Fin. Oversight & Mgmt. Bd. for P.R. v. Ad Hoc Grp. of PREPA Bondholders (In Re Fin. Oversight & Mgmt. Bd. for P.R.)

United States Court of Appeals
For the First Circuit
No. 17-2079

IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
RICO, as representative of Puerto Rico Electric Power Authority
(PREPA),

Debtor.

THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
representative of Puerto Rico Electric Power Authority (PREPA),

Debtor, Appellee,

FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO; PUERTO
RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY,

Objectors, Appellees,

v.

AD HOC GROUP OF PREPA BONDHOLDERS; ASSURED GUARANTY CORPORATION;
ASSURED GUARANTY MUNICIPAL CORPORATION; NATIONAL PUBLIC FINANCE
GUARANTEE CORPORATION; SYNCORA GUARANTEE, INC.,

Movants, Appellants.

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,
Kayatta, Circuit Judge,
and Torresen, Chief U.S. District Judge.


Of the Southern District of New York, sitting by designation.

Of the District of Maine, sitting by designation.
 Martin J. Bienenstock, with whom Timothy W. Mungovan, Stephen
L. Ratner, Mark D. Harris, Chantel L. Febus, and Proskauer Rose
LLP were on brief, for appellee Financial Oversight and Management
Board for Puerto Rico as representative of Puerto Rico Electric
Power Authority.
Thomas Moers Mayer, with whom Amy Caton, Gregory A. Horowitz,
Alice J. Byowitz, Douglas Buckley, Kramer Levin Naftalis & Frankel
LLP, Manuel Fernández-Bared, Linette Figueroa-Torres, Nayda Pérez-
Román, and Toro Colón Mullet P.S.C. were on brief, for appellants
Ad Hoc Group of PREPA Bondholders.
Heriberto Burgos Pérez, Ricardo F. Casellas-Sánchez, Diana
Pérez-Seda, Casellas Alcover & Burgos P.S.C., Howard R. Hawkins,
Mark C. Ellenberg, Ellen Halstead, and Cadwalader, Wickersham &
Taft LLP, on brief for appellants Assured Guaranty Corp. and
Assured Guaranty Municipal Corp.
Gregory Silbert, Marcia Goldstein, Jonathan Polkes, Kelly
DiBlasi, Gabriel A. Morgan, Weil, Gotshal & Manges LLP, Eric Pérez-
Ochoa; Alexandra Casellas-Cabrera Lourdes; Arroyo Portela, and
Adsuar Muñiz Goyco Seda & Pérez-Ochoa, P.S.C., on brief for
appellant National Public Finance Guarantee Corp.
Carlos A. Rodríguez-Vidal, Solymar Castillo-Morales, Goldman
Antonetti & Cordova, LLC, My Chi To, Elie J. Worenklein, and
Debevoise & Plimpton LLP, on brief for appellant Syncora Guarantee,
Inc.

August 8, 2018
 KAYATTA, Circuit Judge. We consider again the

application of PROMESA,1 a statute Congress enacted to address

Puerto Rico's financial crisis. In this instance, holders of

revenue bonds issued by the Puerto Rico Electric Power Authority,

known as PREPA, sought relief from a stay of actions against PREPA

to petition another court to place PREPA in receivership. The

district court concluded that PROMESA sections 305 and 306, 48

U.S.C. §§ 2165, 2166, precluded it from granting such relief. For

the following reasons, we conclude otherwise. Whether the district

court should in its discretion grant the requested relief, and on

what terms and conditions, is a matter we leave to the able

district court to decide on remand in accordance with this opinion

and based on circumstances as they then exist.

I.

Title III of PROMESA authorizes Puerto Rican

governmental entities (such as PREPA) to restructure their debts

in a manner akin to municipal debt restructuring under Chapter 9

of the bankruptcy code. Compare 48 U.S.C. §§ 2161–2177 with 11

U.S.C. §§ 901–946. PROMESA also created the Financial Oversight

and Management Board (the "Oversight Board") and vested it with

powers to assist Puerto Rico and its instrumentalities in achieving

fiscal responsibility and accessing capital markets. See 48 U.S.C.

