Employees Retirement System v. PR AAA Portfolio Target ( 2020 )

United States Court of Appeals
For the First Circuit
No. 19-1699
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.
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,
Plaintiff, Appellee,
OFFICIAL COMMITTEE OF RETIRED EMPLOYEES OF THE COMMONWEALTH OF
PUERTO RICO,
Interested Party, Appellee,
v.
ANDALUSIAN GLOBAL DESIGNATED ACTIVITY COMPANY; GLENDON
OPPORTUNITIES FUND, LP; MASON CAPITAL MASTER FUND LP; OAKTREE
OPPORTUNITIES FUND IX (PARALLEL 2), L.P.; OAKTREE OPPORTUNITIES
FUND IX, L.P.; OAKTREE VALUE OPPORTUNITIES FUND, L.P.; OAKTREE-
FORREST MULTI-STRATEGY, L.L.C. (SERIES B); OCHER ROSE, L.L.C.;
SV CREDIT, L.P.,
Defendants, Appellants,
PUERTO RICO AAA PORTFOLIO BOND FUND II, INC.; PUERTO RICO AAA
PORTFOLIO BOND FUND, INC.; PUERTO RICO AAA PORTFOLIO TARGET
MATURITY FUND, INC.; PUERTO RICO FIXED INCOME FUND II, INC.;
PUERTO RICO FIXED INCOME FUND III, INC.; PUERTO RICO FIXED
INCOME FUND IV, INC.; PUERTO RICO FIXED INCOME FUND V, INC.;
PUERTO RICO FIXED INCOME FUND, INC.; PUERTO RICO GNMA AND U.S.
GOVERNMENT TARGET MATURITY FUND, INC.; PUERTO RICO INVESTORS
BOND FUND I, INC.; PUERTO RICO INVESTORS TAX-FREE FUND II, INC.;
PUERTO RICO INVESTORS TAX-FREE FUND III, INC.; PUERTO RICO
INVESTORS TAX-FREE FUND IV, INC.; PUERTO RICO INVESTORS TAX-FREE
FUND V, INC.; PUERTO RICO INVESTORS TAX-FREE FUND VI, INC.;
PUERTO RICO INVESTORS TAX-FREE FUND, INC.; PUERTO RICO MORTGAGE-
BACKED & U.S. GOVERNMENT SECURITIES FUND, INC.; TAX-FREE PUERTO
RICO FUND II, INC.; TAX-FREE PUERTO RICO FUND, INC.; TAX-FREE
PUERTO RICO TARGET MATURITY FUND, INC.; UBS IRA SELECT GROWTH &
INCOME PUERTO RICO FUND; ALTAIR GLOBAL CREDIT OPPORTUNITIES FUND
(A), LLC; NOKOTA CAPITAL MASTER FUND, L.P.,
Defendants.
No. 19-1700
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.
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,
Plaintiff, Appellee,
OFFICIAL COMMITTEE OF RETIRED EMPLOYEES OF THE COMMONWEALTH OF
PUERTO RICO,
Interested Party, Appellee,
v.
PUERTO RICO AAA PORTFOLIO TARGET MATURITY FUND, INC.; PUERTO
RICO AAA PORTFOLIO BOND FUND, INC.;
PUERTO RICO AAA PORTFOLIO BOND FUND II, INC.; PUERTO RICO FIXED
INCOME FUND II, INC.; PUERTO RICO FIXED INCOME FUND III, INC.;
PUERTO RICO FIXED INCOME FUND IV, INC.; PUERTO RICO FIXED INCOME
FUND V, INC.; PUERTO RICO FIXED INCOME FUND, INC.; PUERTO RICO
GNMA AND U.S. GOVERNMENT TARGET MATURITY FUND, INC.; PUERTO RICO
INVESTORS BOND FUND I, INC.; PUERTO RICO INVESTORS TAX-FREE FUND
II, INC.; PUERTO RICO INVESTORS TAX-FREE FUND III, INC.; PUERTO
RICO INVESTORS TAX-FREE FUND IV, INC.; PUERTO RICO INVESTORS
TAX-FREE FUND V, INC.; PUERTO RICO INVESTORS TAX-FREE FUND VI,
INC.; PUERTO RICO INVESTORS TAX-FREE FUND, INC.; PUERTO RICO
MORTGAGE-BACKED & U.S. GOVERNMENT SECURITIES FUND, INC.; TAX-
FREE PUERTO RICO FUND II, INC.; TAX-FREE PUERTO RICO FUND, INC.;
TAX-FREE PUERTO RICO TARGET MATURITY FUND, INC.,
Defendants, Appellants,
ALTAIR GLOBAL CREDIT OPPORTUNITIES FUND (A), LLC; ANDALUSIAN
GLOBAL DESIGNATED ACTIVITY COMPANY; GLENDON OPPORTUNITIES FUND,
LP; MASON CAPITAL MASTER FUND LP; NOKOTA CAPITAL MASTER FUND,
L.P.; OAKTREE OPPORTUNITIES FUND IX (PARALLEL 2), L.P.; OAKTREE
OPPORTUNITIES FUND IX, L.P.; OAKTREE VALUE OPPORTUNITIES FUND,
L.P.; OAKTREE-FORREST MULTI-STRATEGY, L.L.C. (SERIES B); OCHER
ROSE, L.L.C.; SV CREDIT, L.P.; UBS IRA SELECT GROWTH & INCOME
PUERTO RICO FUND,
Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Laura Taylor Swain,* U.S. District Judge]
* Of the Southern District of New York, sitting by
designation.
Before
Howard, Chief Judge,
Lynch and Lipez, Circuit Judges.
Bruce Bennett, with whom Benjamin Rosenblum, David R. Fox,
Geoffrey S. Stewart, Beth Heifetz, Sparkle L. Sooknanan, Isel M.
Perez, Jones Day, Alfredo Fernández-Martínez, and Delgado &
Fernández, LLC were on brief, for Andalusian Global Designated
Activity Company; Glendon Opportunities Fund, LP; Mason Capital
Master Fund LP; Nokota Capital Master Fund, L.P.; Oaktree
Opportunities Fund IX (Parallel 2), L.P.; Oaktree Value
Opportunities Fund, L.P.; Oaktree-Forrest Multi-Strategy, L.L.C.
(Series B); Ocher Rose, L.L.C; and SV Credit, L.P.
Jason N. Zakia, Glenn M. Kurtz, John K. Cunningham, White &
Case LLP, Alicia I. Lavergne-Ramírez, José C. Sánchez-Castro,
Maraliz Vázquez-Marrero, and Sánchez Pirillo LLC on brief for
Puerto Rico AAA Portfolio Target Maturity Fund, Inc.; Puerto Rico
AAA Portfolio Bond Fund II, Inc.; Puerto Rico AAA Portfolio Bond
Fund, Inc.; Puerto Rico Fixed Income Fund II, Inc.; Puerto Rico
Fixed Income Fund III, Inc.; Puerto Rico Fixed Income Fund IV,
Inc.; Puerto Rico Fixed Income Fund V, Inc.; Puerto Rico Fixed
Income Fund, Inc.; Puerto Rico GNMA and U.S. Government Target
Maturity Fund, Inc.; Puerto Rico Investors Bond Fund I, Inc.;
Puerto Rico Investors Tax-Free Fund II, Inc.; Puerto Rico Investors
Tax-Free Fund III, Inc.; Puerto Rico Investors Tax-Free Fund IV,
Inc.; Puerto Rico Investors Tax-Free Fund V, Inc.; Puerto Rico
Investors Tax-Free Fund VI, Inc.; Puerto Rico Investors Tax-Free
Fund, Inc.; Puerto Rico Mortgage-Backed & U.S. Government
Securities Fund, Inc.; Tax-Free Puerto Rico Fund II, Inc.; Tax-
Free Puerto Rico Fund, Inc.; Tax-Free Puerto Rico Target Maturity
Fund, Inc.; and UBS IRA Select Growth & Income Puerto Rico Fund.
