Coop. de Ahorro y Cred. de Rin v. COFINA ( 2021 )

United States Court of Appeals
For the First Circuit
No. 19-1391
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.
COOPERATIVA DE AHORRO Y CREDITO DR. MANUEL ZENO GANDIA;
COOPERATIVA DE AHORRO Y CREDITO DE JUANA DIAZ; COOPERATIVA DE
AHORRO Y CREDITO DE RINCON,
Creditors, Appellants,
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 Sales Tax Financing
Corporation, a/k/a Cofina,
Debtors, Appellees,
PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY;
ARISTEIA MASTER L.P.; ASIG INTERNATIONAL LIMITED; CANYON
BALANCED MASTER FUND, LTD.; CANYON BLUE CREDIT INVESTMENT FUND,
L.P.; CANYON DISTRESSED OPPORTUNITY INVESTING FUND II, L.P.;
CANYON DISTRESSED OPPORTUNITY MASTER FUND II, L.P.; CANYON NZ-
DOF INVESTING, L.P.; CANYON VALUE REALIZATION FUND, L.P.; CANYON
VALUE REALIZATION MAC 18 LTD.; CANYON-ASP FUND, L.P.; CANYON-GRF
MASTER FUND II, L.P.; CANYON-SL VALUE FUND, L.P.; CENTURYLINK
INC. DEFINED BENEFIT MASTER TRUST; COMPASS ESMA LP; COMPASS TSMA
LP; CORBIN ERISA OPPORTUNITY FUND, LTD.; CORBIN OPPORTUNITY
FUND, L.P.; CREDIT FUND GOLDEN LTD.; DECAGON HOLDINGS 1, LLC;
DECAGON HOLDINGS 2, LLC; DECAGON HOLDINGS 3, LLC; DECAGON
HOLDINGS 4, LLC; DECAGON HOLDINGS 5, LLC; DECAGON HOLDINGS 6,
LLC; DECAGON HOLDINGS 7, LLC; DECAGON HOLDINGS 8, LLC; DECAGON
HOLDINGS 9, LLC; DECAGON HOLDINGS 10, LLC; EP CANYON LTD., f/k/a
Permal Canyon 10 Ltd.; GN3 SIP LIMITED; GOLDENTREE ENTRUST
MASTER SPC, on behalf of and for the account of Segregated
Portfolio I; GOLDENTREE NJ DISTRESSED FUND 2015 LP; GOLD COAST
CAPITAL SUBSIDIARY X LIMITED; GOLDENTREE 2017K-SC, LTD.;
GOLDENTREE DISTRESSED FUND 2014 LP; GOLDENTREE DISTRESSED MASTER
FUND 2014 LTD.; GOLDENTREE E DISTRESSED DEBT FUND II LP;
GOLDENTREE E DISTRESSED MASTER FUND II LP; GOLDENTREE HIGH YIELD
VALUE FUND OFFSHORE (STRATEGIC), LTD.; GOLDENTREE HIGH YIELD
VALUE MASTER UNIT TRUST; GOLDENTREE INSURANCE FUND SERIES
INTERESTS OF THE SALI MULTI-SERIES FUND, LP; GOLDENTREE MASTER
FUND, LTD.; GOLDENTREE MULTI-SECTOR FUND OFFSHORE ERISA, LTD.;
GOLDENTREE MULTI-SECTOR MASTER FUND ICAV - GOLDENTREE MULTI-
SECTOR MASTER FUND PORTFOLIO A; GOLDENTREE STRUCTURED PRODUCTS -
C LP; GOLDENTREE STRUCTURED PRODUCTS OPPORTUNITIES FUND
EXTENSION HOLDINGS, LLC; GT NM, LP; GUADALUPE FUND, LP; HIGH
YIELD AND BANK LOAN SERIES TRUST; LOUISIANA STATE EMPLOYEES'
RETIREMENT SYSTEM; MA MULTI-SECTOR OPPORTUNISTIC FUND, LP;
PANDORA SELECT PARTNERS, L.P.; ROCK BLUFF HIGH YIELD
PARTNERSHIP, LP; SAN BERNARDINO COUNTY EMPLOYEES RETIREMENT
ASSOCIATION; SB SPECIAL SITUATION MASTER FUND SPC-PORTFOLIO D;
SCOGGIN INTERNATIONAL FUND, LTD.; SCOGGIN WORLDWIDE FUND LTD.;