1 The Puerto Rico Oversight, Management, and Economic
Stability Act, 48 U.S.C. §§ 2101–2241.

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§§ 2121, 2141. These powers include the authority to designate

governmental instrumentalities as eligible to petition for court-

supervised debt restructuring under Title III of PROMESA and to

act as the debtor's representative in such proceedings. 48 U.S.C.

§§ 2121(d), 2162, 2175(b). With the Oversight Board's permission,

PREPA filed for bankruptcy under Title III of PROMESA on July 2,

2017. As is customary in most types of bankruptcy proceedings,

that filing triggered an automatic stay of most actions by

creditors against PREPA. Id. § 2161(a) (incorporating 11 U.S.C.

§ 362(a)).

Appellants, to whom we will refer as "the bondholders,"

are holders and insurers of debt issued by PREPA and governed by

a 1974 Trust Agreement. Under that Trust Agreement, PREPA pledged

to the bondholders its revenues to repay over time the money PREPA

acquired by issuing the bonds, plus interest. On July 3, 2017,

PREPA defaulted on its payments. The bondholders accuse PREPA of

breaching a promise to seek a rate increase sufficient to cover

debt payments, of failing to collect on customer accounts, and of

mismanaging operations. For these reasons, the bondholders asked

the district court overseeing the Title III bankruptcy (the

"Title III court") for relief from the automatic stay pursuant to

11 U.S.C. § 362(d)(1), incorporated into PROMESA by 48 U.S.C.

§ 2161(a), so that they could file suit to vindicate their right

under territorial law to have a receiver appointed to manage PREPA

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and seek a rate increase sufficient to cover debt servicing. See

P.R. Laws Ann. tit. 22, § 207(a) (establishing right of PREPA

bondholders to a receiver in the event of default).

The Title III court denied the bondholders' request for

relief from the automatic stay. It reasoned, first, that PROMESA

section 305 ("Section 305"), codified at 48 U.S.C. § 2165 and

modeled after section 904 of the municipal bankruptcy code, 11

U.S.C. § 904, prohibited the Title III court "from transferring

control of PREPA's management and property to a receiver without

the Oversight Board's consent." Second, it concluded that PROMESA

section 306 ("Section 306"), codified at 48 U.S.C. § 2166, which

gives the Title III court exclusive jurisdiction over the debtor's

property, also prevented it from "ced[ing] jurisdiction of PREPA's

property in the form of operating assets and revenues to another

court." Third, and in the alternative, the Title III court

concluded that "cause" did not exist under 11 U.S.C. § 362(d)(1)

to lift the stay because the balance of harms cut against the

relief requested.

II.

We address first the limitation imposed by Section 305.

That section provides:

[N]otwithstanding any power of the court,
unless the Oversight Board 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

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 political or governmental powers of the
debtor; (2) any of the property or revenues of
the debtor; or (3) the use or enjoyment by the
debtor of any income-producing property.

48 U.S.C. § 2165. In an effort to dispose quickly of that

limitation, the bondholders cite two California municipal

bankruptcy cases for the proposition that by allowing the debtor

to file a Title III petition, the Oversight Board consented carte

blanche to the full exercise of the Title III court's powers. See

Alliance Capital Mgmt. L.P. v. Cty. Of Orange (In re Cty. of

Orange), 179 B.R. 185, 190 (Bankr. C.D. Cal. 1995) (noting that

county had consented to court's jurisdiction to order adequate

protection, without clarifying the nature of that consent); Ass'n

of Retired Emps. of Stockton v. City of Stockton (In re City of

Stockton), 478 B.R. 8, 22 (Bankr. E.D. Cal. 2012) (characterizing

the consent in Cty. of Orange as consent under 11 U.S.C. § 904 by

virtue of having filed the bankruptcy petition). We reject this

approach because it would render Section 305 a nullity; consent

would always exist because Section 305 only applies in Title III

cases, and in those cases, the Oversight Board must approve the

debtor's filing. See 48 U.S.C. § 2164(a); see also id. § 2124(j).