Martin J. Bienenstock, with whom Timothy W. Mungovan, John E.
Roberts, William D. Dalsen, Stephen L. Ratner, Mark D. Harris,
Jeffrey W. Levitan, Margaret A. Dale, and Proskauer Rose LLP were
on brief, for 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.
Catherine L. Steege, with whom Melissa M. Root, Ian Heath
Gershengorn, Lindsay C. Harrison, Robert D. Gordon, Richard Levin,
Jenner & Block LLP, A.J. Bennazar-Zequeira, Héctor M. Mayol
Kauffmann, and Bennazar, García & Milián, C.S.P. were on brief,
for the Official Committee of Retired Employees of the Commonwealth
of Puerto Rico.
January 30, 2020
LYNCH, Circuit Judge. The appellant Bondholders own
bonds issued in 2008 by the Employees Retirement System of the
Government of the Commonwealth of Puerto Rico (the "System"). More
than eight years after the bond issuance, Congress enacted the
Puerto Rico Oversight, Management, and Economic Stability Act
("PROMESA"), 48 U.S.C. §§ 2101–2241, to address Puerto Rico's
financial crisis and, under PROMESA's Title III, id. §§ 2161-2177,
provided many bankruptcy protections to Puerto Rico's government
agencies. The Commonwealth and the System filed Title III
petitions for such protections.
Pursuant to a stipulation in earlier litigation between
the System and the Bondholders in 2017, the System filed two
lawsuits against the Bondholders in the Title III court seeking
declaratory relief on the "validity, priority, extent and
enforceability" of the Bondholders' asserted security interest in
the System's "postpetition assets," including "[employer]
contributions [to the System] received postpetition." On summary
judgment, the Title III court addressed three arguments made by
the Bondholders. Fin. Oversight & Mgmt. Bd. for P.R. v. Andalusian
Glob. Activity Co. (In re Fin. Oversight & Mgmt. Bd. for P.R.),
385 F. Supp. 3d 138, 147–55 (D.P.R. 2019). First, the Bondholders
claimed that their security interests fit within exceptions under
§ 552 of the Bankruptcy Code. Id. at 152. The Title III court
rejected that claim. Second, the Bondholders argued that they are
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entitled to the protection of the "special revenue" provisions of
PROMESA. Id.; see also 48 U.S.C. § 2161(a) (incorporating relevant
parts of 11 U.S.C. §§ 902, 928). The Title III court held that
the Bondholders were not so protected, as Employers' Contributions
were not special revenues. Andalusian, 385 F. Supp. 3d at 154.
Finally, the Bondholders argued that the statutes should be
construed in their favor on their first two arguments to avoid an
impermissible taking under the Takings Clause of the Fifth
Amendment. Id. at 154–55. The Title III court rejected this
argument as well. Id. at 155. We affirm.
I.
Background
We describe the relevant statutes, facts, and procedural
history of the appeals. For additional facts and procedural
history, we refer the reader to the earlier litigation between
these parties about these bonds. See Altair Glob. Opportunities
Credit Fund, LLC v. Fin. Oversight & Mgmt. Bd. for P.R. (In re
Fin. Oversight & Mgmt. Bd. for P.R.), 914 F.3d 694, 702–09 (1st
Cir.), cert. denied, 140 S. Ct. 47 (2019).
A. PROMESA and the Bankruptcy Code
PROMESA created the Financial Oversight and Management
Board for Puerto Rico (the "Board") and authorizes that Board "to
restructure the debt of the Commonwealth of Puerto Rico through
'quasi-bankruptcy proceedings.'" Autonomous Municipality of Ponce
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(AMP) v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight
& Mgmt. Bd. for P.R.), 939 F.3d 356, 359 (1st Cir. 2019) (quoting
Assured Guaranty Corp. v. Fin. Oversight & Mgmt. Bd. for P.R. (In
re Fin. Oversight & Mgmt. Bd. for P.R.), 872 F.3d 57, 59 (1st Cir.
2017)). Under 48 U.S.C. § 2161(a), which incorporates § 552 of
the Bankruptcy Code into PROMESA, any property acquired
postpetition by the Title III debtor is not subject to any
prepetition lien, unless an exception applies.1 11 U.S.C.
§ 552(a). The Bondholders' claim is that their liens survive
because of the exception in § 552(b)(1) for the proceeds of
property subject to a prepetition lien. When the exception
applies, the lien survives the filing of the Title III petition.
See id. § 552(b)(1). For this exception to apply to a security
interest, (1) the Title III debtor must have property before filing
the Title III petition; (2) a security interest must attach to
that property prepetition; (3) that property must generate some
proceeds postpetition; and (4) a prepetition security agreement
must grant a security interest in both the original prepetition
property and proceeds arising from it postpetition. Id.
1 We employ "lien" and "security interest"
interchangeably, as the liens at issue were created by agreement.
See 11 U.S.C. § 101(51) (defining "security interest" as a "lien
created by an agreement"); see also 48 U.S.C.
§ 2161(a)(incorporating 11 U.S.C. § 101(51)).
- 8 -
In addition, § 552(a)'s bar on liens against property
received postpetition does not apply to "special revenues acquired
by the [Title III] debtor after the commencement of the [Title
III] case." Id. § 928(a); see also 48 U.S.C. § 2161(a)
(incorporating 11 U.S.C. § 928(a) into PROMESA). These "special
revenues . . . remain subject to any [prepetition] lien." 11
U.S.C. § 928(a). Only these special revenues as defined under
§ 902(2)(A) and § 902(2)(D) are argued by the Bondholders to apply
here. Section 902(2)(A) special revenues are "receipts derived
from the ownership, operation, or disposition of projects or
systems of the [Title III] debtor that are primarily used or
intended to be used primarily to provide transportation, utility,
or other services, including the proceeds of borrowings to finance
the projects or systems." Id. § 902(2)(A). Section 902(2)(D)
special revenues are "other revenues or receipts derived from
particular functions of the [Title III] debtor, whether or not the
debtor has other functions." Id. § 902(2)(D).
B. The Puerto Rico Enabling Act for the System and the Bond
Resolution
In 1951, the Commonwealth created by statute the System
as both a trust and government agency. Law No. 447 of May 15,
1951, 1951 P.R. Laws 1298 (the "Enabling Act") (codified as amended
at P.R. Laws Ann. tit. 3, §§ 761–788). The System provides
pensions and retirement benefits to employees and officers of the
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Commonwealth government, municipalities, and public corporations,
as well as employees and members of the Commonwealth's Legislative
Assembly. P.R. Laws Ann. tit. 3, § 764. The Enabling Act
designated the System as "independent and separate" from other
Commonwealth agencies and funded the System through mandatory
contributions from both employers and employees, and the System's
investment income. Altair, 914 F.3d at 704 (quoting P.R. Laws
Ann. tit. 3, § 775). The employer contributions, in turn, were
allocated to the System through annual appropriations in the
Commonwealth budgets. P.R. Laws Ann. tit. 3, § 781(g) (repealed
2013).
