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.
THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative for the Puerto Rico Highways & Transportation Authority; HON. CARLOS CONTRERAS-APONTE, in his official capacity as Executive Director of Puerto Rico Highways & Transportation Authority; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative for the Commonwealth of Puerto Rico; HON. RICARDO ROSSELLO NEVARES, in his official capacity as Governor of the Commonwealth of Puerto Rico; HON. RAUL MALDONADO GAUTIER, in his official capacity as Secretary of Treasury of the Commonwealth of Puerto Rico; HON. JOSE IVAN MARRERO ROSADO, in his official capacity as Executive Director of the Office of Management & Budget; PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY; HON. GERARDO JOSE PORTELA FRANCO, in his official capacity as Executive Director of the Puerto Rico Fiscal Agency and Financial Advisory Authority, Defendants, Appellees. PEAJE INVESTMENTS LLC, Plaintiff, Appellant,
APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF PUERTO RICO [Hon. Laura Taylor Swain, U.S.
District Judge] [*]
Eric Brunstad, Jr., with whom Allan S. Brilliant, Robert J.
Jossen, Andrew C. Harmeyer, Dechert LLP, Dora L. Monserrate
Peñagarícano, and Monserrate Simonet &
Gierbolini, LLC were on brief, for appellant.
Jeffrey W. Levitan, with whom Timothy W. Mungovan, Martin J.
Bienenstock, Stephen L. Ratner, Mark D. Harris, Michael A.
Firestein, Lary A. Rappaport, John E. Roberts, Pro is kauer
Rose LLP, Hermann D. Bauer, and O'Neill & Borges LLC
were on brief, for appellees The Financial Oversight and
Management Board for Puerto Rico, as representative of the
Commonwealth of Puerto Rico and the Puerto Rico Highways and
J. Rapisardi, Peter Friedman, Elizabeth L. McKeen, and
O'Melveney & Myers LLP, on brief for appellees Puerto
Rico Fiscal Agency and Financial Advisory Authority and Hon.
Gerardo Jose Portela Franco.
Castellanos and Development & Construction Law Group LLC
on brief for appellee Hon. Carlos Contreras Aponte.
Vázquez Garced, Secretary of Justice, Luis R.
Román Negrón, Solicitor General of Puerto Rico,
Department of Justice, on brief for appellees Hon. Ricardo
Antonio Roselló Nevares, Hon. Raúl Maldonado
Gautier, and Hon. José Iván Marrero Rosado.
Howard, Chief Judge, Kayatta, Circuit Judge, and Torresen,
Chief U.S. District Judge. [**]
KAYATTA, Circuit Judge.
asked for the second time to weigh in on Peaje Investments
LLC's claim that what it characterizes as its
"collateral" is being permanently impaired. Peaje
is the beneficial owner of $65 million of uninsured bonds
issued by the Puerto Rico Highways and Transportation
Authority ("Authority"). Peaje alleges that its
bonds are secured by a lien on certain toll revenues of the
Authority and that, in response to Puerto Rico's
financial crisis, the Authority and the Commonwealth of
Puerto Rico ("Commonwealth") are diverting funds to
which Peaje believes it is entitled under the lien and using
them for purposes other than paying the bonds. Because both
the Authority and the Commonwealth have commenced bankruptcy
cases under Title III of the Puerto Rico Oversight,
Management, and Economic Stability Act ("PROMESA"),
48 U.S.C. §§ 2101-2241, Peaje instituted the
adversary proceedings now on consolidated appeal to challenge
this diversion. Despite the novelty and complexity of the
bankruptcies from which this case arose, three narrow rulings
dispose of the appeal now before us: First, the district
court did not abuse its discretion in limiting Peaje to its
argument that it holds a statutory lien on certain toll
revenues of the Authority. Second, Peaje does not hold such a
lien. And third, we vacate the district court's
alternative reasons for denying relief so that they may be
reconsidered de novo on a comprehensive, updated record now
that it is clear that Peaje has no statutory lien.
Authority was formed in 1965 as a public corporation and
instrumentality of the Commonwealth. Pursuant to its enabling
act ("Act" or "Enabling Act"), it may
borrow money, issue bonds, and secure those bonds with
pledges of revenues. P.R. Laws Ann. tit. 9 § 2004(1). In
1968, the Authority adopted Resolution No. 68-18 (the
"1968 Resolution" or the "Resolution").
