continue paying for the health benefits of retired city
employees, reasoning that section 904 is a like a "clean-up hitter
in baseball" and limits the court's authority "absolute[ly]" when
applicable. In re City of Stockton, 478 B.R. at 20. Though these
interpretations express a broad view of what the bankruptcy court
in a municipal bankruptcy may not itself do without the debtor's
consent, they make no effort to address whether and to what extent
the bankruptcy court may lift the stay to allow another court to
do what the bankruptcy court cannot do.
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For these reasons, we hold that Section 305 does not
prohibit as a matter of course the Title III court from lifting
the stay when the facts establish a creditor's entitlement to the
appointment of a receiver in a different court in order to protect
a creditor's collateral should that protection otherwise be
necessary and appropriate. Although we share the Title III court's
concerns about the deleterious impact that a robust receivership
outside the Title III court's control might have on the efforts of
the Title III court to consolidate and adjust the debtor's affairs,
those concerns are best addressed in deciding whether, precisely
to what extent, and for what purpose relief from the automatic
stay might be granted. In other words, it might be possible to
grant tailored relief for the creditor to seek a receivership
provided that the receiver only take specific steps necessary to
protect the creditor's collateral. Further, concerns about moving
the locus of the debtor's protections outside the Title III court
are greatly ameliorated by the fact that the Oversight Board itself
can always, through consent, opt for a regime held more tightly
within the federal forum's direct control.
III.
We turn next to the Title III court's holding that the
exclusive jurisdiction provision contained in PROMESA
section 306(b), 48 U.S.C. § 2166(b), operates to prohibit a court
from entering an order to lift the stay upon a determination of
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inadequate protection if the relief sought is the appointment of
a receiver. Unlike Section 305, Section 306's exclusive
jurisdiction over property rule is not a provision specially
crafted for municipal or territorial bankruptcies. Rather, it is
the general rule for bankruptcies. See 28 U.S.C. § 1334(e). In
short, Section 306(b) provides that bankruptcy courts acquire
exclusive jurisdiction over a debtor's property.
This grant of exclusive jurisdiction has to our
knowledge never limited the bankruptcy court's power to allow
others to act on the debtor's property with the permission of the
bankruptcy court. For example, bankruptcy courts routinely grant
leave to allow a creditor to sell a debtor's property without
threat to the exclusive jurisdiction rule. See, e.g., Catalano v.
Comm'r of Internal Revenue, 279 F.3d 682, 687 (9th Cir. 2002)
(order lifting stay to permit bank to foreclose on residential
property did not extinguish the estate's interest in the property
or constitute abandonment of the property).
Allowing the Title III court to permit or enlist others
to take action with the court's permission enhances rather than
limits the control given to the Title III court by Section 306.
See In re Ridgemont Apartment Assocs., 105 B.R. 738, 741 (Bankr.
N.D. Ga. 1989) (lifting stay for creditor to obtain a receiver to
collect some income from debtor's rental property did not cede
exclusive jurisdiction over the debtor's property, as Congress
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gave "considerable flexibility" to bankruptcy courts to protect
both creditors and debtors). Moreover, were we to read Section 306
as precluding the Title III court from allowing a Commonwealth
court to protect a creditor's collateral from actions of the
debtor, we would create the same problem that our reading of
Section 305 sought to avoid: The creditor would have no forum
that could provide any protection. Section 306 is better
understood as a housekeeping provision keeping the bankruptcy
process ultimately under the prerogative of the Title III court.
Even when the Title III court lifts the stay, that prerogative
remains. Thus, we conclude that Section 306(b) does not prevent
a Title III court from, after a determination of "cause," lifting
the stay to allow a creditor to seek the appointment of a receiver
in another court.
IV.