As of 2008, the Enabling Act authorized the System to
issue bonds, subject to conditions. Altair, 914 F.3d at 704
(citing P.R. Laws Ann. tit. 3, § 779(d)). Before the System's
assets can be used for security as to bonds, the statute requires
both the consent of two-thirds of the System's Board of Trustees
and "the enactment of legislation by the Legislative Assembly."
P.R. Laws Ann. tit. 3, § 779(d). On January 24, 2008, the System's
Board of Trustees adopted a resolution authorizing the issuance of
$2.9 billion in bonds. Altair, 914 F.3d at 704. The Enabling
Act, as amended, references this bond issue, stating: "It is
hereby clarified for future generations that the Retirement System
made a bond issue amounting to three billion dollars, which bears
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between 6.25% to 6.35% interest[2] to bondholders, thus encumbering
employer contributions of the System for up to fifty years." P.R.
Laws Ann. tit. 3, § 779(d). The Bondholders own some of these
bonds.
When the System issued these bonds, it granted the
Bondholders security interests in "Pledged Property." That
definition is very important to the resolution of the issues in
this case. The 2008 Pension Bond Funding Resolution ("Bond
Resolution") defines "Pledged Property" as:
[1] All Revenues. [2] All right, title and interest of
the System in and to Revenues, and all rights to receive
the same. [3] The Funds, Accounts, and Subaccounts held
by the Fiscal Agent . . . . [4] Any and all other rights
and personal property . . . assigned by the System to
the Fiscal Agent . . . . [5] Any and all cash and non-
cash proceeds, products, offspring, rents and profits
from any of the Pledged Property . . . .
"Revenues" is further defined to include "Employers' Contributions
received by the System." The Resolution defines "Employers'
Contributions" as "the contributions paid from and after the date
hereof that are made by the Employers and any assets in lieu
thereof or derived thereunder which are payable to the System
2 This interest rate exceeded the then-market municipal
borrowing rate of closer to four-and-a-half percent, and the 2008
System bonds are, under certain circumstances, tax-exempt. See
Board of Governors of the Federal Reserve System, State and Local
Bonds - Bond Buyer Go 20-Bond Municipal Bond Index (DISCONTINUED),
Economic Research: Federal Reserve Bank of St. Louis (Oct. 7,
2016), https://fred.stlouisfed.org/series/WSLB20/ (indexing
representative bonds' interest rates for bonds higher rated than
those at issue here).
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pursuant to Sections 2-116, 3-105 and 4-113 of the [Enabling]
Act."3
The System also executed a security agreement, in which
it granted the Bondholders a security interest in the Pledged
Property and "all proceeds thereof and all after-acquired
property, subject to application as permitted by the Resolution."
In 2013, the Commonwealth legislature amended the
Enabling Act in response to the ongoing financial crisis. 2013
P.R. Laws 3. Among other changes, the 2013 Amendment repealed
P.R. Laws Ann. tit. 3, §§ 781, 786-5 (commonly referred to by their
section numbers in the original Enabling Act, 2-116 and 3-105)
with respect to active employees. Id. §§ 9, 12. In effect, this
froze the accrual of pension benefits for active government
employees. But, through a savings clause, the 2013 Amendment
required that employers continue to make contributions to pay
benefits accrued by active employees up to the effective date of
the Act. P.R. Laws Ann tit. 3, § 761a. So, while the 2013
Amendment stopped the accumulation of new benefits, it also
preserved for accrued benefits the concept of Employers'
Contributions, and also how those Contributions were calculated,
including the dependence of the calculation on the ongoing payrolls
of each employer.
3 Codified at P.R. Laws Ann. tit. 3, §§ 781, 786-5, 787,
respectively.
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In 2017, the Commonwealth again amended the Enabling
Act. See Con. H.R. Res. 188, 18th Legislative Assemb. (2017)
("Concurrent Resolution 188"); 2017 P.R. Laws 106. Until the 2017
Amendment, the Enabling Act required that the contribution of
government employers be at least 9.275% of their participating
employees' compensation (with respect to accrued benefits). P.R.
Laws Ann. tit. 3, § 781(d) (repealed 2013). The 2017 Amendment
eliminated the employers' obligation to contribute to the System
and required the Commonwealth General Fund to pay individual
pensions.4 See Concurrent Resolution 188. The Act does not
authorize the System to charge any fees for managing participant
investments or providing retirement services. P.R. Laws Ann. tit.
3, § 781.
4 The legal status of these payments and the validity of
the 2017 Amendment are subject to other litigation. See, e.g.,
Altair Glob. Credit Opportunities Fund (A), LLC v. United States,
138 Fed. Cl. 742 (Fed. Cl. 2018); Complaint, Altair Glob. Credit
Opportunities Fund (A), LLC v. Commonwealth of Puerto Rico (In re
Fin. Oversight & Mgmt. Bd. for P.R.), No. 17-00219-LTS (D.P.R.
filed July 27, 2017), ECF No. 1. This other litigation raises the
issues of whether the 2017 Amendment actually eliminated the
Bondholders' liens and, if so, whether that action was
constitutional. The Title III court has stayed the proceedings
pending the outcome of the instant appeal. Order, Altair, No. 17-
00219-LTS (D.P.R. filed Sept. 6, 2018), ECF No. 69. Although the
2017 Amendment repealed the Employers' Contributions provision of
the Enabling Act, subsequent events could reinstate these
provisions. In consequence, and for clarity, we refer to these
provisions in the present tense with respect to the Contributions
still required after the 2013 Amendment.
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The Enabling Act before 2017 specifies the consequences
if employers fail to make their required Contributions to the
System. The "director [or 'head'] of an agency, public corporation
or municipality" who "knowingly, willfully, and without just cause
fails to remit" his/her agency's Contributions to the System "shall
be guilty of a felony." P.R. Laws Ann. tit. 3, § 781a(a), (f).
More significant for present purposes, the Enabling Act also
directs that, upon receiving a certificate of debt from the
Administrator of the System, it is Centro de Recaudación de
Ingresos Municipales ("CRIM"), Puerto Rico's municipal property
tax collection agency, which is obligated to pay the delinquent
Employers' Contributions of municipalities "on or before the
fifteenth (15) day of each month" and it is the Commonwealth
Secretary of the Treasury who is obligated to pay the delinquent
Employers' Contributions of "an agency, public corporation, or any
[Commonwealth-level government] entity . . . immediately." Id.
§ 781a(g), (h). The statute also states that delinquent Employers'
Contributions (and several additional types of debt) "shall have
priority over any other outstanding debt of" a municipality or a
Commonwealth-level entity that fails to make its Contribution.
Id. CRIM and the Secretary of the Treasury are obligated to give
priority to those debts before addressing other debts of the
municipality or Commonwealth entity. The Enabling Act's
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provisions do not accord the System any remedy or mechanism to
collect delinquent Contributions. See id. § 781a.
