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 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, ASSURED GUARANTY CORPORATION; ASSURED GUARANTY MUNICIPAL CORPORATION; FINANCIAL GUARANTY INSURANCE COMPANY; NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION, Plaintiffs, Appellants, 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.
Howard, Chief Judge, Torruella, Lynch, Thompson, Kayatta, and
KAYATTA, Circuit Judge, with whom HOWARD, Chief Judge,
TORRUELLA, Circuit Judge, and THOMPSON, Circuit Judge, join,
statement on denial of rehearing en banc.
petition for rehearing having been denied by the panel of
judges who decided the case, and the petition for rehearing
en banc having been submitted to the active judges of this
court and a majority of the judges not having voted that the
case be heard en banc, it is ordered that the petition for
rehearing and the petition for rehearing en banc be
central issue in this case is whether the
creditor-bondholders, without first obtaining permission from
the Title III court, may commence a judicial proceeding
against a Commonwealth debtor to obtain a court order
restoring the flow of post-petition pledged special revenues
from the debtor. Two panels of this court recently held that
sections 922 and 928 of the municipal bankruptcy code do not
afford creditors a shortcut to bypass the requirement of
obtaining traditional stay relief in order to bring such an
enforcement action. See Ambac Assurance Corp.
v. Commonwealth of Puerto Rico (In re
Fin. Oversight & Mgmt. Bd. for P.R.), 927 F.3d 597,
604-05 (1st Cir. 2019); Assured Guar. Corp.
v. Fin. Oversight & Mgmt. Bd. for P.R.
(In re Fin. Oversight & Mgmt. Bd. for P.R.), 919
F.3d 121, 127-32 (1st Cir. 2019). Because I believe that the
dissent's objection to our denial of the creditors'
petition for rehearing en banc is unsupported by the text of
sections 922 and 928 and misconstrues the legislative context
and history accompanying those provisions, I elaborate on my
support for the panel's holding and for the denial of the
creditors' desire to commence a proceeding without
permission from the Title III court implicates section 362(a)
of the bankruptcy code, which automatically stays a broad
variety of creditor actions against the debtor or the
debtor's property upon the debtor's filing of a
bankruptcy petition. See generally 11 U.S.C. §
362(a). One of the creditor actions that section 362(a) stays
is the "commencement . . . of a judicial . . .
proceeding against the debtor that . . . could have been
commenced before the commencement of the [bankruptcy] case .
. . or to recover a claim against the debtor that arose
before the commencement of the [bankruptcy] case."
Id. § 362(a)(1). Under other subsections, the
stay also applies to many creditor actions that fall short of
commencing a judicial proceeding. These include, in relevant
part, "any act . . . to exercise control over property
of the [debtor]," id. § 362(a)(3); see
also id. § 902(1) (stating that "property of
the estate" when used in the municipal bankruptcy
context "means property of the debtor"), "any
act to . . . enforce any lien against property of the
[debtor]," id. § 362(a)(4), "any act
to . . . enforce against property of the debtor any lien to
the extent that such lien secures a lien that arose before
the commencement of the [bankruptcy] case," id.
§ 362(a)(5), and "any act to collect, assess, or
recover a claim against the debtor that arose before the
commencement of the [bankruptcy] case," id.
leading treatise on bankruptcy law recognizes the breadth of
actions encompassed by the collective subsections of section
362(a), particularly in the municipal bankruptcy context.
See 3 Collier on Bankruptcy ¶ 362.03 (Richard
Levin & Henry J. Sommer eds. 16th ed. 2018) [hereinafter
Collier] ("[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)]."); id. ("[T]he stay applies to
secured creditors in possession of collateral and to
collateral in possession of a custodian."); see
also 6 Collier, supra, ¶ 901.04 ("The
applicability of section 362 to municipal debt adjustment
cases is a continuation of prior law. However, the protection
afforded by section 362 is substantially broader for the
debtor . . . ."). The case law also acknowledges the
breadth of creditor conduct stayed by section 362(a).
See, e.g., Thompson v. Gen.
Motors Corp., 566 F.3d 699, 703 (7th Cir. 2009) (holding
that a secured creditor's passive retention of collateral
after the filing of a bankruptcy petition violates section
362(a)(3)); Lex Claims, LLC v. Fin.
Oversight & Mgmt. Bd., 853 F.3d 548, 551-52 (1st
Cir. 2017) (citing Thompson with approval);
Metromedia Fiber Network Servs. v.