Anticipating the possibility that this "consent" argument

would fail, the bondholders also urge a more nuanced reading of

Section 305 as limiting only what the Title III court can itself

directly order. The Title III court disagreed. It read

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Section 305 as not only preventing the Title III court from

directly interfering with the listed powers and properties of

PREPA, but also from indirectly interfering by issuing an order

for the purpose of allowing another court to engage in any such

interference, at least when the relief sought is the appointment

of a receiver. The Title III court reasoned that Section 305 and

other PROMESA provisions create a structure that is "protective of

the autonomy of public entities engaged in debt adjustment

proceedings." It also read the word "otherwise" in Section 305 as

prohibiting the Title III court from indirectly doing (i.e.,

allowing others to do) what it could not directly do.2

We agree with the bondholders that Section 305 does not

tie the Title III court's hands quite so much as that court found

it did. Our reasoning begins with the statutory text. The text

of Section 305 trains on the powers of "the court," plainly the

Title III court. It states specifically what that court may not

do: "interfere with" certain powers and assets of the debtor "by

any stay, order, or decree." The bondholders' principal request

for relief does not ask the Title III court to issue any such stay,

order, or decree that itself interferes with the debtor's powers

or assets. Rather, the bondholders ask the Title III court to

2 As the Title III court noted, 11 U.S.C. § 105(b),
incorporated by PROMESA section 301, 48 U.S.C. § 2161(a), contains
language prohibiting the Title III court from appointing a
receiver directly.

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stand aside -- by lifting the stay -- to allow another court under

Commonwealth law to decide whether to do what the Title III court

is assumed not to be able to do. Nothing in that text plainly

calls for us to read a prohibition on interference by the Title III

court so broadly as to encompass an action that might allow another

court to decide whether to interfere with the powers or properties

of the debtors.

The statute's use of the word "otherwise" does not alter

our reading. The word "otherwise" serves not as a catchall for

broadly defining what the Title III court cannot do. Rather, it

broadly defines where the Title III court may not interfere: "in

the case or otherwise." In this manner, it makes clear that the

Title III court cannot issue an order of interference, for example,

when deciding disputes under its "related to" jurisdiction. See

48 U.S.C. § 2166(a)(2) (Title III court has original but not

exclusive jurisdiction over civil proceedings "arising in or

related to cases under" PROMESA); see also Celotex Corp. v.

Edwards, 514 U.S. 300, 307–08 & 307 n.5 (1995) (identical provision

for bankruptcy code gives bankruptcy court broad "related to"

jurisdiction over suits between third parties that have an effect

on the debtor's property).

Our interpretation of the text of Section 305 secures

even firmer footing when grounded in context because Title III of

PROMESA also incorporates section 362(d)(1) of the bankruptcy

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code. 48 U.S.C. § 2161(a) (incorporating 11 U.S.C. § 362). That

section says that the court "shall" provide relief from the

automatic stay "for cause, including the lack of adequate

protection of [a creditor's] interest in property." 11 U.S.C.

§ 362(d)(1). In so providing, section 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 destruction.

See Note Holders v. Large Private Beneficial Owners (In re Tribune

Co. Fraudulent Conveyance Litig.), 818 F.3d 98, 108–09 (2d Cir.

2016).

