Assured Guaranty Corp. v. Fin. Oversight & Mgmt. Bd. for Puerto Rico (In Re Fin. Oversight & Mgmt. Bd. for Puerto Rico)
Assured Guaranty Corp. v. Fin. Oversight & Mgmt. Bd. for Puerto Rico (In Re Fin. Oversight & Mgmt. Bd. for Puerto Rico)
Opinion
*124
Appellants, financial guarantee insurers that had insured bonds from the Puerto Rico Highway and Transportation Authority ("PRHTA") (hereinafter the "Insurers"), appeal from the dismissal of their Amended Complaint in an adversary proceeding arising within the debt adjustment proceeding that the Financial Oversight and Management Board (the "Board") commenced on behalf of the PRHTA under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"),
see
I. Background
1. PROMESA
This is one of a sequence of appeals related to PROMESA, a statute enacted by Congress "in June 2016 to address an ongoing financial crisis in the Commonwealth of Puerto Rico."
In re Fin. Oversight & Mgmt. Bd. for Puerto Rico
,
2. The PRHTA Bonds
In 1965, the Commonwealth of Puerto Rico ("the Commonwealth") created the PRHTA, a public corporation, to "oversee and manage the development of roads and various means of transportation" in the Commonwealth by passing Act No. 74-1965, known as the " Enabling Act."
Assured Guar. Corp.
v.
Commonwealth of Puerto Rico (In re Fin. Oversight & Mgmt. Bd. of P.R.)
,
3. The Debt Adjustment Proceeding
In March 2017, after the enactment of PROMESA and appointment of the Board, 2 the Board certified a financial plan by which the PRHTA Pledged Special Revenues formerly being deposited in the Reserve Accounts would instead be diverted and subsumed into the general revenues of Puerto Rico. On May 3 and 21, 2017, the Board commenced debt adjustment proceedings on behalf of the Commonwealth and the PRHTA, respectively, pursuant to Title III of PROMESA.
BNYM continued to make payments to the PRHTA bondholders through June 20, 2017, when the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF" for its Spanish acronym), on behalf of PRHTA, instructed BNYM to cease making scheduled payments from the Reserve Accounts. The reasoning behind the instruction was that making such payments would constitute an act "to exercise control" over PRHTA's property in violation of the automatic stay that arose under
In June 2017, the Insurers initiated adversary proceedings against the Commonwealth, the PRHTA, the Board, the AAFAF, the Governor of the Commonwealth, and other individual defendants in their official capacity (collectively the "Debtors"). 4 In their Amended Complaint, which included four claims for relief, the Insurers essentially alleged that failure to continue to remit the PRHTA Pledged Special Revenues into the Reserve Accounts and pay them as payments come due violates Chapter 9 of the Bankruptcy Code. Specifically, the Insurers' first claim sought declarations that the PRHTA Bonds were secured by special revenues, that the application of such revenues to payments on the bonds is exempted from the automatic stay imposed by Title III of PROMESA, and that failure to continue to remit the PRHTA Pledged Special Revenues during the pendency of the Title III proceedings is in violation of Sections 922(d) and 928 of Chapter 9 of the Bankruptcy Code (which Section 301 of PROMESA makes applicable to Title III proceedings). The second claim sought declarations that the funds held in the Reserve Accounts are: (a) property of the PRHTA bondholders, (b) held in trust for the benefit of the bondholders, and (c) subject to a lien in their favor. They further sought a declaration that the PRHTA lacked enough property interest to prevent the disbursement of the funds currently held in the Reserve Accounts unless or until the PRHTA Bonds are fully retired or defeased. The third claim sought injunctive relief against further alleged violations of Sections 922(d) and 928 of the Bankruptcy Code. Finally, the fourth claim sought injunctive relief requiring the PRHTA to resume remittance of the special revenues securing the PRHTA Bonds in accordance with Sections 922(d) and 928 of the Bankruptcy Code.
The Debtors moved to dismiss the Amended Complaint under Fed. R. Civ. P. 12(b)(1) and 12(b)(6), for lack of subject matter jurisdiction and failure to state a claim upon which relief could be granted. They essentially argued that the Amended Complaint failed to state a claim for relief because neither Section 922(d) nor Section 928 of the Bankruptcy Code requires PRHTA to remit payment of special revenues to bondholders during the pendency of the Title III proceedings nor do those statutes create a cause of action for bondholders to compel payment. Further, they claimed the PRHTA bondholders did not have a property interest in the funds in the Reserve Accounts.
After holding a hearing, the district court granted the motion to dismiss.
Assured
,
The Insurers appeal from the district court's dismissal of the first, third, and fourth claims of their Amended Complaint.
II. Discussion 6
We review
de novo
the district court's grant of a motion to dismiss. In so doing, we treat all well-pleaded facts in the complaint as true and draw all reasonable inferences in favor of the plaintiff.
Ocasio-Hernández
v.