Lexent, Inc. (In re Metromedia Fiber Network,
Inc.), 290 B.R. 487, 493 (Bankr. S.D.N.Y. 2003)
(observing that a secured creditor's failure to remit
collateral to the debtor constitutes an exercise of control
over the debtor's property); In re Reed, 102
B.R. 243, 245 (Bankr. E.D. Okla. 1989) (noting that a secured
creditor's sale of collateral in its possession violates
the automatic stay provision).
importantly, the drafters of what became section 922(d)
expressed concern about the broad reach of the automatic stay
as applied to what the municipal bankruptcy code labels
"special revenues." See 11 U.S.C. §
902(2) (defining "special revenues"). Under many
municipal bond arrangements, like those at issue in this
case, the debtor turns over funds to a fiscal agent, or
trustee, who then turns over the funds to the creditor, who
in turn applies the funds to outstanding debt. But the
breadth of the automatic stay poses a problem for this
general scheme. As the Senate Report accompanying the 1988
amendments to the municipal bankruptcy code observes,
"[t]he automatic stay of Bankruptcy Code Section 362 is
extremely broad, preventing any post-petition collection
activities against the debtor, including application of
the debtor's funds held by a secured lender to secure
indebtedness." S. Rep. No. 100-506, at 11 (1988)
(emphasis added). New section 922(d), enacted in the wake of
that Senate Report, addressed this concern directly. It
states: "Notwithstanding [the automatic stay], a
petition filed under this chapter does not operate as a stay
of application of pledged special revenues in a manner
consistent with section  of this title to payment of
indebtedness secured by such revenues." 11 U.S.C. §
is some ambiguity in the text of section 922(d). The passive
syntax fails to indicate who (e.g.,
creditor, debtor, or fiscal agent) it is that the provision
permits to apply pledged special revenues to the debt. And, I
suppose, one might also wonder what exactly
answer those questions, one might most easily look at that
part of the Senate Report that specifically addresses section
922, quoted above. That portion of the Report expressly and
unambiguously refers to the application of pledged special
revenues already in the hands of the secured
creditor. And, if one views the fiscal agent or trustee
as an agent of the creditor in transmitting funds when due,
one might find in section 922(d) permission for such a
transfer by the fiscal agent as well. This latter view finds
support in another portion of the Senate Report, which
explicitly clarifies that section 922(d) makes the automatic
stay inapplicable to the bond trustee's application of
funds to the payment of outstanding debt. See S.
Rep. No. 100-506, at 13 ("In this context, 'pledged
revenues' includes funds in the possession of the bond
trustee . . . ."). This reading would not somehow render
section 922(d) superfluous or of no effect. Rather, it would
clearly permit exactly what the Senate Report said Congress
was concerned about in referring to the "application of
the debtor's funds held by a secured lender to secure
indebtedness." Id. at 11.
foregoing notwithstanding, the bondholders and the dissent
point to this ambiguity in section 922(d) as license to hunt
the legislative record for bigger game: a conclusion that
section 922(d) was intended to allow creditors to commence,
without prior permission from the Title III court, a judicial
proceeding to secure a court order compelling the debtor to
continue making payments in accordance with the bondholder
resolutions after the filing of a Title III petition. I see
two flaws in this hunt through the legislative record.
its aim exceeds the license afforded by the relevant
ambiguity in section 922(d). If a hypothetical statutory
provision were deemed to be ambiguous because it refers to
"motor vehicles operated on public roads," we might
look to the pertinent legislative history to see if
"electric bikes" were in mind when Congress drafted
that provision. But we would not seize upon language in the
legislative history to hold that "motor vehicles"
includes "kayaks." See 14 Penn Plaza LLC
v. Pyett, 556 U.S. 247, 259 n.6 (2009)
("[R]eading the legislative history in the manner
suggested by respondents would create a direct conflict with
the statutory text . . . . In such a contest, the text must
prevail."); Exxon Mobil Corp. v.
Allapattah Servs., Inc., 545 U.S. 546, 568 (2005)
("Extrinsic materials have a role in statutory
interpretation only to the extent they shed a reliable light
on the enacting Legislature's understanding of otherwise
ambiguous terms."). Similarly, while section 922(d) may
be ambiguous as to who it allows to apply funds, it
is clear that it only grants permission to act;
i.e., it allows some actor to apply funds
"notwithstanding" the automatic stay. 11 U.S.C.