If we were nevertheless to read Section 305 broadly as

barring the Title III court from lifting the automatic stay as

otherwise allowed by section 362(d)(1) to enable another court to

take action interfering with the debtor's property, we would

effectively wipe out section 362(d)(1) whenever the creditor

needed protection of its interest in that property.3 The creditor

would be left to stand by helplessly as the debtor spent the

creditor's collateral, leaving the debtor entirely unsecured. As

we have previously said, we would "doubt the constitutionality of"

a rule that would allow a debtor to "expend every penny of the

Movants' collateral, leaving the debt entirely unsecured." Peaje

3
So, too, would we effectively eliminate subsections (3) and
(4), and potentially (2), of 11 U.S.C. § 362(d).

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Investments LLC v. García-Padilla, 845 F.3d 505, 511–12 (1st Cir.

2017) ("Peaje I"). Such a marked change in the status quo ante

undercutting creditor rights, see United States v. Whiting Pools,

Inc., 462 U.S. 198, 207 (1983) (describing rights and treatment of

secured creditors in bankruptcy, including right to adequate

protection), would be an ambitious undertaking unlikely to have

been implemented by Congress without some discussion and

expression of awareness.

The Title III court did try to deflect these problems by

stating that its refusal to lift the stay arose in the context of

a request for a receiver, certainly a robust form of interference

with the debtor's finances and property. The implication -- which

the debtor's brief makes express -- is that perhaps the Title III

court would lift the stay to allow another court to provide some

other type of protection of collateral. But neither the Title III

court nor the debtor points to any toehold in the language of

Section 305 that would accommodate a distinction allowing the

Title III court to lift the stay to allow another court to

interfere with the debtor's property sometimes but not others.

Either Section 305 only bars the Title III court itself from

interfering, or it bars that court also from lifting the stay to

allow another court to do that which it cannot do. And it is only

the latter, broader possibility that creates a situation in which

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the creditor is deprived of any means of protecting its property

interest.

The Title III court also pointed out that Section 305

would not bar section 362(d) relief when the Oversight Board

consents to the requested relief. But the principal aim of

section 362(d)(1) is to protect the creditor when protection is

needed, which is customarily when the debtor is not obliging. In

short, saying that a creditor can get relief from the stay when

the debtor's representative consents effectively wipes out

section 362(d)(1) precisely when it is most likely needed.

We also find no inconsistency between the apparent

purpose served by Section 305 and a reading of that section as

only barring the Title III court itself from directly interfering

with the debtor's powers or property. Like the Title III court,

we read Section 305 as respectful and protective of the status of

the Commonwealth and its instrumentalities as governments, much

like section 904 of the municipal bankruptcy code respects and

protects the autonomy of states and their political subdivisions.

See 11 U.S.C. § 904. When a bankruptcy or Title III court acts

directly, it impinges on that autonomy. But when it merely stands

aside by lifting the automatic stay, it allows the processes of

state or territorial law to operate in normal course as if there

were no bankruptcy.

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 Finally, the limited case law on this subject provides

no holdings or reasoning that call for a contrary interpretation

of Section 305. Other courts have had occasion to pass on the

plain meaning of 11 U.S.C. § 904, but only in the context of

considering the bankruptcy court's ability to interfere directly

with the powers, property, and revenues of the debtor. In

Detroit's recent bankruptcy case, the Sixth Circuit held that the

"plain language [of section 904] expressly prohibits the

bankruptcy court from" ordering the city's water department to

restore service or institute a water affordability plan for

residents. Lyda v. City of Detroit (In re City of Detroit), 841

F.3d 684, 696 (6th Cir. 2016). Likewise, in municipal bankruptcy

proceedings for the city of Stockton, California, the bankruptcy

court determined that section 904 prevented it from ordering the

city to continue paying for the health benefits of retired city

employees, reasoning that section 904 is a like a "clean-up hitter

in baseball" and limits the court's authority "absolute[ly]" when

applicable. In re City of Stockton, 478 B.R. at 20. Though these

interpretations express a broad view of what the bankruptcy court

in a municipal bankruptcy may not itself do without the debtor's

consent, they make no effort to address whether and to what extent

the bankruptcy court may lift the stay to allow another court to

do what the bankruptcy court cannot do.