TACONIC MASTER FUND 1.5 LP; TACONIC OPPORTUNITY MASTER FUND LP;
CANYON VALUE REALIZATION MASTER FUND, L.P.; PAROCHIAL EMPLOYEES'
RETIREMENT FUND OF LOUISIANA; TILDEN PARK INVESTMENT MASTER FUND
LP; WHITEBOX ASYMMETRIC PARTNERS, L.P.; WHITEBOX CAJA BLANCA
FUND, LP; WHITEBOX INSTITUTIONAL PARTNERS, L.P.; WHITEBOX MULTI-
STRATEGY PARTNERS, L.P.; WHITEBOX TERM CREDIT FUND I L.P.;
WINDERMERE IRELAND FUNDS PLC; OFFICIAL COMMITTEE OF UNSECURED
CREDITORS; ARISTEIA CAPITAL, LLC; CANYON CAPITAL ADVISORS, LLC;
GOLDENTREE ASSENT MANAGEMENT LP; TACONIC CAPITAL ADVISORS, L.P.;
TILDEN PARK CAPITAL MANAGEMENT LP; WHITEBOX ADVISORS LLC,
Movants, Appellees,
EDUARDO BHATIA-GAUTIER; JOSE L. DALMAU-SANTIAGO; ROSSANA LOPEZ-
LEON; MIGUEL A. NADAL-POWER; CIRILO TIRADO-RIVERA; ANIBAL JOSE
TORRES-TORRES; PETER C. HEIN; STEPHEN T. MANGIARACINA; SERVICE
EMPLOYEES INTERNATIONAL UNION; UNITED AUTOMOBILE, AEROSPACE &
AGRICULTURAL IMPLEMENT WORKERS OF AMERICA INTERNATIONAL UNION;
PETER C. HEIN; GMS GROUP LLC; LAWRENCE B. DVORES; MARK ELLIOTT;
COOPERATIVA DE AHORRO Y CREDITO DEL VALENCIANO; CAPITULO
AUTORIDAD DE CARRETERAS; CAPITULO INSTITUTO DE CULTURA
PUERTORRIQUENA; CAPITULO DE OFICINA DESARROLLO SOCIOECONOMICO Y
COMUNITARIO; CAPITULO OFICINA DEL PROCURADOR DEL VETERANO;
CAPITULO DE JUBILADOS; MOVIMIENTO DE CONCERTACION CIUDADANA
INC.; RENE PINTO-LUGO; UNION DE EMPLEADOS DE OFICINA Y
PROFESIONALES DE LA AUTORIDAD DE EDIFICIOS PUBLICOS; UNION
INSULAR DE TRABAJADORES INDUSTRIALES Y CONSTRUCCIONES ELECTRICAS
INC.; UNION INDEPENDIENTE DE EMPLEADOS DE LA AUTORIDAD DE
ACUEDUCTOS Y ALCANTARILLADOS; UNION DE EMPLEADOS DE OFICINA
COMERCIO Y RAMAS ANEXAS, PUERTOS; UNION DE EMPLEADOS
PROFESIONALES INDEPENDIENTES; UNION NACIONAL DE EDUCADORES Y
TRABAJADORES DE LA EDUCACION; ASOCIACION DE INNSPECTORES DE
JUEGOS DE AZAR; MANUEL NATAL-ALBELO,
Movants.
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,
and Kayatta, Circuit Judge.**
Guillermo J. Ramos-Luiña for appellants.
Martin J. Bienenstock, with whom Stephen L. Ratner, Jeffrey
W. Levitan, Brian S. Rosen, Mark. D. Harris, Timothy W. Mungovan,
John E. Roberts, Adam L. Deming, Michael A. Firestein, Lary A.
Rappaport, Proskauer Rose LLP were on brief, for debtors-
appellees.
Peter M. Friedman, with whom John J. Rapisardi, Suzzanne
Uhland, and O'Melveny & Myers LLP were on brief, for appellee
* Of the Southern District of New York, sitting by designation.
** Judge Torruella heard oral argument in this matter and
participated in the semble, but he did not participate in the
issuance of the panel's decision. The remaining two panelists
therefore issued the opinion pursuant to 28 U.S.C. § 46(d).