Fortuño-Burset
,
Whether the Amended Complaint properly pleads a claim for relief as to the Insurers' first, third, and fourth claims hinges on the statutory construction of Sections 928(a) and 922(d) of the Bankruptcy Code. We thus turn to those statutes and provide some statutory context necessary to understand the parties' arguments.
Section 552(a) of the Bankruptcy Code establishes generally that "property acquired
*128
by the ... debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case."
(a) Notwithstanding section 552(a) of this title and subject to subsection (b) of this section, special revenues acquired by the debtor after the commencement of the case shall remain subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.
(b) Any such lien on special revenues, other than municipal betterment assessments, derived from a project or system shall be subject to the necessary operating expenses of such project or system, as the case may be.
The Insurers argue that Section 928(a) not only overrides Section 522(a) and thus preserves prepetition liens, but also requires continued payments of special revenue bonds, such as the PRHTA Bonds, during the pendency of the Title III proceeding to avoid debtor misuse of the property subject to the lien.
It is elementary that in resolving a dispute over the meaning of a statute we begin with the language of the statute itself.
Landreth Timber Co.
v.
Landreth
,
We find Section 928(a)'s plain language unambiguous. Section 928(a) simply provides that consensual prepetition liens on special revenues will remain in place after the filing of the petition, despite the fact that Section 552(a) generally protects property acquired after the petition from being subject to prepetition liens.
7
That is, without Section 928(a), pursuant to Section 552(a), consensual prepetition liens would be invalidated with respect to special revenues acquired by the debtor post-petition. As the district court found, Section 928, however, is silent about enforcement of liens or "payment of the secured obligation," and does not order any action on the part of the debtor.
Assured
,
The Insurers contest the district court's conclusion that this reading of Section 928 is supported by the legislative history of the 1988 Municipal Bankruptcy Amendments ("1988 Amendments"), Pub. L. No. 100-597 (1988).
See
Assured
,
The Insurers next argue that Section 922(d) of the Bankruptcy Code requires Debtors to continue to turn over the revenues allegedly securing the PRHTA Bonds and exempts bondholder enforcement actions from the automatic stays of Sections 362 and 922(a) of the Bankruptcy Code.
Pursuant to Section 362, an automatic stay goes into effect upon the filing of a bankruptcy petition.
See
Section 922(a) expands the scope of the Section 362 automatic stay in Chapter 9 cases to "action[s] or proceeding[s] against an officer or inhabitant of the debtor that seeks to enforce a claim against the debtor," and to "enforcement of a lien on or arising out of taxes or assessments owed to the debtor."
9
*130
Section 922 further provides that notwithstanding the automatic stays under Sections 362 and 922(a), "a petition filed under [Chapter 9] does not operate as a stay of application of pledged special revenues in a manner consistent with [S]ection [928]
[
10
]
of [Chapter 9] to payment of indebtedness secured by such revenues."
The Insurers take issue with the district court's conclusion that although Section 922(d)"excepts the 'application' of special revenues from the automatic stay" -- and thus allows for voluntary payment by the debtor, "including the application of the debtor's funds held by a secured lender to secure indebtedness" -- it does not except bondholder actions seeking to enforce special revenue liens,
Assured
,
Again, we turn first to the statute's language to determine its meaning.
Landreth
,
*131
Assured
,
Our construction of Section 922(d) complies with the tenet that in construing statutory provisions we must be mindful of "the broader context of the statute as a whole" and avoid creating a conflict between various sections.
Robinson
,
*132 Furthermore, contrary to the Insurers' contention, our construction does not render Section 922(d) superfluous. Before Congress adopted the 1988 Amendments there was ample reason to believe that Section 362(a) stayed a creditor from accepting voluntary payments from a debtor or stayed a creditor from applying debtor funds already in the creditor's possession (as security) to the debt. See , e.g. , 6 Collier on Bankruptcy ¶ 362.03 ("[I]nnocent conduct such as the cashing of checks received from account debtors of accounts assigned as security may be a technical violation [of Section 362(a)(6) ]."). Thus, Section 922(d) made clear that a creditor holding pledged special revenues as security may apply those revenues to outstanding debt, notwithstanding the automatic stay.
The Insurers also point us to
In re Jefferson Cty.
,
The Insurers also challenge the district court's conclusion that its reading of Section 922(d) is consistent with the legislative history of the 1988 Amendments.
See
Assured
,
We thus agree with the district court that Section 922(d) only makes clear that the automatic stay is not an impediment to continued payment, whether by the debtor or by another party in possession of pledged special revenues, of indebtedness secured by such revenues.
See
Assured
,
The Insurers and their amici make several arguments rooted in social policy and consideration of fairness urging the court to adopt their proposed broader construction of Sections 928(a) and 922(d), and advance their theory about the possible effect upholding the district court's interpretation might have on the municipal bonds market. Our duty, however, is to interpret the law, not to re-write it.
See
Obergefell
v.
