Two more decisions from the First Circuit in the restructuring of the debt of Puerto Rico and its instrumentalities stand for the proposition that raising constitutional arguments gives the creditor neither the right to a modification of the automatic stay nor immunity from the doctrine of equitable mootness.
The opinions on March 2 and March 3 were the third by the First Circuit in the last month upholding actions taken by the district court in proceedings to restructure the debt of Puerto Rico and its instrumentalities under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.). PROMESA incorporates large parts of the Bankruptcy Code.
On February 8, the Boston-based circuit court held, among other things, that equitable mootness applies in PROMESA proceedings. Pinto-Lugo v. Financial Oversight and Management Board for Puerto Rico (In re Financial Oversight and Management Board for Puerto Rico), 19-1181, 2021 WL 438891 (1st Cir. Feb. 8, 2021). To read ABI’s report, click here.
The February 8 opinion dealt with a statutory lien carving out a portion of sales tax revenue exclusively for so-called Cofina bondholders. Bondholders were appealing a settlement and the confirmed plan for Cofina, which gave about 54% of sales tax revenue to Cofina bondholders. The bondholders contended that they were entitled to all sales tax revenues necessary to pay their claims.
Because the bondholders neither sought nor obtained a stay pending appeal, the First Circuit dismissed the appeal as equitably moot. The appeals court held that “the presence of underlying constitutional claims does not act as a per se bar to the applicability of [equitable mootness].”
The March 2 Opinion
The March 2 opinion also involved Cofina bonds. This time, credit unions who held the bonds were the appellants. They too were appealing confirmation of the Cofina plan that paid them only 54% of sales tax revenue.
Before confirmation, the credit unions had commenced an adversary proceeding in the PROMESA case contending, among other things, that depriving them of sales tax revenue violated the Takings Clause of the U.S. Constitution. Plan confirmation resolved the adversary proceeding over the credit union’s objection and released their claims.
As was true in the February 8 opinion, the Cofina plan had been consummated two years earlier. In the wake of confirmation, Cofina distributed $322 million to creditors plus $1 billion in sales tax revenues to the commonwealth and Cofina. Since then, newly issued Cofina bonds traded tens of thousands of times, the appeals court said.
In the March 2 opinion, Circuit Judge William J. Kayatta, Jr. decided that the credit unions’ appeal was equitably moot for the reasons stated in the February 8 opinion that he had written.
The credit unions offered several other theories to say that equitable mootness was inapplicable, none of which persuaded Judge Kayatta. Among other things, he said that constitutional arguments do not raise a per se bar to application of equitable mootness. He reasoned that constitutional rights can be waived, even in criminal proceedings, by failing to raise the arguments below. Not having sought a stay, they waived their constitutional claims.
The credit unions claimed that the doctrine of equitable mootness violates the Due Process Clause.
Judge Kayatta noted that equitable mootness, adopted in some form by every circuit, “would not exist” if it violated the Constitution. He said that failing to reach the merits of constitutional claims as a consequence of equitable mootness “does not amount to a denial of the Credit Unions’ due process.”
Judge Kayatta recounted how the credit unions “vaguely assert that the Plan’s confirmation was ‘steamrolled.’” He dismissed the idea by saying they “were ‘steamrolled’ only in that they lost quickly.”
The March 3 Opinion
The March 3 opinion by Circuit Judge Sandra L. Lynch dealt with allegedly secured bondholders of Puerto Rico instrumentalities whose plans have not yet been confirmed. The appellants were insurers of bonds claiming that some of Puerto Rico’s tax revenue was earmarked for the bondholders.
Before the PROMESA proceedings, the insurers had sued in federal courts claiming that the deprivation of the income stream was unconstitutional.
Once the automatic stay came into effect halting the lawsuits, the insurers applied for a modification of the automatic stay. They contended that Sections 362 and 922(a) did not apply because the bonds were secured by “pledged special revenue.” Around the same time, Puerto Rico’s Financial Management and Oversight Board commenced an adversary proceeding objecting to the insurers’ claims. The suit in the PROMESA proceedings would presumably resolve questions regarding the entitlement to allegedly pledged revenue.
The district judge presiding over the PROMESA proceedings denied the motion to lift the stay and have the secured claims resolved in other courts. The district judge ruled that the insurers did not have a “colorable claim” to a security interest, thus obviating relief from the stay without reaching the question of “cause” for modification of the stay. Later, the district judge also decided that the insurers had not shown “cause” for modifying the stay under Section 362(d)(1).
The insurers argued in district court that their constitutional claims entitled them to stay modification. The district judge rejected the idea. If raising constitutional claims alone would result in stay modification, she said that unsecured creditors could raise constitutional claims and demand stay relief.
On appeal, Judge Lynch found no abuse of discretion in denying modification of the stay. Raising constitutional claims in another court, she said, “will not be faster than adjudicating their claims in the [adversary proceeding in the PROMESA court], where motions for summary judgment have already been filed.”
The opinions are Cooperative de Ajorro y Credito v. Financial Oversight & Management Board for Puerto Rico (In re Financial Oversight & Management Board for Puerto Rico), 19-1391 (1st Cir. March 2, 2021); and Assured Guaranty Corp. v. Financial Oversight & Management Board for Puerto Rico (In re Financial Oversight & Management Board for Puerto Rico), 20-1930 (1st Cir. March 3, 2021).
Two more decisions from the First Circuit in the restructuring of the debt of Puerto Rico and its instrumentalities stand for the proposition that raising constitutional arguments gives the creditor neither the right to a modification of the automatic stay nor immunity from the doctrine of equitable mootness.
The opinions on March 2 and March 3 were the third by the First Circuit in the last month upholding actions taken by the district court in proceedings to restructure the debt of Puerto Rico and its instrumentalities under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.). PROMESA incorporates large parts of the Bankruptcy Code.
On February 8, the Boston-based circuit court held, among other things, that equitable mootness applies in PROMESA proceedings. Pinto-Lugo v. Financial Oversight and Management Board for Puerto Rico (In re Financial Oversight and Management Board for Puerto Rico), 19-1181, 2021 WL 438891 (1st Cir. Feb. 8, 2021). To read ABI’s report, click here.
The February 8 opinion dealt with a statutory lien carving out a portion of sales tax revenue exclusively for so-called Cofina bondholders. Bondholders were appealing a settlement and the confirmed plan for Cofina, which gave about 54% of sales tax revenue to Cofina bondholders. The bondholders contended that they were entitled to all sales tax revenues necessary to pay their claims.
Because the bondholders neither sought nor obtained a stay pending appeal, the First Circuit dismissed the appeal as equitably moot. The appeals court held that “the presence of underlying constitutional claims does not act as a per se bar to the applicability of [equitable mootness].”
The March 2 Opinion
The March 2 opinion also involved Cofina bonds. This time, credit unions who held the bonds were the appellants. They too were appealing confirmation of the Cofina plan that paid them only 54% of sales tax revenue.
Before confirmation, the credit unions had commenced an adversary proceeding in the PROMESA case contending, among other things, that depriving them of sales tax revenue violated the Takings Clause of the U.S. Constitution. Plan confirmation resolved the adversary proceeding over the credit union’s objection and released their claims.
As was true in the February 8 opinion, the Cofina plan had been consummated two years earlier. In the wake of confirmation, Cofina distributed $322 million to creditors plus $1 billion in sales tax revenues to the commonwealth and Cofina. Since then, newly issued Cofina bonds traded tens of thousands of times, the appeals court said.