Puerto Rico Fiscal Agency and Financial Advisory Authority.
David M. Cooper, with whom Susheel Kirpalani, Quinn Emanuel
Urquhart & Sullivan LLP, Rafael Escalera, Sylvia M. Arizmendi,
Carlos R. Rivera-Ortiz, Reichard & Escalera LLC were on brief, for
movants-appellees.
March 2, 2021
KAYATTA, Circuit Judge. We consider another appeal
arising out of the Title III debt-restructuring proceedings
commenced by the Financial Oversight and Management Board for
Puerto Rico ("the Board") on behalf of the Puerto Rico Sales Tax
Financing Corporation (COFINA) under the Puerto Rico Oversight,
Management, and Economic Stability Act (PROMESA), 48 U.S.C.
§§ 2101–2241. Following the initiation of the Title III
proceedings, appellants -- various Puerto Rican credit unions
("the Credit Unions") -- filed an adversary proceeding against
several defendants, including the Commonwealth of Puerto Rico, the
Government Development Bank for Puerto Rico, and COFINA. While
that adversary proceeding was pending, the Board proposed a plan
of adjustment ("the Plan") restructuring COFINA's debt by, among
other things, resolving disputes between COFINA and the
Commonwealth of Puerto Rico and between the junior and senior
holders of COFINA's outstanding debt. As most relevant here, over
the Credit Unions' objection, the Plan as finally approved also
called for the dismissal with prejudice of all litigation against
COFINA that arose prior to the Plan's effective date. The Credit
Unions failed to seek a stay of the order approving the Plan and
dismissing their claims against COFINA. The Plan has now been
fully implemented for over two years and given rise to transactions
involving billions of dollars and tens of thousands of individuals.
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For the following reasons, we now dismiss this appeal as equitably
moot.
I.
We have previously chronicled the contentious fight over
Puerto Rico's sales and use tax revenues ("SUT revenues"), which
spurred the Title III proceedings to restructure COFINA. See
Pinto-Lugo v. Fin. Oversight & Mgmt. Bd., Nos. 19-1181 , 19-1182,
19-1960, 2021 WL 438891, at *1-4 (1st Cir. Feb. 8, 2021). So we
repeat only those facts critical to this appeal.
The Commonwealth of Puerto Rico has long been in the
midst of what Congress has described as a "fiscal emergency." 48
U.S.C. § 2194(m)(1). In 2006, to address its inability to fill
budget shortfalls by issuing general obligation bonds ("GO
bonds"), the Commonwealth passed Act 91, which established COFINA,
a public corporation independent from the Commonwealth with the
purpose of issuing non-recourse bonds. See P.R. Laws Ann. tit. 13,
§§ 11a–16. Act 91 financed COFINA bonds by pledging a certain
percentage of the Commonwealth's SUT revenues to the payment of
COFINA bondholders. Conflict over those SUT revenues eventually
led to litigation between the Commonwealth, COFINA bondholders,
and GO bondholders, the latter of whom claimed that the SUT
revenues were "available revenues" which must first be used to
satisfy general public debt under Puerto Rico's Constitution, P.R.
Const. art. VI, § 8. See Lex Claims, LLC v. Fin. Oversight & Mgmt.
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Bd., 853 F.3d 548, 550–51 (1st Cir. 2017). To resolve this
dispute, the Board initiated Title III proceedings on May 5, 2017.
As of that date, the aggregate outstanding principal and interest
on COFINA bonds totaled over $17 billion, a significant portion of
the Commonwealth's sizeable public debt.
On March 22, 2018, while those Title III proceedings
were ongoing, the Credit Unions filed an adversary complaint. They
alleged that prior to the Title III proceedings, the Commonwealth,
COFINA, and other Puerto Rico government entities fraudulently
induced the Credit Unions to purchase COFINA bonds. The Credit
Unions later amended their complaint to add a claim alleging a
violation of the Takings Clause of the United States Constitution.
They also asserted that the claims raised in the adversary
proceeding are non-dischargeable because they alleged violations
of constitutional rights and conduct of a fraudulent nature.