The Title III court also included a brief section in its
order stating, in the alternative, that it would deny the requested
relief from the automatic stay even if it had the power to do
otherwise. In so stating, it identified the impediments that a
receiver appointed outside the adjustment proceeding would pose to
the successful conclusion of that proceeding. The Title III court,
however, undertook no assessment of the extent to which any
collateral of the bondholders might be irreversibly harmed in the
interim, or whether PREPA could demonstrate that it was adequately
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protecting that interest, factors a court would ordinarily examine
and weigh. See United Sav. Ass'n of Texas v. Timbers of Inwood
Forest Assocs., 484 U.S. 365, 370 (1988) (adequate protection means
that the value of the creditor's interest in the collateral must
be protected from diminution while the property is being used or
retained during the bankruptcy proceeding); Mazzeo v. Lenhart (In
re Mazzeo), 167 F.3d 139, 142 (2d Cir. 1999) (burden falls first
on the creditor to make an initial showing of cause, then on the
debtor to show lack of cause). It is true that the bondholders
took the position that their motion could be decided "on the basis
of law and limited undisputed facts." But one of the predicate
legal issues was whether and to what extent the bondholders
possessed property interests. The Title III court found it
unnecessary to decide that issue. We, in turn, decline to do so
now without first having the issue framed by proceedings in the
Title III court. Cf. SW Boston Hotel Venture, LLC v. City of
Boston (In re SW Boston Hotel Venture, LLC), 748 F.3d 393, 402
(1st Cir. 2014) (bankruptcy court fact-finding is reviewed for
clear error); see also Whispering Pines Estates, Inc. v. Flash
Island, Inc. (In re Whispering Pines Estates, Inc.), 369 B.R. 752,
757 (B.A.P. 1st Cir. 2007) (review of stay relief order is for
abuse of discretion).
We agree with the parties that the factors identified by
the Second Circuit in Sonnax and recited by the Title III court
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provide a helpful framework for considering whether the Title III
court should permit litigation to proceed in a different forum.
See Sonnax Indus. v. Tri Component Products Corp. (In re Sonnax
Indus.), 907 F.2d 1280, 1286 (2d Cir. 1990). But the Title III
court’s order does not make clear what use it made of these
guideposts beyond a high-level consideration of the balance of the
harms. It also made no findings regarding what limitations it
might be able to impose upon the receiver.
Additionally, to say that the potential harm to the
debtor and the Title III process "far outweighs the temporary
impediments imposed on the bondholders" would also seem to require
some assessment of the pre-petition value of the bondholders'
collateral (if any exists), whether the bondholders face a threat
of uncompensated diminution in such value, whether the bondholders
are seeking the protection of existing collateral or, instead, the
creation of new collateral, and what, if any, adequate protection
PREPA can offer short of a receiver being appointed to manage it
if protection is warranted. See United Sav. Ass'n of Texas, 484
U.S. at 370; Lend Lease v. Briggs Transp. Co. (In re Briggs Transp.
Co.), 780 F.2d 1339, 1344 (8th Cir. 1985) (debtor can propose a
form of relief to provide adequate protection of a secured
creditor's interest in property). Without more to understand what
the Title III court weighed on each side of the balance of the
harms, we cannot say whether there was adequate support upon which
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to rest the Title III court's exercise of its discretion in finding
that "cause" did not exist.
The Title III court did observe in its order of
September 14, 2017, that the bondholders only faced "temporary
impediments." Much time has since passed, and the situation on
the ground -- and at PREPA -- has changed greatly since last
September in the wake of Hurricanes Irma and Maria. Additionally,
our decision today in Peaje Investments LLC v. Financial Oversight
and Management Board for Puerto Rico (In re Financial Oversight
and Management Board for Puerto Rico), Nos. 17-2165, 17-2166, 17-
2167, confirms some of the basic ground rules that may govern the
ascertainment and classification of security interests in this
case. Having now clarified the legitimate questions raised
concerning the effects of Section 305 and Section 306 of PROMESA,
we think it best to allow the bondholders to file a new and updated
request for relief from the automatic stay so that the parties and
the Title III court can focus on the merits of that request free
of any thought that the request is categorically precluded.
That being said, nothing in this opinion should be read
as implying any decision concerning issues not expressly addressed
in this opinion.
V.
For the reasons stated above, we vacate the order denying
the bondholders' request for relief from the automatic stay and we
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remand for further proceedings consistent with this opinion. No
costs are awarded.
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