§ 922(d). Nothing in the language remotely suggests that
it compels anyone to make such an application. So, if, as the
dissent maintains, this case is really about "whether a
debtor . . . must continue to pay pledged special
revenues," nothing in the permission granted by section
922(d) could possibly provide an answer that helps the
whatever "application" may mean, it cannot
reasonably be read as "commencing a judicial
proceeding" to compel payment. The dissent points to two
contemporaneous dictionary definitions of the term
"application" to demonstrate the term's
ambiguity. But even the dissent's proffered definition of
"application" -- "[a]ppropriation of a payment
to some particular debt," Application,
Black's Law Dictionary (6th ed. 1990) -- could
not reasonably encompass the instigation of an enforcement
action against a debtor.
subsection (a)(1) of the automatic stay provision
demonstrates, Congress knew how to refer to the filing of a
lawsuit against a debtor, and it did so in straightforward
terms in that instance. See 11 U.S.C. §
362(a)(1) (staying "the commencement or continuation . .
. of a judicial, administrative, or other action or
proceeding against the debtor that was or could have been
commenced before the [bankruptcy] case"). Had Congress
wanted to exempt from the stay a creditor's judicial
action to enforce the terms of a bondholder agreement, it
would have been exceedingly easy to do so by invoking the
language used in subsection (a)(1). See Lozano
v. Montoya Alvarez, 572 U.S. 1, 16 (2014)
(observing that when the drafters of legislation did not use
"obvious alternative" language, "the natural
implication is that they did not intend" that
alternative). But Congress did not do so. Further, if one
looks at all seven subsections of section 362(a) and asks
which one covers the "application" of funds to a
debt, one would never pick subsection (1). It reasonably
follows that 922(d) leaves that subsection undisturbed.
does section 922(d)'s reference to section 928 require a
contrary result. Section 922(d) commands that
"application of pledged special revenues" be done
in a manner "consistent" with section 928 -- which
in turn provides that liens on special revenues "shall
be subject to the necessary operating expenses" of the
project or system. See 11 U.S.C. §§
922(d), 928(b). The dissent contends that this
cross-reference to 928(b) means that "application"
must refer to something more than funds already in the hands
of a creditor. Not so. In a non-municipal bankruptcy
proceeding, a bankrupt debtor (or its trustee) can move the
bankruptcy court to compel a third party in possession of
estate property to turn over that property to the debtor.
See 11 U.S.C. § 542. Similarly, in the
municipal bankruptcy context, the Senate Report makes evident
that the bankruptcy court "retain[s] the power to enjoin
application of proceeds . . . upon a specific showing of
need, for example, where a secured creditor was about to
apply proceeds of a gross revenue pledge in a manner
inconsistent with policies of the proposed new section."
S. Rep. No. 100-506, at 11; see also 6 Collier,
supra, ¶ 922.05 n.22 ("[T]he bankruptcy
court has ample authority under its general equitable powers
to accomplish what the statute appears to contemplate,
namely, use of pledged special revenues when necessary for
the continued operation of the project or system from which
the revenues are derived."). Thus, in ordinary course,
section 922(d) enables a creditor to apply pledged special
revenues in its possession to outstanding debt unless the
Title III or bankruptcy court enjoins the creditor from doing
so upon a showing by the debtor of a need to pay necessary
creditors and the dissent also suggest that section 928(a) of
the municipal bankruptcy code might be read to accomplish
what section 922(d) clearly does not. But section 928(a)
bears no relevant ambiguity. It simply means what it says:
The provision orders that "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." 11 U.S.C. § 928(a). In other words,
post-petition pledged special revenues are still subject to
the pre-petition lien created by the bondholder agreements
despite the filing of a bankruptcy petition. Contrary to the
dissent's view, section 928(a) suggests nothing about the
enforcement of a creditor's lien on pledged special
revenues. It merely preserves a secured creditor's right
to those post-petition funds throughout the bankruptcy
proceeding, and the creditor can then assert its right to
those funds during the plan-of-adjustment confirmation phase,
see generally 11 U.S.C. § 943(a) (granting
standing to object to a plan of adjustment to "special
tax payer[s]"); id. § 902(3) (defining
"special tax payer"); 6 Collier, supra,
¶ 943.02 (explaining that "creditors whose claims
are affected by the plan of adjustment" have standing to
object), or earlier by requesting stay relief "for
cause," such as "the lack of adequate
protection" of that collateral, 11 U.S.C. §
362(d)(1). Nor does subsection 928(b) -- which, again,
provides that "any such lien on special revenues . . .
derived from a project or system shall be subject to the
necessary operating expenses of such project or system,"
id. § 928(b) -- compel a different reading.