Meanwhile, mediation in the Title III proceedings led to
a settlement between COFINA and the Commonwealth, which allocated
53.65% of the SUT revenues to COFINA and the remainder to the
Commonwealth, and between junior and senior COFINA bondholders,
resolving competing claims to the payments that a reorganized
COFINA would make in the future. Those settlements formed the
basis of the Plan, which provided for a complete restructuring of
COFINA's debt. The Plan also discharged all claims against COFINA
and provided for the dismissal with prejudice of all litigation
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arising from the COFINA restructuring. In that regard, the Plan
stated that "the releases, injunctions and exculpation . . .
constitute an essential component of the compromises reached and
are not severable from the other provisions of this Plan."
The Credit Unions objected to the Plan's discharge of
all claims against COFINA, arguing that the discharge should be
narrowed to exclude the claims they asserted against COFINA and
other governmental entities in their adversary proceeding, which
was (and remains) at the pleading stage. In response, the Plan
was amended to clarify that the Credit Unions were "entitled to
continue pursuit" of their adversary proceeding "against all
parties other than COFINA and Reorganized COFINA."
After hearing argument on January 16 and 17, 2019, the
Title III court overruled all objections to the Plan and, on
February 5, 2019, entered its final approval. Because no party
objected to the Plan's waiver of the typical fourteen-day stay or
otherwise asked the Title III court to stay approval pending any
appeal, the Plan was implemented beginning on February 12, 2019.
One week later, the Credit Unions moved for
reconsideration of the confirmation order, seeking to strike the
provision releasing the claims they asserted against COFINA in
their adversary proceeding. The Title III court denied the motion.
The court explained that the discharge of claims against COFINA
"is a fundamental component of the Plan and of restructuring
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proceedings in general" and found that removing the discharge
provision would cause COFINA "substantial" prejudice, "as the
uncertainty presented by pending litigation after confirmation of
a plan would frustrate the purpose of these Title III proceedings
and could adversely impact the marketability of new bonds issued
pursuant to the Plan." This appeal followed one month later.
II.
A.
The Board and an intervening coalition of senior COFINA
bondholders urge us to dismiss this appeal under the doctrine of
equitable mootness. Under that doctrine, we have long recognized
that "where a reorganization plan has been in place for an extended
period of time after thorough vetting and approval by the
bankruptcy court, there comes a point where 'the impracticability
of fashioning fair and effective judicial relief' cautions against
disturbing the reorganization plan." United Sur. & Indem. Co. v.
López-Muñoz (In re López-Muñoz), 983 F.3d 69, 72 (1st Cir. 2020)
(quoting Rochman v. Ne. Utils. Serv. Grp. (In re Pub. Serv. Co. of
N.H.), 963 F.2d 469, 471 (1st Cir. 1992)). And just recently, we
discussed the doctrine at length in Pinto-Lugo, a set of appeals
contesting the same plan of adjustment challenged by the Credit
Unions here. See 2021 WL 438891, at *4–11. As we explained in
Pinto-Lugo, the decision
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whether to reject an appeal of an order
confirming a plan of reorganization because
the plan has been implemented calls for us to
consider at least three factors: "(1) whether
the appellant pursued with diligence all
available remedies to obtain a stay of
execution of the objectionable order;
(2) whether the challenged plan proceeded to
a point well beyond any practicable appellate
annulment; and (3) whether providing relief
would harm innocent third parties."
Id. at *4 (internal quotation marks and alterations omitted)
(emphasis in original) (quoting PPUC Pa. Pub. Util. Comm'n v.
Gangi, 874 F.3d 33, 37 (1st Cir. 2017)).
Analyzing those factors, we dismissed the Pinto-Lugo
objectors' challenges to the Plan as equitably moot. We found
that the first factor cut sharply against the objectors because
they "failed to object to the waiver of the automatic stay of
confirmation, did not seek any stay pending appeal, neither sought
to expedite the appeal nor objected to requests for extension, and
in fact sought to extend the briefing schedule themselves." Id.
at *9. As to the second factor, we explained that the Plan could
not feasibly be unwound:
Pursuant to the Plan and new bond legislation,
upon consummation of the Plan old COFINA bonds
worth over $17 billion were exchanged for
reorganized COFINA bonds worth over
$12 billion. Those new COFINA bonds have
since changed hands tens of thousands of times
on the open market for over a year, with many
now held by strangers to these proceedings.