C. Procedural History
The first time this court addressed these bonds, it held
that the Bondholders had perfected a security interest in whatever
property was pledged to them under the bond issuance's security
agreement. Altair, 914 F.3d at 719. We then remanded to the Title
III court to determine whether the Bondholders held "valid,
enforceable, attached, perfected, first priority liens on and
security interest in [prepetition and postpetition Employers'
Contributions]" and whether the Employers' Contributions were
special revenues under 11 U.S.C. § 928(a). Id. at 720.
As said, the Title III court concluded that, under 11
U.S.C. § 552(b)(1), postpetition Employers' Contributions were not
proceeds of a secured, prepetition property right of the System to
receive them. Andalusian, 385 F. Supp. 3d at 152. It also
concluded that the Employers' Contributions were not special
revenues under § 902(2)(A) or (D). Id. at 154. Finally, the court
rejected the Bondholders' argument that the canon of
constitutional avoidance required it to construe PROMESA's
incorporation of § 552 to be prospective only. Id. at 155. In
consequence, the Title III court held that, under § 552(a),
postpetition Employers' Contributions were not subject to any
security interest of the Bondholders, denied summary judgment to
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the Bondholders, and granted summary judgment to the Board. Id.
These appeals followed.
II.
Standard of Review
"We review de novo the grant or denial of summary
judgment, as well as pure issues of law." Rodriguez v. Am. Int'l
Ins. Co. of P.R., 402 F.3d 45, 46–47 (1st Cir. 2005) (citation and
emphasis omitted). We must "'view [the parties' cross motions for
summary judgment] separately,' in the light most favorable to the
non-moving party, and draw all reasonable inferences in that
party's favor." OneBeacon Am. Ins. Co. v. Commercial Union
Assurance Co. of Can., 684 F.3d 237, 241 (1st Cir. 2012) (quoting
Estate of Hevia v. Portrio Corp., 602 F.3d 34, 40 (1st Cir. 2010)).
III.
Section 552 Prevents the Bondholders' Security Interest from
Attaching to Postpetition Employers' Contributions
The Bondholders argue that § 552(a) does not bar a lien
on Employers' Contributions received postpetition because those
Contributions are "proceeds" within the meaning of § 552(b)(1).
That is, the Bondholders argue that (1) the System's statutory
authority to receive Employers' Contributions constituted a
property right; (2) the Security Agreement gave the Bondholders a
security interest in the System's property right to receive those
Contributions; (3) the Employers' Contributions actually received
postpetition are the "proceeds" of the System's prepetition
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property right; and (4) the Security Agreement gave the Bondholders
a security interest in these "proceeds" of the System's prepetition
right. They argue they have an interest in both the System's
prepetition right to receive postpetition Employers' Contributions
and in the employers' prepetition obligations to make postpetition
contributions to the System on account of any actuarial deficit.
They argue that these obligations continue postpetition and so are
proceeds of the prepetition property.5 After addressing the
contract and statutory language common to these theories, we
address each theory in turn.
We look at a combination of the points of the above
analysis by examining the extent of the Bondholders' security
interest as defined in the Bond Resolution to determine whether,
as of the petition date, that interest constituted a property right
to receive postpetition Employers' Contributions. The
Bondholders' security interests are restricted to those defined as
Pledged Property.
"Pledged Property" is defined in the Bond Resolution to
include "Revenues," and Revenues are restricted to Employers'
Contributions received by the System, "rights to receive [the
Revenues]," and the proceeds of any property or rights defined as
5 At different stages of the proceedings, the Bondholders
have framed the same argument in these two different ways.
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Revenues.6 The Official Statement accompanying the bonds denotes
that the "[b]onds are not payable from or secured by any other
assets of the System." The key to resolving the § 552 argument in
this case is the limited definition of "Employers' Contributions."
We start by rejecting the Bondholders' argument, as did
the Title III court, that, in the Bond Resolution's definition of
Employers' Contributions, the limiting clause "which are payable
to the System pursuant to Sections 2-116, 3-105 and 4-113" modifies
only the antecedent phrase "any assets in lieu thereof or derived
thereunder" and not the other antecedent phrase "the contributions
paid from and after the date hereof that are made by the
Employers." The Supreme Court has held that "[w]hen several words
are followed by a clause which is applicable as much to the first
and other words as to the last, the natural construction of the
language demands that the clause be read as applicable to all."
Paroline v. United States, 572 U.S. 434, 447 (2014) (quoting Porto
Rico Ry., Light & Power Co. v. Mor, 253 U.S. 345, 348 (1920)).
That principle applies here, and the limiting clause here is
6 Not at issue are other categories of Pledged Property
than those addressed in this opinion. Pledged Property also
comprises various funds, accounts, and additional rights of the
System. "Revenues" is also defined to include various other
payments and income received by the System (and unrelated to
Employers' Contributions). No party has argued any of these
additional definitions are relevant here, so we need not discuss
them further.
- 18 -
applicable to both antecedent phrases. Such Employers'
Contributions, and so the extent of the security interest granted
by the Security Agreement, are limited to those contributions
payable to the System pursuant to Sections 2-116, 3-105, and 4-
113 of the Enabling Act. We turn to each of these sections.
As to pension benefits preserved under the 2013
Amendment's savings provision, see P.R. Laws Ann. tit. 3, § 761a
(2013), Section 2-116(a) states that Employers' Contributions
"should" cover the difference between the total cost of the System
and employee contributions. Id. § 781 (repealed 2013). The
Section also provides the formula for computation of each
employer's monthly contribution. Id. Importantly, the Section
provides that an employer is not obligated to contribute anything
until the Employers' Contributions are determinable. See id.
§ 781(c), (d), (f). The Section also provides that future
appropriations by the legislature would allocate the funds in the
amount of the Employers' Contributions. Id. § 781(g).
As to benefits similarly preserved under the savings
provision of the 2013 Amendment, Section 3-105 requires Employers'
Contributions to be paid for salaried employees. Id. § 786-5.
These are computed in the same manner as the Contributions are for
other employees.
Finally, Section 4-113 states only that the intent of
the Enabling Act is that contributions, annuities, benefits,
- 19 -
reimbursements, and administration expenses be obligations of the
employers. Id. § 787.
A. As of the Petition Date, the System Did Not Have a Property
Right, and the Bondholders Did Not Have a Security Interest,
in Any Right To Receive Postpetition Employers' Contributions
We turn to the Bondholders' argument that their security
interest in prepetition "rights" to receive Employers'
Contributions gave them a security interest in Contributions
received postpetition. The Security Agreement covers only
Contributions paid or payable to the System and rights to receive
the same under the three provisions outlined above.
We conclude that the System's statutory authority to
receive postpetition Employers' Contributions constituted merely
an expectancy and not a property "right" as it is clear that the
payment and the amounts of the Contributions depended on work
occurring on and after the petition date. It is also clear and
our result is reinforced by the fact that language in the Bond
Resolution and the Official Statement for the bonds explicitly
contemplated that the payment of future Contributions was
contingent on Puerto Rico's future fiscal status and the decisions
of future Puerto Rico legislatures. Because Employers'
Contributions to the System based on payroll amounts for work
occurring on and after the petition date could not be determined
as of the petition date, the Contributions were not payable
prepetition and the Bondholders did not have any security interest
- 20 -
in such contributions. The Bondholders thus lacked any secured
interest in property that could produce postpetition "proceeds" to
which they could be entitled. See 11 U.S.C. § 552(b)(1); N.H.