That subsection merely limits the pool of post-petition funds
to which a creditor has an interest; in practical terms, this
means a creditor cannot object -- through a request for stay
relief or at the plan-confirmation phase -- to the
debtor's use of post-petition pledged special revenues
for "necessary operating expenses."
Senate Report accompanying the 1988 amendments makes this
explicit. As that Report explains, "[new] Section ,
along with the definition of special revenues in Section
902(3), protects the lien on revenues. . . . It is intended
to negate Section 552(a) in the municipal context and to go
no further. In other words, it is not intended to create
new rights . . . ." S. Rep. No. 100-506, at 12
(emphasis added). Section 552(a) of the bankruptcy code,
incorporated from the non-municipal context, provides that
"property acquired . . . by the debtor after the
commencement of [bankruptcy] 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). As the Senate Report explains, this provision
created a slew of potential problems in the municipal
context. Among those problems included the termination of
creditors' security interests in future special revenues.
This, in turn, made it possible that (1) revenue bonds would
be converted into general obligation debt upon the filing of
bankruptcy; (2) future streams of special revenues would be
made accessible to general creditors; (3) municipal debt
limits would be exceeded; and (4) municipalities that elected
to continue paying bondholders would face difficulty in
obtaining plan confirmation. See S. Rep. No.
100-506, at 5-9. As the Senate Report makes evident, section
928(a) simply reverses the problems created by section 552,
but it does nothing more.
foregoing should be enough to end the debate. The ambiguity
of the statutory text is simply not broad enough to allow one
to read these sections as allowing the bondholders to
commence a collection action without first obtaining leave of
court. In resisting this conclusion, the dissent and the
creditors also commit the further error of badly
misconstruing the context and legislative history
accompanying the 1988 amendments in support of their reading
of sections 922(d) and 928(a).
evidence that these provisions should be read to allow a
creditor to bring a post-petition enforcement action against
a debtor to enforce the terms of a bondholder agreement, the
dissent points to one portion of the Senate Report that
reads: "[T]he amendments insure that revenue bondholders
receive the benefit of their bargain with the municipal
issuer, namely, they will have unimpaired rights to the
project revenue pledged to them." Id. at 12.
When read in context, however, it is apparent that this
statement was made in reference to the new section 928(a) and
its elimination of the problems created by section 552 of the
bankruptcy code, discussed above. See id. As I have
already explained, section 928(a) does ensure that
creditors receive the benefit of their bargain by securing
their liens on future streams of pledged special revenues
(and their right to protect their property interests in those
revenues at the appropriate time and through the appropriate
channels) despite the debtor's bankruptcy filing. Of
course, it is true that a debtor's decision to
discontinue making payments and to divert its revenues
elsewhere might impair the security created by such liens.
The risk that a debtor will misuse collateral exists in every
bankruptcy case, municipal or otherwise. But that possibility
gives us no license to rewrite section 922(d) to authorize
the commencement of a judicial proceeding against the debtor
without leave of the Title III or bankruptcy court. Rather,
in such an event, the statute and the case law direct the
creditor to seek and obtain relief from the stay to protect
its interests. See 11 U.S.C. § 362(d);
infra Part IV.
dissent also points to the Senate Report's assertion that
the "[r]easonable assurance of timely payment is
essential to the orderly marketing of municipal bonds and
notes and continued municipal financing." S. Rep. No.
100-506, at 21. Unlike the previous quote, this excerpt does
refer to the new section 922(d). But in reading this passage
to suggest that section 922(d) mandates the continued payment
of pledged special revenues or to allow an enforcement action
to achieve the same end, the dissent ignores the Senate's
use of the qualifier "reasonable" before
"assurance." More importantly, it ignores the
larger context in which Congress passed the 1988 amendments.