See Puerto Rico Highway Authority, Resolution No.
68-18, available at
In order to provide additional funds for the construction of
roads, bridges, and other facilities, the 1968 Resolution
provided for the issuance of bonds. Id. Art. II,
Resolution guaranteed that the Authority would "promptly
pay the principal of and the interest on every bond
issued," but that it would do so "solely from
Revenues and from any funds received by the Authority for
that purpose from the Commonwealth which Revenues and funds
are hereby pledged to the payment thereof in the manner and
to the extent" provided by the Resolution. Id.
Art. VI, § 601. The Resolution established a special
account called the "Sinking Fund," which itself
contains three separate accounts: the Bond Service Account,
the Redemption Account, and the Reserve Account. Id.
Art. IV, § 401. The revenues (and any other pledged
funds) deposited in these accounts were to be held in trust
by the "Fiscal Agent," a bank or trust company
appointed by the Authority, until, in the case of the Bond
Service Account, they were applied to the principal and
interest due on the bonds. Id. Art. IV, § 402.
Pending the application of these funds, the Resolution
provided that the money "shall be subject to a lien and
charge in favor of the holders of the bonds . . . and for the
further security of such holders until paid out or
transferred." Id. Art. IV, § 401. Peaje is
the beneficial owner of various bonds issued pursuant to the
1968 Resolution, with maturity dates ranging from 2023 to
2036. Peaje's basic position is that it holds, as
security for its bonds, a lien on toll revenues generated
from three specific highways maintained by the Authority. It
further contends that its lien extends not just to toll
revenues currently held by the Fiscal Agent, but also to the
Authority's toll revenues before they are deposited with
April 2016, in response to growing economic problems in
Puerto Rico, the Commonwealth enacted the Puerto Rico
Emergency Moratorium and Financial Rehabilitation Act,
pursuant to which then-Governor Alejandro
García-Padilla issued several executive orders that
suspended the Authority's obligation to deposit toll
revenues with the Fiscal Agent. Peaje contends that, as a
result, the Authority and the Commonwealth began using the
toll revenues for purposes other than those allowed by the
Resolution, including to pay operating expenses. In July
2016, Peaje filed suit in district court to challenge this
diversion of funds. But Congress had just enacted PROMESA,
instituting a temporary stay of all proceedings against the
Commonwealth and its instrumentalities. See 48
U.S.C. § 2194(b). Peaje therefore requested relief from
the temporary stay, pursuant to PROMESA section 405(e)(2), 48
U.S.C. § 2194(e)(2), patterned after section 362(d) of
the bankruptcy code ("Code"), 11 U.S.C. §
362(d). The district court denied relief, Peaje Invs.
LLC v. Garcia-Padilla, Nos.
16-2365-FAB, 16-2384-FAB, 16-2696-FAB, 2016 WL 6562426, at *6
(D.P.R. Nov. 2, 2016), and we affirmed in relevant part,
Peaje Invs. LLC v.
García-Padilla, 845 F.3d 505, 514, 516 (1st
Cir. 2017) (Peaje I).
PROMESA's temporary stay expired, Peaje filed a second
action in district court in May 2017 seeking similar relief.
But soon afterward, the Authority, acting through the
Financial Oversight and Management Board, filed a bankruptcy
petition under Title III of PROMESA. (The Commonwealth had
already filed its Title III petition.) This petition
triggered an automatic stay (this time for the pendency of
the bankruptcy case) of all actions against the Authority,
including Peaje's second suit. See 11 U.S.C.
§§ 362(a), 922(a); see also 48 U.S.C.
§ 2161(a) (incorporating 11 U.S.C. §§ 362(a)
and 922(a) into PROMESA).Peaje then timely exercised its right to
file an adversary proceeding seeking declaratory and
injunctive relief in the jointly administered bankruptcy
cases of the Authority and the Commonwealth.