In addition, COFINA distributed about
$322 million to creditors, Bank of New York
Mellon (BNYM), as trustee, transferred more
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than $1 billion in disputed SUT revenues to
the Commonwealth and COFINA, and insurers of
the old bonds have paid holders of old bonds
under the Plan. Complicating matters further,
claims have been released and all litigation
arising from the restructuring has been
dismissed with prejudice.
Id. at *8. The third factor also weighed in favor of equitable
mootness, given the "incalculable inequity" that unraveling the
plan would cause to "many thousands of innocent third parties who
have extended credit, settled claims, relinquished collateral and
transferred or acquired property in legitimate reliance on the
unstayed order of confirmation." Id. (quoting In re Pub. Serv.
Co. of N.H., 963 F.2d at 475).
This appeal suffers from the same problems. As in Pinto-
Lugo, the Credit Unions here were anything but diligent in seeking
to obtain a stay or prevent delay: They failed to object to the
waiver of the automatic stay of confirmation, to seek any stay
pending appeal, to request to expedite the appeal, or to object to
requests for extension. In fact, on multiple occasions the Credit
Unions sought to extend the briefing schedule themselves. As to
the second and third factors, the Credit Unions challenge the same
plan that the objectors in Pinto-Lugo sought to overturn, a plan
which has now been fully implemented for over two years and which
has led to tens of thousands of transactions worth billions of
dollars by third parties relying on it in good faith. Upsetting
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the Plan at this late date would throw those transactions into
doubt, harming those third parties.
B.
Notwithstanding the foregoing, the Credit Unions make
six arguments why equitable mootness is inapplicable to their
appeal. First, they contend that the doctrine is inapplicable to
proceedings under PROMESA. Yet we rejected this same argument in
Pinto-Lugo, explaining that nothing in PROMESA undercuts the
equitable nature of a proceeding to approve a plan of adjustment
and that the interests of finality and reliance that undergird the
doctrine in the context of Chapter 9 and 11 bankruptcies apply
with equal force to proceedings under Title III. See 2021 WL
438891, at *6.
Second, the Credit Unions argue that the nature of their
claims cautions against application of the doctrine. To the extent
the Credit Unions rely on the constitutional nature of their
claims, we have previously held that "the presence of underlying
constitutional claims does not act as a per se bar to the
applicability of the doctrine" of equitable mootness. Id. at *7(applying the doctrine despite the presence of constitutional
claims). This is because a "'constitutional right,' or a right of
any other sort, 'may be forfeited in criminal as well as civil
cases by the failure to make timely assertion of the right before
a tribunal having jurisdiction to determine it.'" Henderson v.
- 12 -
United States, 568 U.S. 266, 271 (2013) (quoting United States v.
Olano, 507 U.S. 725, 731 (1993)); see also Bennett v. Jefferson
Cnty., 899 F.3d 1240, 1251 (11th Cir. 2018) (applying equitable
mootness despite the presence of state-based constitutional claims
and explaining that "the mere fact that a potential or actual
violation of a constitutional right exists does not generally
excuse a party's failure to comply with procedural rules for
assertion of the right"). Similarly, the Credit Unions' reliance
on the allegedly non-dischargeable nature of their claims goes to
the merits of their objections to plan approval rather than to the
ramifications of their failures to try to forestall plan
implementation. And while the merits of an objection may perhaps
play some role in weighing the pros and cons of the equitable
relief being sought, certainly the merits cannot be determinative.
Otherwise, equitable mootness would apply only when not needed.
See Pinto-Lugo, 2021 WL 438891, at *9.
Third, the Credit Unions contend that dismissing their
appeal as equitably moot would violate their due process right to
appeal. Suffice to say, if this were so, the doctrine of equitable
mootness -- which every circuit has adopted in some form, see id.at *4 -- would not exist. More to the point, the Credit Unions
have not been denied any right to appeal. To the contrary, they
have briefed their case and presented oral argument on the various
issues raised by their appeal. Although in denying this appeal as
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equitably moot we will not reach the merits of those issues, that
does not amount to a denial of the Credit Unions' right to due
process, just as dismissal of a cause of action based on an
affirmative defense such as laches does not violate a litigant's
right to due process.