Both the Senate and House Reports note examples of
municipalities electing to continue making payments to
bondholders after filing for bankruptcy --despite the
practical difficulties created by section 552 of the
bankruptcy code discussed above --to ensure their
creditworthiness. See id. at 6 (providing examples,
including the San Jose School District and Medley, Florida);
H.R. Rep. No. 100-1011, at 3 (1988) (discussing the San Jose
School District); see also S. Rep. No. 100-506, at
25 ("[S]ection 552 may prevent troubled municipalities
from giving the kind of assurances that are necessary for
continued financing."). Along with section 928(a),
section 922(d) facilitates voluntary payments from a
municipal debtor -- and therefore a municipality's
ability to give "reasonable assurance of timely
payment" -- to a creditor by allowing a creditor in
receipt of pledged special revenues to apply those revenues
to outstanding debt.
Reports' references to "payments," S. Rep. No.
100-506, at 13; H.R. Rep. No. 100-1011, at 7, and the Senate
Report's subsequent statement that "[w]here a pledge
of revenues survives under Section , it would be
needlessly disruptive to financial markets for the
effectuation of the pledge to be frustrated by an automatic
stay," S. Rep. No. 100-506, at 21, must be understood in
a similar light. And the dissent ignores the immediately
succeeding sentence from the Senate Report, which states:
"Further, the use of an automatic stay may be contrary
to Section 904 and interfere with the government, affairs and
the municipality's use or enjoyment of income producing
property." Id. at 21. The reference to section
904 of the municipal bankruptcy code would make no sense
under the preferred interpretation of section 922 tendered by
the bondholders and the dissent.
three brief final thoughts. First, I note that the
dissent's arguments regarding section 305 of PROMESA are
adequately addressed in our recent opinion in Ambac
Assurance Corp., 927 F.3d at 602-05. I do not rehash
those arguments here.
stay relief under section 362(d) of the bankruptcy code is
not the paper tiger that the dissent makes it out to be. That
section affords the bankruptcy or Title III court no
discretion to decline a request for stay relief upon a
showing of a "lack of adequate protection of an interest
in property." See 11 U.S.C. § 362(d)(1)
(stating that a bankruptcy court "shall grant
relief from the stay" for "lack of adequate
protection of an interest in property" (emphasis
added)); see generally Fin. Oversight & Mgmt. Bd. for
P.R. v. Ad Hoc Group of PREPA
Bondholders (In re Fin. Oversight & Mgmt. Bd.
for P.R.), 899 F.3d 13, 20 (1st Cir. 2018)
("[S]ection 362(d)(1) guards against the possibility
that the automatic stay could deprive a creditor of its
property interest by precluding the creditor from exercising
any rights it possesses to protect that interest from
I note that the application of the automatic stay provision
to the bondholders' claims against the Commonwealth
raises no new issues of constitutional dimension that would
warrant a different reading of sections 922 and 928. Courts,
including the U.S. Supreme Court, have time and again
affirmed the constitutionality of section 362 of the
bankruptcy code against Fifth Amendment Takings Clause
claims. See, e.g., Wright v.
Union Cent. Life Ins. Co., 311 U.S. 273, 278 (1940)
("Safeguards were provided to protect the rights of
secured creditors, throughout the proceedings, to the extent
of the value of the property. There is no constitutional
claim of the creditor to more than that." (citations
omitted)); United Sav. Ass'ns of Tex.
v. Timbers of Inwood Forest Assocs., Ltd.
(In re Timbers of Inwood Forest Assocs., Ltd.), 793
F.2d 1380, 1390 (5th Cir. 1986) ("In general, the Fifth
Amendment requires only that the value of the secured
position of a creditor be maintained during the stay.");
Lend Lease v. Briggs Transp. Co.
(In re Briggs Transp. Co.), 780 F.2d 1339, 1342 (8th
Cir. 1985) ("The bankruptcy code's automatic stay .
. . causes only a temporary delay of a creditor's right
to enforce its lien on the collateral. . . . [The] suspension
of the right to enforce a lien is within Congress's
constitutional bankruptcy powers." (citations omitted)).
for the dissent's invocation of the Tenth Amendment, the
Supreme Court --more than eighty years ago and before section
922(d) even existed -- upheld the municipal bankruptcy code
against such an attack. See United States
v. Bekins, 304 U.S. 27, 51-52 (1938)
("The statute is carefully drawn so as not to impinge
upon the sovereignty of the State. The State retains control
of its fiscal affairs.").
above-stated reasons, I support the denial of the
creditors' petition for rehearing en banc.