Bus. Dev. Corp. v. Cross Baking Co. (In re Cross Baking Co.), 818
F.2d 1027, 1032 n.6 (1st Cir. 1987) (stating that "[§] 552(b)
'creates an exception for proceeds generated by prepetition
collateral, and not for property acquired by the debtor or the
estate postpetition or proceeds of the same.'" (quoting 4 Collier
on Bankruptcy ¶ 552.02, at 552–7 (Lawrence King ed., 15th ed.
1987))). So, the Bondholders did not have a prepetition property
right in any postpetition contributions that might be made. At
most, the Bondholders had an expectation.7
7 Typically, local law creates and defines property
interests in bankruptcy proceedings. Soto-Rios v. Banco Popular
de P.R., 662 F.3d 112, 117 (1st Cir. 2011) (citing Butner v. United
States, 440 U.S. 48, 54–55 (1979)). Puerto Rico law recognizes
that the mere expectancy of property is not itself a property
interest. See, e.g., Redondo-Borges v. HUD, 421 F.3d 1, 9 (1st
Cir. 2005) (holding that, under Puerto Rico law, a government
contract bidder had only a "unilateral expectation," not a vested
property interest in a Puerto Rico agency's determination of the
party's responsible bidder determination, even if it prevented the
party from receiving future bids and payment from the government);
Carrasquillo v. Aponte Roque, 682 F. Supp. 137, 141 (D.P.R. 1988)
(distinguishing between "vested property interests" and
"subjective expectancies" under Puerto Rico law). This treatment
of expectancies as not property interests is generally accepted.
See Restatement (Third) of Trusts § 41 cmt. a (Am. Law Inst. 2003)
("By all traditional and current concepts of property,
expectancies are not property interests.").
- 21 -
Importantly, the Bond Resolution explicitly states that
the legislature of the Commonwealth might reduce (or, by
implication, eliminate) Employers' Contributions, and so
"adversely affect[]" the Bondholders. And legislative
appropriations are the method by which the Commonwealth allocates
the Employers' Contributions to the System. Although required by
Section 2-116(g),8 this directive could be disregarded by a
subsequent legislature (to the Bondholders' detriment). See P.R.
Laws Ann. tit. 3, § 781(g) (repealed 2013); United States v.
Winstar Corp., 518 U.S. 839, 873 (1996) ("[O]ne legislature is
competent to repeal any act which a former legislature was
competent to pass; and one . . . legislature cannot abridge the
powers of a succeeding legislature." (quoting Fletcher v. Peck,
10 U.S. (6 Cranch) 87, 135 (1810))).
Moreover, the Official Statement for the bonds
explicitly contemplates that, if faced with insufficient funds to
pay approved appropriations, the Commonwealth would prioritize
paying public debt over funding Employers' Contributions. As the
Official Statement provides, "[t]his Constitutional restriction
does not apply to Employers' Contributions made by public
corporations and municipalities, because the funds of public
8 At least, this was true until the Contributions
provisions were repealed with respect to future benefits in 2013
and fully repealed in 2017.
- 22 -
corporations and municipalities are not 'available resources' of
the Commonwealth." This language in the Official Statement put
the Bondholders on notice that the Employers' Contributions stem
from appropriations that the Commonwealth legislature could, and
likely would, reduce if it could not fully fund its planned
appropriations.
The Bondholders knew that if the Commonwealth
experienced additional financial problems, such problems could
adversely affect the Bondholders. These known risks of alterations
to the Employers' Contributions distinguish the instant case from
the cases the Bondholders cite regarding liens on prepetition
contracts. See, e.g., United Va. Bank v. Slab Fork Coal Co., 784
F.2d 1188, 1191 (4th Cir. 1986) (deciding whether postpetition
payments under a coal contract made subject to a prepetition lien
were proceeds subject to the same lien).
The Bondholders argue that Cadle Co. v. Schlichtmann,
267 F.3d 14 (1st Cir. 2001), requires that we rule in their favor.
Not so. In fact, Cadle, although partially distinguishable on the
facts, supports the Board. In Cadle, a law firm granted to a bank
a security interest in its accounts receivable, including a
$300,000 contingency fee interest in escrowed settlement funds.
Id. at 16. Schlichtmann, a partner in the firm, later declared
bankruptcy and the firm dissolved. Id. Schlichtmann completed
the remaining work on the settlement, distributed the $300,000
- 23 -
among himself and his partners, and did not transfer anything to
the security interest owner. Id. Although the finalization of
the settlement depended on judicial approval, the security
interest had attached to the escrowed funds. Id. at 19. Those
funds were not "future fees", id. at 18 n.2, as "the amount of the
fee . . . was established outside of Schlichtmann's bankruptcy,"
id. at 19, and nothing in the security agreement suggested that
"the fees or the security interest were contingent on the
performance of substantial further legal services," id. at 21. On
these facts, the Cadle court held that the contingent fee was
proceeds of a prepetition account receivable, not after-acquired
property, and so the security interest survived under § 552(b)(1).
Id.
The facts here differ considerably. The Bondholders
claim a security interest in future, yet-to-be calculated or
contributed Employers' Contributions, and not in deposited funds.
Unlike the fee in Cadle, the Contributions at issue are only
determinable postpetition and so are not "established outside of
. . . bankruptcy." Id. at 19. Further, unlike in Cadle, the
future Employers' Contributions necessarily depend on future
payrolls, which depend in turn on the performance of labor by
government employees. Although the finality of the settlement was
contingent on judicial and regulatory approval, the secured
property in Cadle was otherwise fixed prepetition and payable at
- 24 -
any time. The postpetition Employers' Contributions here, by
contrast, are not payable until they are determined postpetition.
As of the petition date, postpetition Employers' Contributions
were too indeterminate for any "right" to receive postpetition
Employers' Contributions to be prepetition property of which those
postpetition Contributions could be proceeds.9
B. The Bondholders Do Not Have Liens on "Obligations" of
Employers To Solve Any Deficiency in the Pension System
The Bondholders raise another theory of recovery under
§ 552(b): they claim to have a prepetition security interest in
payments on the employers' "obligation" to pay down the actuarial
deficit, that Employers' Contributions are proceeds of this
actuarial deficit obligation, and so they conclude the Bondholders
have a security interest in these actuarial deficit "proceeds"
under § 552(b)(1).10 This theory fails both because the plain
9 Valley Bank & Trust Co. v. Spectrum Scan, LLC (In re
Tracy Broadcasting), 696 F.3d 1051 (10th Cir. 2012), cited by the
Bondholders, is, of course, not binding on us and further is
similarly distinguishable. Tracy held that the right to the
proceeds of selling a Federal Communications Commission license
was prepetition property, the postpetition revenues from selling
the license were proceeds of that property, and so the creditor's
security interest in the sale proceeds survived the debtor's
bankruptcy under § 552(b)(1). Id. at 1058–59.
In Tracy, the FCC license already existed, so the right
to its sale proceeds was more analogous to uncalculated accounts
receivable than the "right to receive" Employers' Contributions,
which arise postpetition from employee labor and salary every
month.