Fourth, the Credit Unions vaguely assert that the Plan's
confirmation was "steamrolled," presumably suggesting that the
Plan proponents have unclean hands. But, as noted, the Credit
Unions received notice of the Plan, objected to it in writing,
participated in the confirmation hearing, and had their objection
heard and addressed by the court. They were "steamrolled" only in
that they lost quickly.
Fifth, trying to fight fire with fire, the Credit Unions
argue that appellees are equitably estopped from asserting that
the Credit Unions' claims are equitably moot because appellees
"represented that in the confirmation process [the Credit Unions]
should have had the opportunity to assert them." Specifically,
the Credit Unions point to appellees' contention in the adversary
proceeding that "[u]ntil a plan of adjustment is filed that does
not provide for payment in full of any claims [the Credit Unions]
may have, any decisions on (or requests related to)
dischargeability are premature." That assertion, however, was
correct: Had the Plan allowed the Credit Unions' claims, there
would have been no need to litigate dischargeability. And, as we
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have repeatedly noted, the Credit Unions had ample opportunity to
object to the discharge before the Title III court.
Finally, the Credit Unions argue that their protection
and the protection of their members and depositors "would be
aligned with the policy objectives of a Plan of Adjustment," and
so the "failure to protect [them] and their members . . . would
defeat" the purpose of the Plan. But reversing the order approving
the Plan would by no means inevitably provide any benefit to the
Credit Unions and their members. It would imperil the roughly 50%
of bond value preserved by the Plan. See Pinto-Lugo, 2021 WL
438891, at *2. And it would leave the Credit Unions with a claim
against a debtor that could well have no assets with which to pay
unsecured claims. In any event, trying to undo the Plan at this
point would hardly further the Plan's policy objectives. To the
contrary, it would reverse or at least call into question the
"important forward motion" the Plan provides to "the
Commonwealth's economic recovery." Id. at *8.
C.
Unable to show that the equitable mootness doctrine is
inapplicable to their case, the Credit Unions assert a variety of
reasons why the equitable mootness factors do not actually favor
dismissal.
As to "whether the appellant pursued with diligence all
available remedies to obtain a stay of execution of the
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objectionable order," id., at *4 (alteration omitted) (emphasis in
original) (quoting PPUC Pa. Pub. Util. Comm'n, 874 F.3d at 37),
the Credit Unions do not contest that they repeatedly failed to
seek a stay of the confirmation order. Rather, they argue that
"preservation of [their] rights did not require staying the
Plan . . . but merely limiting the releases and discharge to be
granted to COFINA." This argument, however, ignores the fact that
the discharge could only be limited by modifying the Plan. The
Credit Unions also argue that they timely sought to challenge the
Plan through the filing of their objections and by their oral
presentation at the confirmation hearing. But objecting to the
merits of a Plan is simply not the same as asking that the Plan
approval order be stayed while those objections are considered on
appeal.
The Credit Unions next take issue with "whether
providing relief would harm innocent third parties." PPUC Pa.
Pub. Util. Comm'n, 874 F.3d at 37. In that regard, they argue
that because "COFINA provides no public services, no
citizens . . . [would] be affected by the modification or delay of
the Plan." Along similar lines, they contend that the third
parties trading COFINA bonds, particularly certain hedge funds,
are not "innocent" parties but instead were "active participants
in the use of the bankruptcy proceeding to profit at the expense
of" COFINA and its "traditional investors." But the restructured
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COFINA bonds are traded on public markets and have changed hands
tens of thousands of times since confirmation of the Plan. It is
simply implausible that all, or even most, current COFINA
bondholders were involved in the Title III proceedings. And given
the existence of these numerous innocent third parties, whether
COFINA itself provides public services is irrelevant.
Undeterred, the Credit Unions point to provisions of the
Plan that exclude certain claims against BNYM, the bond trustee,
from the releases, and suggest that if those claims are
permissible, then the continuation of their claims against COFINA
would not disrupt the Plan. Those provisions, however, do not
permit any claims against COFINA. Indeed, every claim against
COFINA, to the extent not satisfied in full, was discharged by the
Plan. The fact that the Plan permits certain claims against BNYM,
just as it allows the Credit Unions' claims against non-COFINA
defendants, in no way suggests that permitting the Credit Unions
to pursue claims against COFINA would not disrupt the Plan or the
marketability of COFINA bonds.
