Pinto-Lugo v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.)

987 F.3d 173

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 and Transportation Authority ; The Financial Oversight and Management Board for Puerto Rico, as Representative for the Puerto Rico Electric Power Authority (PREPA); The Financial Oversight and Management Board for Puerto Rico, as Representative for the Puerto Rico Sales Tax Financing Corporation, a/k/a COFINA; The Financial Oversight and Management Board for Puerto Rico, as Representative for the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Debtors.

René Pinto-Lugo; Movimiento de Concertación Ciudadana Inc., (VAMOS); Unión de Empleados de Oficina y Profesionales de la Autoridad de Edificios Públicos, (UEOGAEP); Unión Insular de Trabajadores Industriales y Construcciones Electricas Inc., (UITICE); Unión Independiente de Empleados de la Autoridad de Acueductos y Alcantarillados, (UIA); Unión de Empleados de Oficina Comercio y Ramas Anexas, Puertos, (UEOCRA); Unión de Empleados Profesionales Independientes, (UEPI); Unión Nacional de Educadores y Trabajadores de la Educación, (UNETE); Asociación de Inspectores de Juegos de Azar, (AIJA); Manuel Natal Albelo, Movants, Appellants,

v.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 Sales Tax Financing Corporation, a/k/a COFINA, Debtors, Appellees,Puerto Rico Fiscal Agency and Financial Advisory Authority, Movant, Appellee,Aristeia Capital, LLC; Canyon Capital Advisors, LLC; Golden Tree Asset Management LP; Old Bellows Partners LLP ; Scoggin Management LP; Taconic Capital Advisors, L.P.; Tilden Park Capital Management LP ; Whitebox Advisors LLC, Intervenors.

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 and Transportation Authority ; The Financial Oversight and Management Board for Puerto Rico, as Representative for the Puerto Rico Electric Power Authority (PREPA); The Financial Oversight and Management Board for Puerto Rico, as Representative for the Puerto Rico Sales Tax Financing Corporation, a/k/a COFINA; The Financial Oversight and Management Board for Puerto Rico, as Representative for the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Debtors.

Mark Elliott; Lawrence B. Dvores; Peter C. Hein, Movants, Appellants,

v.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 Sales Tax Financing Corporation, a/k/a COFINA, Debtors, Appellees,Puerto Rico Fiscal Agency and Financial Advisory Authority, Movant, Appellee,Aristeia Capital, LLC; Canyon Capital Advisors, LLC; Golden Tree Asset Management LP; Old Bellows Partners LLP ; Scoggin Management LP; Taconic Capital Advisors, L.P.; Tilden Park Capital Management LP ; Whitebox Advisors LLC, Intervenors.

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 and Transportation Authority ; The Financial Oversight and Management Board for Puerto Rico, as Representative for the Puerto Rico Electric Power Authority (PREPA); The Financial Oversight and Management Board for Puerto Rico, as Representative for the Puerto Rico Sales Tax Financing Corporation, a/k/a COFINA; The Financial Oversight and Management Board for Puerto Rico, as Representative for the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Debtors.

Peter C. Hein, Movant, Appellant,

v.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 Sales Tax Financing Corporation, a/k/a COFINA, Debtors, Appellees,Puerto Rico Fiscal Agency and Financial Advisory Authority, Movant, Appellee.

No. 19-1181

No. 19-1182

No. 19-1960

United States Court of Appeals, First Circuit.

February 8, 2021

Roberto O. Maldonado-Nieves for appellants Pinto Lugo, et. al.

Rafael A. González Valiente, Guaynabo, Puerto Rico, for appellant Elliot.

Lawrence B. Dvores on brief for appellant Dvores.

Peter C. Hein, New York, NY, for appellant Hein.

Martin J. Bienenstock, New York, NY, and Hermann D. Bauer-Alvarez, San Juan, PR, with whom Timothy W. Mungovan, John E. Roberts, Boston, MA, Stephen L. Ratner, Brian S. Rosen, Mark D. Harris, Jeffrey W. Levitan, Lucas Kowalczyk, New York, NY, Shiloh A. Rainwater, Michael A. Firestein, Lary Alan Rappaport, Los Angeles, CA, and Proskauer Rose LLP, were on brief for appellee Financial Oversight and Management Board for Puerto Rico as representative for the Commonwealth of Puerto Rico and the Puerto Rico Sales Tax Financing Corporation.