10 Even if the Bondholders' actuarial deficit argument is
meant to show that they had liens on postpetition Employers'
- 25 -
language of the Security Agreement and Bond Resolution does not
include the Bondholders' purported collateral and because the
Employers' Contributions are not "proceeds" as a matter of fact or
of law.
1. The Security Agreement's Language Does Not Cover the
Actuarial Deficit
As said, the Bondholders only had a security interest in
Contributions made under the three Puerto Rico statutory
provisions discussed earlier. As to these three provisions, the
Enabling Act does not create an obligation of employers to pay the
actuarial deficit. In consequence, there is no security interest
granted by the Security Agreement in payments on any purported
employer obligation to pay down the actuarial deficit.
As the Title III court correctly recognized, even were
employers required to make actuarial deficit contributions,
employers could not be obligated to pay actuarial deficit
contributions until such deficiencies were determinable. Section
2-116(e) provides that "the [actuarial deficit] shall constitute
a deficiency in the employer contribution" and that "[t]he
Contributions of a determinable amount (that is, the actuarial
deficit as of 2013), this argument fails for the reasons stated in
Section III.A. In the interest of completeness, we address in the
text the Bondholders' actuarial deficit argument as one separate
from the Bondholders' primary § 552 argument, and not merely as a
response to the Title III court's conclusion that the Bondholders'
purported prepetition collateral was insufficiently "fixed in form
or quantity."
- 26 -
obligation accrued as a result of this deficiency shall constitute
an actuarial deficit for the System and an obligation of the
employer." P.R. Laws Ann. tit. 3, § 781(e). The Bondholders did
not acquire a security interest explicitly in payments toward the
deficit. The statutory provisions that do give the Bondholders a
security interest merely require employers to pay whatever rate
the System's Administrator sets (not the entire deficit). See id.
§§ 781(c), (d), 786-5.
Because this deficit is calculated after the payment of
the employers' monthly contribution, as a factual matter, it cannot
be a part of that contribution. See id. § 781 (c)–(e). Under
Section 3-105, Employers' Contributions are based on the salary of
each participant covered by the System retirement program. Id.
§ 786-5. And the Employers' Contributions are required "to be
made concurrently with employee contributions," id. § 781(d), and
these are made monthly, id. § 780. The Title III court correctly
observed that, before employees actually worked, those
Contributions were not, and could not be, "fixed in form or
quantity." The Employers' Contributions could not form a
prepetition pool of obligations in which the Bondholders have a
security interest.
In addition, Section 1-110(d) of the Enabling Act
provides that the System's Administrator shall annually "certify
the . . . amounts which shall be contributed by [employers]" and
- 27 -
can "require [employers] to make additional payments to eliminate
[accumulated actuarial] shortages." P.R. Laws Ann. tit. 3,
§ 782(d). That section makes it plain that employers could not be
required to make additional payments until there were
certifications.11
Our conclusion is buttressed by Section 4-113, which
provides: "It is the intent of §§ 761 et seq. of this title [i.e.,
the Enabling Act] that the contributions required from the
employer, as well as all annuities, benefits, reimbursements, and
administration expenses, shall constitute obligations of the
employer." P.R. Laws Ann. tit. 3, § 787 (2013). The provision
expresses an aspiration that Employers' Contributions will cover
the System's cost, but it does not create an additional obligation
that alters Employers' Contributions. Nor does it create an
interest in property to which the Bondholders' Security Agreement
applies. Further, this provision clearly distinguishes between
contributions and the other expenses of the System which constitute
employers' obligations.
The Bondholders argue that the 2013 Amendment, by
freezing the accrual of future benefits, fixed prepetition the
total pension liability of the System. They then contend that
11 We do not reach the additional argument by the System
that even if the employer had a payment obligation to the System,
that obligation would not constitute property of the System.
- 28 -
Sections 2-116(e) and 4-113, which each state that deficiencies
"shall constitute" employer obligations, accord the System an
enforceable right to collect Employers' Contributions. See P.R.
Laws Ann. tit. 3, §§ 781(e), 787. The Bondholders characterize
the System's pension liability as a pool of benefits (fixed by the
2013 Amendment) for which all employers are jointly liable. In
consequence, they argue, Employers' Contributions are merely a
mechanism of standardizing this liability month-to-month. Not so.
The Bondholders' view of the System contradicts the Enabling Act's
plain language, and their asserted security interest exceeds the
language of the Security Agreement. The 2013 Amendment does not
change whether the Bondholders had a prepetition security interest
in postpetition Employers' Contributions. It does not alter the
extent of the Security Agreement and, for the Contributions it did
not discontinue, it did not alter their calculation or payment.
The 2013 Amendment is irrelevant to the determination of whether
the § 552(b)(1) exception applies.
2. The Employers' Contributions Cannot Be "Proceeds" of Any
Deficit
Employers' Contributions cannot be proceeds of any
secured, prepetition property for another reason. The Enabling
Act does not include a provision that creates an obligation of the
employers to plug a deficiency in the System, so no such obligation
exists. It is impossible to have a lien on something that does
- 29 -
not exist. See Sims v. Jamison, 67 F.2d 409, 411 (9th Cir. 1933)
("[T]here can be no lien upon something which does not exist at
the time of the [bankruptcy] adjudication."). The Employers'
Contributions cannot be the proceeds of some property interest on
which the Bondholders do not have a lien.
C. The Amendment of Article 9 of the Puerto Rico Uniform
Commercial Code Does Not Affect the Resolution of the § 552
Issue
The Bondholders argue that the expanded definition of
collateral and proceeds in the amended Article 9 of Puerto Rico's
Uniform Commercial Code ("UCC") renders as secured proceeds the
Employers' Contributions. This lacks merit.
First, Congress codified the term "proceeds" in
§ 552(b)(1) well before Puerto Rico or any state revised Article
9. Compare Bankruptcy Abuse Prevention Act of 2005, 119 Stat. 23
(2005) (amending § 552 in 2005, its most recent amendment), with
Law No. 21 of January 17, 2012, 2012 P.R. Laws 162 (codified at
P.R. Laws Ann. tit. 19, §§ 2211-2409) (implementing the American
Law Institute's revisions to the UCC on January 13, 2013); Paul
Hodnefield, Proposed 2010 Amendments to UCC Article 9: State-by-
State Adoption (June 6, 2015), Westlaw Practical Law. When
enacting, or last amending, § 552, Congress employed the
definition of "proceeds" as it was at that time (not as it would
be if there were a material alteration made in a future alteration
of Article 9). See Saint Francis Coll. v. Al-Khazraji, 481 U.S.
- 30 -
604, 610 (1987) (stating that courts should look to a statutory
term's definition when Congress enacted the statute). So, the
revised definition in Puerto Rico law of Article 9 is irrelevant.
Second, even if the revised UCC Article 9 expanded the
concept of collateral and altered Puerto Rico law distinguishing
between expectancies and property (which we need not decide), the
Bondholders' claims still require a collection on a receivable.
Here, there were no postpetition collections on, i.e., proceeds
of, any prepetition receivables, i.e., collateral, onto which the
Bondholders' lien might attach. See P.R. Laws Ann. tit. 19,
§ 2212(a)(64). The only receivables at issue are the Employers'
Contributions and, as said, such Contributions only become
receivables after the employers' employees actually performed the
work necessary for payroll to be calculated.12 The Bondholders do
not have the security interest they claim to have in postpetition
Employers' Contributions.