The Credit Unions also contend that there is no
evidentiary support for the idea that permitting their claims would
upend the Plan. We long ago noted, however, that "substantial
consummation" of a plan of reorganization "raises a 'strong
presumption' that an appellate court will not be able to fashion
an equitable and effective remedy." In re Pub. Serv. Co. of N.H.,
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963 F.2d at 473 n.13 (quoting In re AOV Indus., Inc., 792 F.2d
1140, 1149 (D.C. Cir. 1986)). On top of that presumption, the
Plan states that "the releases, injunctions and exculpation . . .
constitute an essential component of the compromises reached and
are not severable from the other provisions of this Plan." See In
re Millennium Lab Holdings II, LLC, 945 F.3d 126, 143 (3d Cir.
2019) (holding that "striking the release provisions as to Voya
would certainly undermine the plan" because "the plan says that
the settlement payment . . . could not be compelled absent full
and complete releases from all of Millennium’s pre-bankruptcy
lenders, including Voya" (emphasis in original)); see also In re
Charter Commc’ns, Inc., 691 F.3d 476, 485 (2d Cir. 2012) (noting
that, although "a nonseverability clause standing on its own cannot
support a finding of equitable mootness," such a clause "may be
one indication that a particular term was important to the
bargaining parties").
Additionally, in approving the Plan, the Title III court
found that the Plan
incorporates a complex series of interrelated
compromises and settlements that resolve the
most significant potential obstacle to
confirmation of a plan of adjustment.
Moreover, since the compromises and
settlements are inextricably interwoven, they
all hinge on one another and the approval of
all of these compromises and settlements is
required in order to satisfy the conditions to
the Effective Date set forth in the Plan.
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And, as we have already explained, in denying the Credit Unions'
motion for reconsideration, the court further found that the
release of claims against COFINA "is a fundamental component of
the Plan" and that removing the release would cause COFINA
"substantial" prejudice, "as the uncertainty presented by pending
litigation after confirmation of a plan would frustrate the purpose
of these Title III proceedings and could adversely impact the
marketability of new bonds issued pursuant to the Plan."
The Credit Unions' only response to these findings is
that the financial value of the relief they seek amounts to only
four tenths of one percent of the restructured debt of COFINA. We
rejected a similar argument in Pinto-Lugo, declining to grant
relief involving amounts only slightly larger (in relation to the
$12 billion of restructured COFINA debt) than those claimed by the
Credit Unions. We did so because the Plan
rested at base on the [Title III] court's
approval of a settlement between the
Commonwealth and COFINA pursuant to which the
Commonwealth retained 46.35% of SUT revenues.
The Title III court could approve or
disapprove the plan; no one explains how the
Title III court could have successfully
compelled the Commonwealth to settle its
adversary proceeding against COFINA for less
than the 46.35% provided for in the approved
settlement. See 48 U.S.C. § 2165. So it would
seem to follow that we, too, could not "tweak"
the plan by ordering the Commonwealth to
settle for 46.35% minus $316 million. In
short, we face an up-or-down decision --
affirm or vacate Plan approval. And because
no one sought a stay of the plan approval,
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vacating approval is precisely what would
trigger a hopeless effort to unscramble the
eggs.
2021 WL 438891 at *10.
So too here, the Credit Unions fail to explain how the
Title III court could successfully compel COFINA to accept the
Plan without the release of all claims against it, particularly in
light of the COFINA-Commonwealth settlement's carefully calibrated
division of SUT revenues, which could be upset if the release were
modified as the Credit Unions request. See 48 U.S.C. § 2165. Nor
do the Credit Unions explain how their recovery from COFINA of a
judgment of many millions of dollars would not adversely affect
the thousands of innocent purchasers of new COFINA bonds. So it
would seem to follow that we face the same up-or-down decision we
faced in Pinto-Lugo -- affirm or vacate Plan approval. This
conclusion is further confirmed by the Credit Unions' own
description of relief they seek on appeal, which recognizes that
the "Judgment confirming COFINA's plan of adjustment must be
reversed" before any modification of the Plan would be possible.
But just as in Pinto-Lugo, because the Credit Unions failed to
seek a stay of the Plan's implementation, granting such relief
would be as futile as squeezing the toothpaste back into the tube.