Hodges
, --- U.S. ----,
III. Conclusion
In sum, Sections 928(a) and 922(d) permit, but do not require, continued payment during the pendency of the bankruptcy proceedings. The two provisions stand for the premise that any consensual prepetition *133 lien secured by special revenues will survive the period of municipal bankruptcy, and, accordingly, municipalities can elect to voluntarily continue payment on these debts during the course of the bankruptcy proceedings so as to not fall behind and thus be at risk of being unable to secure financing in the future. Because neither provision requires Debtors to continue to remit the PRHTA Pledged Special Revenues into the Reserve Accounts or continue payments to bondholders during the pendency of the Title III proceedings, the district court properly dismissed the first, third, and fourth claims of the Amended Complaint.
Affirmed .
Each fund established by the Resolutions consists of a bond service fund, a bond redemption fund, and a reserve fund.
For our decision regarding the constitutionality of the Board members' appointment,
see
Aurelius Inv., LLC
v.
Commonwealth of P.R.
,
As of July 3, 2017, the Reserve Accounts contained cash and investments valued at approximately $76 million.
The Insurers are subrogated to the rights of the PRHTA bondholders whose claims they have paid.
The district court found the second claim for relief to be premised on the following three different theories of bondholder interests in the Reserve Accounts: that (1) the PRHTA bondholders were outright owners of the funds in the Reserve Accounts and thus neither the automatic stay nor Section 305 of PROMESA barred them from collecting the funds; (2) the funds in the Reserve Accounts are held in trust for the benefit of the PRHTA bondholders "under terms that exclude cognizable property interests of PRHTA in those funds"; and (3) the funds in the Reserve Accounts are held in trust by BNYM for the benefit of the PRHTA bondholders.
Assured
,
We need not address the district court's dismissal of the Insurers' second claim for relief because the Insurers have failed to develop on appeal any argument on the PRHTA bondholders' property interest in the Reserve Account funds.
See
United States
v.
Zannino
,
Because the district court correctly decided the issues, and persuasively explained its reasoning in a detailed opinion, we see no reason to write at length.
See
Moses
v.
Mele
,
For its part, Section 928(b) allows debtors to offset "necessary operating expenses" of a "project or system" from "[a]ny such lien on special revenues" "derived from [that] project or system."
Section 362(b) establishes certain exceptions to Section 362(a)'s automatic stay, none applicable here.
The statute reads as follows:
A petition filed under this chapter operates as a stay, in addition to the stay provided by section 362 of this title, applicable to all entities, of--
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against an officer or inhabitant of the debtor that seeks to enforce a claim against the debtor; and
(2) the enforcement of a lien on or arising out of taxes or assessments owed to the debtor.
The statute states "section 927," which the parties and the district court agree appears to be a scrivener's error.
Specifically, Section 904 of the Bankruptcy Code establishes:
Notwithstanding any power of the court, unless the debtor consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with: (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor's use or enjoyment of any income-producing property.
The Insurers argue that Section 305 poses no impediment to their more liberal construction of Section 922(d). Citing
In reCity of Stockton
,
First, if Section 922(d) clearly mandated what the Insurers contend, their argument would be stronger, and we would need to examine whether one section of PROMESA controls over another. But, when the plain language of a section is clear, we will not assign it an alternate interpretation that clashes with other clearly written sections. As Congress knows how to command performance when it wants to, so too does it know how to create exceptions to general rules when that is its intent. And, while Section 922(d) provides an exception from the automatic stays of Sections 362 and 922(a), it does not similarly provide an exception from Section 904 of the Bankruptcy Code.
Second, the cases cited by the Insurers are clearly inapposite. Section 305, like Section 904, prohibits judicial interference with the property and revenues of the debtor "unless the Oversight Board consents or the plan so provides."
Reference
- Full Case Name
- In RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as Representative for the Commonwealth of Puerto Rico; The Financial Oversight and Management Board for Puerto Rico, as Representative for the Puerto Rico Highways & Transportation Authority, Debtors. Assured Guaranty Corporation; Assured Guaranty Municipal Corporation; Financial Guaranty Insurance Company; National Public Finance Guarantee Corporation, Plaintiffs, Appellants, v. the Financial Oversight and Management Board for Puerto Rico, as Representative for the Commonwealth of Puerto Rico; Financial Oversight and Management Board for Puerto Rico; Puerto Rico Fiscal Agency and Financial Advisory Aurthority; The Financial Oversight and Management Board for Puerto Rico, as Representative for the Puerto Rico Highways & Transportation Authority ; Ricardo Rosselló-Nevares; Gerardo José Portela-Franco; Carlos Contreras-Aponte; José Iván Marrero-Rosado; Raúl Maldonado-Gautier; Natalie A. Jaresko, Defendants, Appellees, José B. Carrión III; Andrew G. Briggs; Carlos M. García; Arthur J. González; José R. González; Ana J. Matosantos; David A. Skeel, Jr.; Christian Sobrino, Defendants.
- Cited By
- 50 cases
- Status
- Published