Peaje asserted the following claims in two identical verified
complaints, filed in the respective Title III cases of the
Authority and the Commonwealth: (1) a declaration that the
Authority's toll revenues qualify as "pledged
special revenues" under Code section 922(d); (2)
adequate protection or, in the alternative, relief from the
stay; (3) a declaration that Code section 922(d) preempts
fiscal plan implementation; (4) a declaration that Code
section 922(d) requires the Authority to deposit toll
revenues with the Fiscal Agent; (5) a declaration that
neither Code section 552 nor 928(b) apply to its bonds; (6) a
declaration that to the extent Code section 928(b) applies to
its bonds, netting out "necessary operating
expenses" would constitute a taking in violation of the
Constitution; (7) relief from the stay so that it can
challenge, on constitutional grounds, the diversion of toll
revenues; and (8) injunctive relief requiring the Authority
to resume depositing the toll revenues with the Fiscal Agent.
with its complaints, Peaje filed a motion for a temporary
restraining order ("TRO") enjoining the Authority
from continuing to divert the toll revenues. The motion also
sought relief from the automatic bankruptcy stay or, in the
alternative, adequate protection. As we discuss more fully
below, Peaje argued in its request for a TRO that it was
entitled to relief because it holds a statutory lien on the
Authority's toll revenues. The district court, to which
we will hereinafter refer as the Title III court, held a
preliminary hearing on Peaje's motion and defendants then
filed an opposition brief in which they challenged
Peaje's assertion of a statutory lien on the
Peaje filed its Reply in the Title III court, defendants
moved, on waiver grounds, to strike from that brief all
assertions related to Peaje's alternative argument that
it holds a non-statutory lien. The Title III court, relying
on Local Civil Rule 7(c), granted the motion to strike on the
grounds that Peaje had failed to argue, prior to its Reply,
that it holds a non-statutory lien. See P.R.L.Cv.R.
7(c) (a reply memorandum "shall be strictly confined to
replying to new matters raised in the objection or opposing
memorandum"); see also P.R. LBR 1001-1(b)
(incorporating local rules of the District of Puerto Rico
into the local bankruptcy rules). After an evidentiary
hearing, the Title III court issued a second order denying
both Peaje's request for a preliminary injunction and its
request for adequate protection or, alternatively, relief
from the stay. See Peaje Invs. LLC v.
P.R. Highways & Transp. Auth., 301 F.Supp.3d
290, 293 (D.P.R. 2017). Peaje appeals from both orders.
first to the Title III court's decision to grant
defendants' motion to strike. We have previously reviewed
similar orders for abuse of discretion. See Amoah
v. McKinney, 875 F.3d 60, 62 (1st Cir.
2017); Turner v. Hubbard Sys.,
Inc., 855 F.3d 10, 12 (1st Cir. 2017). Presented with no
argument to the contrary, we assume that the same standard
statutory context is necessary to understand Peaje's
potential waiver. As we explain more fully in the next
section of this opinion, the Code divides liens into three
mutually exclusive categories, two of which are relevant
here: statutory liens and security interests. Two provisions of
the Code, incorporated into PROMESA, see 48 U.S.C.
§ 2161(a), single out certain types of liens
(specifically, security interests) for special treatment.
First, Code section 552(a) establishes a general rule,
subject to several exceptions not relevant here, see
11 U.S.C. § 552(b), that property acquired by the debtor
after the commencement of the bankruptcy case "is not
subject to any lien resulting from any security agreement
entered into by the debtor before the commencement of the
case." 11 U.S.C. § 552(a); see also Assured
Guar. Corp. v. Commonwealth of Puerto
Rico (In re Fin. Oversight and Mgmt. Bd. of
P.R.), 582 B.R. 579, 593 (D.P.R. 2018). Second, Code
section 928(a) provides an exception to section 552(a)'s
general rule for "special revenues acquired by the
debtor after the commencement of the case." 11 U.S.C.
§ 928(a). Such revenues "shall remain subject to
any lien resulting from any security agreement entered into
by the debtor before the commencement of the case."
Id. Code section 928(b) allows debtors to offset
"necessary operating expenses" from "[a]ny
such lien on special revenues." Id. §
928(b). As the text of both provisions makes clear, the
general rule of section 552(a) and its exception in section
928(a) apply only to a "lien resulting from [a] security
agreement." Id. §§ 552(a), 928(a).
Neither provision applies to statutory liens. See 5
Collier on Bankruptcy ¶ 552.01 (16th ed.); 6
id. ¶ 928.02. Thus, Peaje's rights in
the Title III proceeding differ considerably depending on
whether it possesses a statutory lien or a lien resulting
from a security agreement (i.e., a security interest).
this framework in mind, we find that the district court did
not abuse its discretion in granting the motion to strike. We
begin where these adversary proceedings began, with the
filing of the verified ...