Peter M. Friedman, Washington, DC, with whom John J. Rapisardi, New York, NY, Suzanne Uhland, and O'Melveny & Myers LLP, were on brief for appellee Puerto Rico Fiscal Agency and Financial Advisory Authority.

David M. Cooper, with whom Susheel Kirpalani, New York, NY, Quinn Emanuel Urquhart & Sullivan, LLP, Rafael Escalera, San Juan, PR, Sylvia M. Arizmendi, Carlos R. Rivera-Ortiz, San Juan, PR, and Reichard & Escalera LLC, were on brief for intervenors.

Before Howard, Chief Judge. Torruella^** and Kayatta, Circuit Judges.

KAYATTA, Circuit Judge.

These three consolidated appeals arise out of Title III debt-restructuring proceedings brought by the Financial Oversight and Management Board for Puerto Rico ("the Board") on behalf of the Puerto Rico Sales Tax Financing Corporation (COFINA) under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). 48 U.S.C. §§ 2101 – 2241. The Title III court approved a plan of adjustment proposed by the Board ("the Plan") resolving disputes between COFINA and the Commonwealth of Puerto Rico and between the junior and senior holders of COFINA's outstanding debt. Two groups -- the Elliott and Pinto-Lugo groups -- objected to the Plan, variously contending that it unlawfully abrogated their rights as junior COFINA bondholders, that the plan confirmation procedures were unlawful, and that the plan confirmation should not have been implemented because the Commonwealth violated the Puerto Rico Constitution in enacting implementing legislation. An individual creditor, Peter Hein, also challenged the dismissal of his proof of claim against COFINA. The Title III court overruled the objections to the Plan and dismissed Hein's challenges. No party sought to stay the Title III court's order approving the Plan, which has been fully implemented for nearly two years and given rise to transactions involving billions of dollars and likely tens of thousands of individuals. For the following reasons, we now dismiss the Elliott and Pinto-Lugo appeals as equitably moot and we affirm the dismissal of Hein's claim against COFINA.

I.

The Commonwealth of Puerto Rico consistently spent much more than it received in taxes and other payments. Rather than balance spending and revenues, it repeatedly opted to borrow more by issuing general obligation bonds ("GO bonds"). It did so until limits on sovereign debt contained in the Commonwealth's Constitution substantially constrained the Commonwealth's direct access to the credit markets. To address the situation, the Commonwealth in 2006 passed Act 91, establishing COFINA as a public corporation, separate and independent from the Commonwealth. See P.R. Laws Ann. tit. 13, §§ 11a – 16. COFINA had a sole purpose: issuing non-recourse bonds. See id. § 11a. By the time of the Title III petition in this case, aggregate principal and unpaid interest in outstanding COFINA bonds totaled over $17 billion, adding to the already very significant total of accrued public debt in Puerto Rico, a jurisdiction of just over three million people.

To pay the COFINA bondholders, Act 91 looked to the Commonwealth's sales and use tax revenues ("SUT revenues"). Under Puerto Rico's Constitution, all "available revenues" must first be utilized to satisfy general public debt. P.R. Const. art. VI, § 8. Act 91 sought to render a specified percentage of SUT revenues "unavailable" by pledging that percentage to COFINA and creating a statutory lien on future SUT revenues. In this manner, Act 91 set in place a potential conflict between the interests of COFINA bondholders (who looked to the pledged SUT revenues for their payments) and the interests of the Commonwealth and GO bondholders (who might view Act 91 as unconstitutional to the extent it sought to put otherwise available Commonwealth revenues beyond the reach of Commonwealth creditors).

This tension turned into outright conflict when the Commonwealth declared a moratorium on payments to GO bondholders. The GO bondholders sued the Commonwealth, claiming a superior right to the SUT revenues that the Commonwealth had pledged to COFINA. COFINA bondholders intervened, joining a zero-sum contest to determine which entity had superior rights under Puerto Rico law to the SUT revenues: the Commonwealth (to pay its GO creditors), or COFINA (to pay its bondholders). This court eventually deemed that lawsuit subject to PROMESA's temporary automatic stay. Lex Claims, LLC v. Fin. Oversight & Mgmt. Bd., 853 F.3d 548 (1st Cir. 2017). At the same time, we expressed hope that the parties would find "a way to accommodate and balance the respective interests of these bondholders if there...