Circuit Judge, dissenting from the denial of rehearing en
the greatest respect for my colleagues, I dissent. I have
grave doubts about the panel's holding and the analysis
of both the panel and the concurrence as to the denial of en
banc, and I believe that further review is warranted, if not
by this court, then by the Supreme Court. At its core, this
case is about whether, under municipal bankruptcy law, the
government debtor must continue to pay pledged special
revenues to special revenue bondholders during a bankruptcy
proceeding (or, put another way, whether a debtor can elect
not to pay, and order a fiscal agent not to pay, special
revenue bondholders despite the indenture). This issue is of
extraordinary importance: it goes well beyond the Title III
proceedings in the Commonwealth as to both potential
municipal and state defaults, affects special revenue bonds
nationwide, and has Constitutional implications.
petitioners are insurers ("the Insurers") of Puerto
Rico Highway and Transportation Authority ("PRHTA")
special revenue bonds secured by liens on pledged special
revenues. They allege the Commonwealth has diverted these
special revenues to uses not authorized by the terms of the
bonds. Specifically, the Commonwealth stopped the making of
payments from the reserve accounts associated with the bonds,
taking the position that automatic stay provisions
incorporated from the Bankruptcy Code into the Puerto Rico
Oversight, Management, and Economic Stability Act
("PROMESA") barred such special revenue payments.
The Commonwealth, by legislation, also ordered the fiscal
agent for the special revenue bonds, the Bank of New York
Mellon, "to halt payments to [PR]HTA
bondholders." Ambac Assurance Corp. v.
Puerto Rico (In re Fin. Oversight & Mgmt.
Bd. for P.R.), 927 F.3d 597, 601 (1st Cir. 2019). The
petitioners sought relief, alleging that: under several
provisions of the Bankruptcy Code, see 11 U.S.C.
§§ 922(d), 928, and U.S. Constitutional
requirements, the filing of the Title III petition does not
operate as a stay against the application of pledged special
revenues to these special revenue bondholders; such payments
are required during the pendency of the Title III proceeding;
and the Commonwealth's actions effectively have nullified
their ability to collect the pledged revenues. It is
estimated that the sums at issue are about $2.6 billion of
the $4.5 billion in outstanding PRHTA bonds.
panel opinion, from which further review is sought, holds
that under Sections 362, 922(d), and 928 of the Bankruptcy
Code, mandatory payments to PRHTA special revenue bondholders
from the reserve accounts, and actions by those bondholders
or insurers to enforce their liens on such revenues, are
automatically stayed. Assured Guaranty Corp.
v. Fin. Oversight & Mgmt. Bd. for P.R.
(In re Fin. Oversight & Mgmt. Bd. for P.R.), 919
F.3d 121, 132-33 (1st Cir. 2019). As a result, during the
Title III proceeding, these bondholders cannot receive
payment of special revenues promised to them at issuance
unless the Commonwealth voluntarily makes such
payment. Id. One other option, which is
not discussed by the opinion, is for the special revenue
bondholders (or the subrogated insurers) to petition the
district court to lift the stay as to their interests; in my
view, it is not likely that Congress intended to impose such
a burden on those bondholders, preferring instead to make the
automatic stay inapplicable to start with.
disagree with the panel opinion that the statutory exceptions
to the stay are limited to giving the debtor the voluntary
option of payment and disagree that the text is unambiguous.
Any interpretation of the text of Section 922(d) and Section
928 of the Bankruptcy Code requires resort to both context and
legislative history. That required analysis supports the
Insurers' position: because payment of the special
revenues pursuant to the relevant bond resolution(s) is
mandatory during the bankruptcy proceeding (after deducting
"necessary operating expenses" per Section 928(b)),
bondholders can bring an action to enforce their liens if
necessary without first having to seek relief from the
automatic stay. The panel opinion, which stints on the
analysis required by rules of construction, also conflicts
with the persuasive view in In re Jefferson County,
474 B.R. 228 (Bankr. N.D. Ala. 2012), that "[t]he
structure and intent of what Congress enacted by its 1988
amendments to chapter 9 [of the Bankruptcy Code] was to
provide a mechanism whereby the pledged special revenues
would continue to be paid uninterrupted," id.
understanding of the statutes essentially preserves the
status quo before the filing, and the benefit of the bargain
between the issuer and bondholder, as to these special
revenues; provides assurance for the massive and important
municipal bond market; and supports the operation of local
governments. Nothing in substantive municipal bankruptcy law
excuses the debtor or any of its intermediaries from
continued payment of special revenues, and the automatic stay
does not apply to these special revenues due to the
exceptions created by Sections 922 and 928.
procedural history and basic facts of this case are ably
described in the panel opinion. See Assured
Guaranty, 919 F.3d at 124-27. Before explaining why I
disagree with the panel's analysis, however, some
background on the statutory arrangement is necessary.