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 For these reasons, we hold that Section 305 does not

prohibit as a matter of course the Title III court from lifting

the stay when the facts establish a creditor's entitlement to the

appointment of a receiver in a different court in order to protect

a creditor's collateral should that protection otherwise be

necessary and appropriate. Although we share the Title III court's

concerns about the deleterious impact that a robust receivership

outside the Title III court's control might have on the efforts of

the Title III court to consolidate and adjust the debtor's affairs,

those concerns are best addressed in deciding whether, precisely

to what extent, and for what purpose relief from the automatic

stay might be granted. In other words, it might be possible to

grant tailored relief for the creditor to seek a receivership

provided that the receiver only take specific steps necessary to

protect the creditor's collateral. Further, concerns about moving

the locus of the debtor's protections outside the Title III court

are greatly ameliorated by the fact that the Oversight Board itself

can always, through consent, opt for a regime held more tightly

within the federal forum's direct control.

III.

We turn next to the Title III court's holding that the

exclusive jurisdiction provision contained in PROMESA

section 306(b), 48 U.S.C. § 2166(b), operates to prohibit a court

from entering an order to lift the stay upon a determination of

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inadequate protection if the relief sought is the appointment of

a receiver. Unlike Section 305, Section 306's exclusive

jurisdiction over property rule is not a provision specially

crafted for municipal or territorial bankruptcies. Rather, it is

the general rule for bankruptcies. See 28 U.S.C. § 1334(e). In

short, Section 306(b) provides that bankruptcy courts acquire

exclusive jurisdiction over a debtor's property.

This grant of exclusive jurisdiction has to our

knowledge never limited the bankruptcy court's power to allow

others to act on the debtor's property with the permission of the

bankruptcy court. For example, bankruptcy courts routinely grant

leave to allow a creditor to sell a debtor's property without

threat to the exclusive jurisdiction rule. See, e.g., Catalano v.

Comm'r of Internal Revenue, 279 F.3d 682, 687 (9th Cir. 2002)

(order lifting stay to permit bank to foreclose on residential

property did not extinguish the estate's interest in the property

or constitute abandonment of the property).

Allowing the Title III court to permit or enlist others

to take action with the court's permission enhances rather than

limits the control given to the Title III court by Section 306.

See In re Ridgemont Apartment Assocs., 105 B.R. 738, 741 (Bankr.

N.D. Ga. 1989) (lifting stay for creditor to obtain a receiver to

collect some income from debtor's rental property did not cede

exclusive jurisdiction over the debtor's property, as Congress

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gave "considerable flexibility" to bankruptcy courts to protect

both creditors and debtors). Moreover, were we to read Section 306

as precluding the Title III court from allowing a Commonwealth

court to protect a creditor's collateral from actions of the

debtor, we would create the same problem that our reading of

Section 305 sought to avoid: The creditor would have no forum

that could provide any protection. Section 306 is better

understood as a housekeeping provision keeping the bankruptcy

process ultimately under the prerogative of the Title III court.

Even when the Title III court lifts the stay, that prerogative

remains. Thus, we conclude that Section 306(b) does not prevent

a Title III court from, after a determination of "cause," lifting

the stay to allow a creditor to seek the appointment of a receiver

in another court.

IV.