IV.
The Bondholders Did Not Have Special Revenue Bonds Under
§ 902(2)(A) or (D)
The Bondholders argue that the Employers' Contributions
are special revenues within the meaning of 11 U.S.C. § 902(2)(A)
and (D). Section 902(2)(A) defines as "special revenues" any
12 This analysis does not address Employers' Contributions
calculated and owed, but not paid to the System, before the filing
of the Title III petition. The Board concedes that the Bondholders
have a security interest in these receivables.
- 31 -
"receipts derived from the ownership, operation, or disposition of
. . . systems . . . primarily used or intended to be used primarily
to provide transportation, utility, or other services." Id.
§ 902(2)(A). Section 902(2)(D) defines as "special revenues"
"other revenues or receipts derived from particular functions of
the debtor." Id. § 902(2)(D). This statutory analysis turns on
whether the Employers' Contributions are "derived from" the
ownership or operation of a system of "other services" provided by
the System or the "particular functions" of the System. The
"particular function" of the System is limited to collecting
Employers' Contributions, making investments, and paying out
pension benefits.
The Title III court concluded that the Employers'
Contributions were not special revenues. Applying the canon of
ejusdem generis, the Title III court concluded that, in
§ 902(2)(A), "other services" comprised only "physical system[s]
of providing services to third parties." Andalusian, 385 F. Supp.
3d at 154. The court then held that, because the System did not
provide transportation, utility, or other services involving a
"physical system," the Bondholders did not have special revenue
bonds under § 902(2)(A). Id.
Turning to § 902(2)(D), the Title III court stated that
the System served as a conduit for the deferred compensation of
government employees through the Contributions, it did not charge
- 32 -
any fees for its services, the Employers' Contributions were not
derived from a "particular function" of the System, and so
Bondholders did not have special revenue bonds under § 902(2)(D).
Id.
On appeal, the Bondholders argue that the System derives
the Employers' Contributions from its ownership and operation of
the pension system because, as defined in the Bond Resolution, the
System performs its pension functions "due to its statutory right
to receive Employers' Contributions." They define "derive" as "to
take or receive especially from a specific source," citing Derive,
Webster's Ninth Collegiate Dictionary (1986). The Bondholders
also argue that, because the System receives Employers'
Contributions, for that same reason it performs its "particular
functions," and Employers' Contributions are "fees" for providing
pension benefits, the Employers' Contributions are special
revenues under § 902(2)(D).
Neither the Bankruptcy Code nor PROMESA give "derived
from" a special definition. In consequence, we "construe [it] in
accordance with its ordinary or natural meaning." FDIC v. Meyer,
510 U.S. 471, 476 (1994) (citing Smith v. United States, 508 U.S.
223, 228 (1993)). In this context, we interpret "derived from" as
requiring that Employers' Contributions originate in the System's
"particular functions" or its "ownership, operation, or
disposition of" a system of "other services." See Derive,
- 33 -
Webster's Third New International Dictionary (1993) (defining
"derive" as "to have or take origin: ORIGINATE: STEM, EMANATE");
Derive, Merriam-Webster Unabridged Dictionary,
http://unabridged.merriam-webster.com/unabridged/derive (last
visited Jan. 29, 2020) (same); Derive, Oxford English Dictionary
Online, https://oed.com/view/Entry/50613 (last visited Jan. 29,
2020) (defining "derive" as "[t]o flow, spring, issue, emanate,
come, arise, [or] originate").13 The Bondholders' argument fails
to meet this test.
We need look only to the plain language of the statute
to reject the Bondholders' special revenues arguments.14 See Conn.
Nat'l Bank v. Germain, 503 U.S. 249, 254 (1992) ("When the words
of a statute are unambiguous, then, th[e] first canon [of statutory
13 We use the definition of "derive" in its intransitive
sense, as opposed to in its transitive sense (as the Bondholders
do). See Bell Commc'ns Research, Inc. v. Fore Sys., Inc., 62 Fed.
App'x 951, 959 (Fed. Cir. 2003) (interpreting similar "derived
from" language as intransitive and concluding the best definition
for "derive" was "to have or take origin: ORIGINATE: STEM,
EMANATE").
14 The legislative history of § 902(2)(D) also supports our
conclusion. It indicates that Congress intended § 902(2)(D) to
capture miscellaneous revenues accruing from government services
to the public, like "regulatory fees and stamp taxes imposed for
the recording of deeds," H.R. Rep. No. 100-1011, at 7 (1988), as
reprinted in 1988 U.S.C.C.A.N. 4115, 4121; S. Rep. No. 100-506, at
21 (1988), or "tolls or fees relating to a particular service or
benefit," S. Rep. No. 100-506, at 21.
- 34 -
construction] is also the last: 'judicial inquiry is complete.'"
(quoting Rubin v. United States, 449 U.S. 424, 430 (1981))).
The System does not charge any fees, much less any in
which the purported "special revenues" could originate. Employers
do not, as the Bondholders assert, pay the System in exchange for
it later paying pension benefits to employees. Instead, the
employers (and employees) pool retirement savings in the System,
a trust, for the future benefit of the employees. The Employers'
Contributions originate in the work of the employees that generate
the contributions15 and the statutory obligation of employers to
contribute.
Neither the System's "particular function" nor its
"ownership" or "operation" of its system of providing pension
services produces any revenue. Indeed, the Employers'
Contributions, far from deriving from a "particular function" of
the System, come from annual appropriations of the Commonwealth.
P.R. Laws Ann. tit. 3, § 781(g) (repealed 2013). As the Title III
15 The Bondholders argue that, because most government
labor does not actually generate revenue, the Employers'
Contributions are not derived from the labor of the employees.
But this lacks merit. The profitability of the employees is
irrelevant. Under the Enabling Act, an employer must contribute
to the System a percentage of the salary it pays its employee.
P.R. Laws Ann. tit. 3, §§ 781(d), 786-5. This salary, in turn,
originates in the employee's labor. But for the labor of the
employee and this statutory obligation, the employer would not
need to contribute. Accordingly, the Employers' Contributions are
derived from employee labor.
- 35 -
court correctly concluded, the System merely "functions as a
conduit for distribution of Employers' Contributions."
Andalusian, 385 F. Supp. 3d at 154.
As to § 902(2)(A), the Employers' Contributions do not
originate in either the System's ownership or disposition of
pension assets, or its ownership or operation of the pension system
as a whole. That the Puerto Rico legislature may have intended to
direct the Employers' Contributions to the System because it owned
or operated a system of pension services does not mean the
Contributions originate in the System's ownership or operation.
The Contributions originate in, and so are derived from, employee
labor and statutory obligations, both of which occur and exist
separately from any of the System's ownership interests or
operation activities. In consequence, the Employers'
Contributions are not special revenues under § 902(2)(A).16
Similarly, as to § 902(2)(D), that the "particular
functions" of the System relate to the management, investment, and
distribution of these funds does not mean the Contributions
originate in these activities. We conclude that, although the
Contributions may relate to and support the System's functions,
they do not originate in them, analogously to our § 902(2)(A)
16 We need not decide the congressional meaning of "other
services" in § 902(2)(A), as the Employers' Contributions are not
derived from the System's ownership, operation, or disposition of
its system of pension services.