See In re Specialty Equip. Cos., 3 F.3d 1043, 1049 (7th Cir. 1993)
(dismissing appeal as equitably moot because nullification of non-
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debtor third-party releases "would amount to imposing a different
plan of reorganization on the parties").
The Credit Unions also point to Samson Energy Resources
Co. v. Semcrude, L.P., in which the Third Circuit rejected an
attempt to dismiss an appeal as equitably moot. 728 F.3d 314 (3d
Cir. 2013). In Samson, the appellants sought to modify a confirmed
Chapter 11 plan so that they could go forward with an adversary
proceeding. The amount at issue was only $207,300, approximately
0.13% of the funds set aside under the plan for the class to which
the appellants belonged and just 0.01% of the $2 billion
reorganized by the plan. Id. at 324.1 Given the small amounts at
issue and the debtor's "robust financial health" post-bankruptcy,
id. at 325, the court found that the debtor's financial well-being
would not be threatened by allowing appellant's claims to proceed,
id. at 325-26, nor would any other third-party be negatively
impacted, id. The court also found that there was no risk that
allowing the appellants' claims to proceed would lead to any other
claims against the debtor. Id. at 324.
1 Although the appellants' adversary proceeding was a
putative class action with potential liability of approximately
forty to eighty million dollars, no class had been certified at
the time of the appeal, nor was it clear how many of the class
members' claims may have been precluded due to their acquiescence
to the plan of reorganization. Id. Without more clarity about
the class, the court found premature any fears of upending the
plan of reorganization. Id. at 324-25.
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Here, by contrast, there is no reason to expect that
COFINA would have anywhere near the available unpledged funds
necessary even to begin paying the Credit Unions' claims. There
would also be no principled basis for allowing the Credit Unions'
claims to proceed and not allowing, for example, the claims of the
Elliott objectors in Pinto-Lugo. While the sums claimed by the
Credit Unions and the Elliott objectors are small in relation to
the amount of pledged revenues that flow through COFINA, they could
still result in liability on the order of nine figures. Such
substantial liability might well threaten COFINA's solvency, given
its inability to divert pledged SUT revenues, thereby upsetting
the central aim of the Plan. And, as set forth above, the Title III
court specifically found that permitting the Credit Unions' claims
could disrupt the marketability of the restructured COFINA bonds,
which would harm tens of thousands of innocent bondholders and
threaten the Commonwealth's economic recovery. Furthermore, if
the claims are valid, then the Credit Unions offer no reason why
liability would not inure to the Commonwealth, which would be more
likely to have assets to pay than would COFINA. Because, as we
have noted, the Plan does not bar proceeding against anyone other
than COFINA, the practical harm to the Credit Unions would appear
to be speculative.
Finally, the Credit Unions argue that one of the purposes
of equitable mootness -- finality of confirmed plans of
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reorganization -- would not be served by denial of this appeal
because "Puerto Rico's fiscal crisis will not be resolved by
COFINA’s Plan of Adjustment." Expanding on this argument, the
Credit Unions note that Title III proceedings regarding the
Commonwealth and other governmental agencies are ongoing and that
unspecified issues surrounding COFINA's plan of adjustment are
still being litigated. Similarly, the Credit Unions argue that
"[m]arket participants are aware that finality is only achieved
upon exhaustion of all legal remedies and expiration of all
applicable terms" and that restructured COFINA bonds are "subject
to market risks." Yet we have long affirmed the "important public
policy favoring orderly reorganization and settlement of debtor
estates by 'affording finality to the judgments of the bankruptcy
court.'" In re Pub. Serv. Co. of N.H., 963 F.2d at 471–72 (quoting
In re AOV Indus., Inc., 792 F.2d at 1147). Furthermore, that other
proceedings may be ongoing or that Puerto Rico's fiscal recovery
remains a work in progress does not change the fact that the Plan
has been fully implemented for over two years. Whatever risks
market forces or those other proceedings may pose to Puerto Rico's
recovery, we decline to add to those risks by ruling in favor of
parties who, by their inaction, rendered the relief they seek
impossible without causing harm to many other innocent parties and
the public.
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III.
For the foregoing reasons, we dismiss as equitably moot
the Credit Unions' challenge to the Title III court's confirmation
of the Plan.
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