The Title III court also included a brief section in its

order stating, in the alternative, that it would deny the requested

relief from the automatic stay even if it had the power to do

otherwise. In so stating, it identified the impediments that a

receiver appointed outside the adjustment proceeding would pose to

the successful conclusion of that proceeding. The Title III court,

however, undertook no assessment of the extent to which any

collateral of the bondholders might be irreversibly harmed in the

interim, or whether PREPA could demonstrate that it was adequately

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protecting that interest, factors a court would ordinarily examine

and weigh. See United Sav. Ass'n of Texas v. Timbers of Inwood

Forest Assocs., 484 U.S. 365, 370 (1988) (adequate protection means

that the value of the creditor's interest in the collateral must

be protected from diminution while the property is being used or

retained during the bankruptcy proceeding); Mazzeo v. Lenhart (In

re Mazzeo), 167 F.3d 139, 142 (2d Cir. 1999) (burden falls first

on the creditor to make an initial showing of cause, then on the

debtor to show lack of cause). It is true that the bondholders

took the position that their motion could be decided "on the basis

of law and limited undisputed facts." But one of the predicate

legal issues was whether and to what extent the bondholders

possessed property interests. The Title III court found it

unnecessary to decide that issue. We, in turn, decline to do so

now without first having the issue framed by proceedings in the

Title III court. Cf. SW Boston Hotel Venture, LLC v. City of

Boston (In re SW Boston Hotel Venture, LLC), 748 F.3d 393, 402

(1st Cir. 2014) (bankruptcy court fact-finding is reviewed for

clear error); see also Whispering Pines Estates, Inc. v. Flash

Island, Inc. (In re Whispering Pines Estates, Inc.), 369 B.R. 752,

757 (B.A.P. 1st Cir. 2007) (review of stay relief order is for

abuse of discretion).

We agree with the parties that the factors identified by

the Second Circuit in Sonnax and recited by the Title III court

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provide a helpful framework for considering whether the Title III

court should permit litigation to proceed in a different forum.

See Sonnax Indus. v. Tri Component Products Corp. (In re Sonnax

Indus.), 907 F.2d 1280, 1286 (2d Cir. 1990). But the Title III

court’s order does not make clear what use it made of these

guideposts beyond a high-level consideration of the balance of the

harms. It also made no findings regarding what limitations it

might be able to impose upon the receiver.

Additionally, to say that the potential harm to the

debtor and the Title III process "far outweighs the temporary

impediments imposed on the bondholders" would also seem to require

some assessment of the pre-petition value of the bondholders'

collateral (if any exists), whether the bondholders face a threat

of uncompensated diminution in such value, whether the bondholders

are seeking the protection of existing collateral or, instead, the

creation of new collateral, and what, if any, adequate protection

PREPA can offer short of a receiver being appointed to manage it

if protection is warranted. See United Sav. Ass'n of Texas, 484

U.S. at 370; Lend Lease v. Briggs Transp. Co. (In re Briggs Transp.

Co.), 780 F.2d 1339, 1344 (8th Cir. 1985) (debtor can propose a

form of relief to provide adequate protection of a secured

creditor's interest in property). Without more to understand what

the Title III court weighed on each side of the balance of the

harms, we cannot say whether there was adequate support upon which

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to rest the Title III court's exercise of its discretion in finding

that "cause" did not exist.

The Title III court did observe in its order of

September 14, 2017, that the bondholders only faced "temporary

impediments." Much time has since passed, and the situation on

the ground -- and at PREPA -- has changed greatly since last

September in the wake of Hurricanes Irma and Maria. Additionally,

our decision today in Peaje Investments LLC v. Financial Oversight

and Management Board for Puerto Rico (In re Financial Oversight

and Management Board for Puerto Rico), Nos. 17-2165, 17-2166, 17-

2167, confirms some of the basic ground rules that may govern the

ascertainment and classification of security interests in this

case. Having now clarified the legitimate questions raised

concerning the effects of Section 305 and Section 306 of PROMESA,

we think it best to allow the bondholders to file a new and updated

request for relief from the automatic stay so that the parties and

the Title III court can focus on the merits of that request free

of any thought that the request is categorically precluded.

That being said, nothing in this opinion should be read

as implying any decision concerning issues not expressly addressed

in this opinion.

V.

For the reasons stated above, we vacate the order denying

the bondholders' request for relief from the automatic stay and we

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remand for further proceedings consistent with this opinion. No

costs are awarded.

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