- 36 -
reasoning. The Contributions originate in employee labor and the
statutory obligation. Accordingly, the Employers' Contributions
are not derived from any "particular function" of the System, and
so are not "special revenues" under § 902(2)(D).
V.
Section 552 Applies Retroactively to the Security Agreement
We address the Bondholders' fallback argument that if
our reading of § 552 led to a rejection of their arguments, then
applying § 552 to them would "raise grave constitutional
questions." We disagree. The Bondholders frame the issue as one
of constitutional avoidance. They argue first that Congress has
not explicitly commanded that PROMESA applies § 552 retroactively.
The Bondholders then argue that the canon of constitutional
avoidance requires us to interpret PROMESA as applying § 552
prospectively only, because, in their view, interpreting § 552 to
impair retroactively the Bondholders' liens would violate the
Takings Clause. See Jones v. United States, 529 U.S. 848, 857
(2000) (discussing the role of the canon of constitutional
avoidance "where a statute is susceptible of two constructions"
(quoting U.S. ex rel. Att'y Gen. v. Del. & Hudson Co., 213 U.S.
366, 408 (1909))). The Bondholders argue that, because § 552 did
not apply to liens granted by Puerto Rico and its instrumentalities
at the time when the Bondholders purchased the bonds in 2008, see
Franklin Cal. Tax-Free Tr. v. Puerto Rico, 805 F.3d 322, 329–31
- 37 -
(1st Cir. 2015), aff'd 136 S. Ct. 1938 (2016), then applying § 552
to the Security Agreement after they purchased the bonds would
constitute an unconstitutional taking.
The Title III court addressed similar arguments and
concluded that Congress, by its purpose in enacting PROMESA to
address Puerto Rico's financial crises, clearly intended to apply
§ 552 retroactively. Andalusian, 385 F. Supp. 3d at 154–55. That
ruling was correct.
Courts typically presume Congress intends a statute to
operate only prospectively, but will give retrospective operation
to a statute if such construction is "the manifest intention of
the legislature." Kaiser Aluminum & Chem. Corp. v. Bonjorno, 494
U.S. 827, 844 (1990) (quoting Union Pac. R.R. Co. v. Laramie Stock
Yards Co., 231 U.S. 190, 199 (1913)). PROMESA's plain language
controls here and determines the issue. A court cannot adopt a
statutory construction "plainly contrary to the intent of
Congress" to avoid a constitutional question. Miller v. French,
530 U.S. 327, 341 (2000) (quoting Edward J. DeBartolo Corp. v.
Fla. Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575
(1988)). The canon of constitutional avoidance can apply only
when the statute is ambiguous. See id. (citing Pa. Dep't of Corr.
v. Yeskey, 524 U.S. 206, 212 (1998)).
PROMESA's effective date states that "[s]ubchapters III
and VI shall apply with respect to debts, claims, and liens (as
- 38 -
such terms are defined in section 101 of Title 11) created before,
on, or after [June 30, 2016]." 48 U.S.C. § 2101(b)(2) (emphasis
added). PROMESA incorporates § 552 of the Bankruptcy Code under
Subchapter III. Id. § 2161(a). PROMESA also adopts the Code's
definitions of "lien" and "security interest." Id. § 2161(a),
(c); see also 11 U.S.C. § 101(37) (defining "lien" as a "charge
against or interest in property to secure payment of a debt or
performance of an obligation"); 11 U.S.C. § 101(51) (defining
"security interest" as a "lien created by an agreement"). This
shows that Congress plainly intended to apply § 552 to security
interests and agreements created before the enactment of PROMESA.17
See, e.g., Vartelas v. Holder, 566 U.S. 257, 267 (2012) (stating
17 Given the plain language of the statute, we need not
address the parties' arguments regarding PROMESA's underlying
policy rationale or that the Bondholders waived any argument
regarding § 2101(b)(2).
The Bondholders have not raised in their initial
appellate brief an argument based on their counterclaim V for
declaratory judgment. We do not decide an argument not presented
to us. See Pignons S.A. de Mecanique v. Polaroid Corp., 701 F.2d
1, 3 (1st Cir. 1983). Nor is it clear that we would have
jurisdiction over such a Takings Clause claim if it were made.
See Horne v. Dep't of Agric., 569 U.S. 513, 527 (2013) ("A claim
for just compensation under the Takings Clause must be brought to
the Court of Federal Claims in the first instance, unless Congress
has withdrawn the Tucker Act grant of jurisdiction in the relevant
statute." (quoting E. Enters. v. Apfel, 524 U.S. 498, 520 (1998)
(plurality opinion of O'Connor, J.))).
Indeed, the Bondholders brought a different action in
the Court of Federal Claims under its exclusive Tucker Act
jurisdiction, alleging that the 2017 Amendment effected an
unconstitutional taking of their liens on Employers'
Contributions. Altair, 138 Fed. Cl. at 752–54.
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that a statutory provision applying "before, on, or after" the
statute's enactment date required retroactive application);
Goncalves v. Reno, 144 F.3d 110, 131–32 (1st Cir. 1998) (same).
PROMESA's statutory language clearly expresses an intent
that § 552 apply retroactively, which distinguishes the instant
case from United States v. Security Industrial Bank, 459 U.S. 70
(1982), which the Bondholders argue requires us to give only
prospective effect to PROMESA's incorporation of § 552. This
contention lacks merit. Security Industrial Bank held that "[n]o
bankruptcy law shall be construed to eliminate property rights
which existed before the law was enacted in the absence of an
explicit command from Congress." Id. at 81 (emphasis added).
There, the Supreme Court concluded that 11 U.S.C. § 522(f)(2), a
recently enacted provision of the Bankruptcy Reform Act of 1978,
did not apply retroactively.18 Id. at 82. Whether or not there
is a property right at issue, as said, Congress provided an
explicit command at 48 U.S.C. § 2101(b)(2) to apply PROMESA
retroactively. Congress did not do so for the statute at issue in
Security Industrial Bank. See 459 U.S. at 81.
The Bondholders rely on PROMESA's "[a]pproval of fiscal
plans" provision for their interpretation argument, but that
18 Security Industrial Bank did not address any issues
regarding PROMESA or the application of an existing bankruptcy
provision to a previously unprotected debtor.
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reliance is misplaced. 48 U.S.C. § 2141. The Bondholders argue
that, because PROMESA requires the Board to develop a "Fiscal Plan"
that "respect[s] the relative lawful priorities or lawful liens,
as may be applicable, in the constitution, other laws, or
agreements of a covered territory or covered territorial
instrumentality in effect prior to June 30, 2016," id.
§ 2141(b)(1)(N), Congress intended that PROMESA not alter the
"status quo" existing before PROMESA's enactment. But this
provision governs only the Board's Fiscal Plan, not the operation
of Title III of PROMESA. We cannot read it to find Congress did
not intend for § 552 to apply retroactively, in light of the
express language earlier. We reject the Bondholders' prospective
construction argument.
VI.
Conclusion
We emphasize that we decide each of these three claims
narrowly, based on these specific facts.
Affirmed. Costs are awarded to the Board.
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