III of PROMESA incorporates by reference numerous provisions
from the Bankruptcy Code. See 48 U.S.C. § 2161.
These include the automatic stay provisions at 11 U.S.C.
§§ 362(a) and 922 (and the express exceptions in
those provisions), and the provision regarding the
"[p]ost petition effect of security interest" at 11
U.S.C. § 928.
Section 922(d) and Section 928 were added to the Bankruptcy
Code as part of the 1988 amendments to Chapter 9 of the
Bankruptcy Code, to solve certain problems created by prior
law in the area of municipal bankruptcy. See Pub. L.
No. 100-597, 102 Stat. 3028, 3029 (codified at scattered
sections of 11 U.S.C.). Here, I identify certain problems
Congress was trying to solve, in the municipal bond market
and in municipal bankruptcy, by enacting the 1988 amendments.
the 1988 amendments, concerns had been brought to Congress
about the Bankruptcy Code's application to municipal
bankruptcy, and the problems that prior amendments had
caused. Chapter 9, which addresses municipal bankruptcy, had
been substantially amended in 1976. See Act to Amend
Chapter IX of the Bankruptcy Act, Pub. L. No. 94-260, 90
Stat. 315 (1976). It was amended again in 1978. See
The Bankruptcy Reform Act of 1978, Pub. L. No. 95- 598, 92
Stat. 2549. The latter revision problematically incorporated
by reference a number of concepts from the law of corporate
bankruptcy into municipal bankruptcy law. Id.
§ 901(a); 92 Stat. at 2621.
making the revisions ten years later, Congress stated,
"[b]ecause the worlds of commercial finance and
municipal finance are so diverse, the simple incorporation by
reference of the 1978 commercial finance concepts into the
municipal bankruptcy arena simply did not work."
See S. Rep. No. 100-506, at 3 (1988). The House
Report to the 1988 amendments pointed out that a municipality
is different than other debtors in bankruptcy, because
"a municipality cannot simply go out of business"
and "must continue to provide its residents with
essential services." H.R. Rep. No. 100-1011, at 2
(1988). And so Chapter 9 "is designed just for
municipalities, to keep them in existence." Id.
Accordingly, both the Senate and House Reports for the 1988
amendments stated a need to fix "inconsistencies between
bankruptcy law and principles of municipal finance."
Id. at 3; accord S. Rep. No. 100-506, at 1.
had been urged to make these amendments by a range of
officials and groups including the Vice Mayor of San Jose,
California (on behalf of the National League of Cities), the
National Bankruptcy Conference, and the National Association
of Bond Lawyers. H.R. Rep. No. 100-1011, at 1. In response,
Congress then articulated several specific concerns stemming
from the commercial concepts that had been incorporated into
municipal bankruptcy law. One of the concerns was that,
without the amendments, Section 552(b) of the Bankruptcy Code
might "effectively destroy the distinction between
general obligation debt and limited revenue obligation
debt," in part by allowing "general creditors of
the municipality to seek payment from the pledged
revenues." S. Rep. No. 100-506, at 5.
bonds are bonds "issued to finance projects or programs
. . . [such as] toll roads, water systems, sports and
convention centers, health care facilities, sewer and waste
water treatment facilities, power generating facilities,
waste disposal facilities, or low and moderate income housing
programs," and are paid through pledged revenue from the
project or system. S. Rep. No. 100-506, at 4. By contrast,
general obligation bonds are those "for which the
general taxing power of the issuer is pledged to repay the
bonds." Id. at 4-5. There are clear,
well-delineated contrasts between these types of bonds. For
revenue bonds, "bondholders cannot look to any other
assets of the municipality for repayment," H.R. Rep. No.
100-1011, at 4, meaning that "the general taxpayers are
usually not committed to repaying the [revenue] bonds or
funding operational deficits through general tax
revenues," S. Rep. No. 100-506, at 5. Accordingly, the
rates on the different types of bonds can be different for
the same ...