Case: LTS Doc#:25 Filed:05/31/17 Entered:05/31/17 17:51:40 Document Page 1 of 55

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1 Document Page 1 of 55 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO In re: PROMESA THE FINANCIAL OVERSIGHT AND Title III MANAGEMENT BOARD FOR PUERTO RICO, as representative of No. 17 BK 3283-LTS THE COMMONWEALTH OF PUERTO RICO, Debtor. In re: PROMESA THE FINANCIAL OVERSIGHT AND Title III MANAGEMENT BOARD FOR PUERTO RICO, as representative of No. 17 BK 3567-LTS PUERTO RICO HIGHWAYS & TRANSPORTATION AUTHORITY, Debtor. Peaje Investments LLC, Adversary Proceeding Plaintiff, No against- Puerto Rico Highways & Transportation Authority, Hon. Carlos Contreras Aponte, The Commonwealth of Puerto Rico, EVIDENTIARY HEARING Hon. Ricardo Rosselló, REQUESTED Hon. Raúl Maldonado Gautier, Hon. José Iván Marrero Rosado, Puerto Rico Fiscal Agency and Financial Advisory Authority, Hon. Gerardo Portela Franco, Defendants. (I MOTION OF PEAJE INVESTMENT LLC (A FOR TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION, AND (B FOR RELIEF FROM STAY OR, ALTERNATIVELY, ADEQUATE PROTECTION; AND (II MEMORANDUM OF LAW IN SUPPORT THEREOF

2 Document Page 2 of 55 TABLE OF CONTENTS Page STATEMENT... 4 ARGUMENT... 9 I. THE COURT SHOULD TEMPORARILY AND PRELIMINARILY ENJOIN HTA AND ITS EXECUTIVE DIRECTOR FROM DIVERTING THE TOLL REVENUES A. Plaintiff is Likely to Succeed on the Merits Section 922(d of the Bankruptcy Code Requires HTA and its Executive Director to Resume Depositing the Toll Revenues The Toll Revenues Qualify as Special Revenues Section 928(b of the Bankruptcy Code Does Not Affect Plaintiff s Bonds PROMESA Does Not Prevent the Requested Relief B. Plaintiff Will Suffer Irreparable Harm C. The Balance of Harms (and the Equities Sharply Favor Plaintiff D. The Public Interest Favors Granting an Injunction II. PLAINTIFF SHOULD NOT BE REQUIRED TO POST A BOND III. UNLESS HTA PROVIDES PLAINTIFF WITH ADEQUATE PROTECTION, THE COURT SHOULD LIFT THE BANKRUPTCY STAYS (TO THE EXTENT APPLICABLE IN THIS MATTER PRAYER FOR RELIEF PROPOSED TEMPORARY RESTRAINING ORDER... EXHIBIT A PROPOSED PRELIMINARY INJUNCTION ORDER... EXHIBIT B PROPOSED ORDER GRANTING RELIEF FROM STAY... EXHIBIT C

3 Document Page 3 of 55 TABLE OF AUTHORITIES Page(s Cases Alliance Capital Management L.P. v. County of Orange, 189 B.R. 499 (C.D. Cal Armstrong v. United States, 364 U.S. 40 ( Certified Restoration Dry Cleaning Network, LLC v. Tenke Corp., 511 F.3d 535 (6th Cir In re City of Orange, 179 B.R. 185 (Bankr. C.D. Cal , 22 Crowell v. Benson, 285 U.S. 22 ( Crowley v. Local No. 82, Furniture & Piano Moving, Furniture Store Drivers, Helpers, Warehousemen, & Packers, 679 F.2d 978 (1st Cir. 1982, judgment rev d on other grounds, 467 U.S. 526 ( Franklin California Tax-Free Trust v. Puerto Rico, 805 F.3d 322 (1st Cir Harris v. Wall, No. 16-cv-80, 2016 WL (D.R.I. Nov. 18, In re Heffernan Mem l Hosp. Dist., 202 B.R. 147 (Bankr. S.D. Cal In re Jefferson County, 474 B.R. 228 (Bankr. N.D. Ala , 15 Kaiser Aetna v. United States, 444 U.S. 164 ( Kener v. La Grange Mills, 231 U.S. 215 ( Mercado-Salinas v. Bart Enterprises Intern., Ltd., 671 F.3d 12 (1st Cir Micro Signal Research, Inc. v. Otus, 417 F.3d 28 (1st Cir ii

4 Document Page 4 of 55 Moltan Co. v. Eagle-Picher Industries, Inc., 55 F.3d 1171 (6th Cir Peaje Investments LLC v. García-Padilla, 845 F.3d 505 (1st Cir passim Peaje Investments LLC v. García-Padilla, No , 2016 U.S. Dist. LEXIS (D.P.R. Nov. 2, passim Rio Grande Community Health Center, Inc. v. Rullan, 397 F.3d 56 (1st Cir Rodriguez v. Montalvo, 371 F.Supp.2d 3 (D. Mass Ross-Simons of Warwick, Inc. v. Baccarat, Inc., 102 F.3d 12 (1st Cir TEC Eng g Corp. v. Budget Molders Supply, Inc., 927 F. Supp. 528 (D. Mass TLS Mgmt. & Mktg. Servs. LLC v. Rodriguez-Toledo, No. 15-cv-2121, 2017 WL (D.P.R. Mar. 30, , 30 Total Petroleum Puerto Rico Corp. v. Quintana, No. 16-cv-2979, 2016 WL (D.P.R. Nov. 30, United Parcel Service v. Flores-Galarza, 210 F. Supp. 2d 33 (D.P.R. 2002, aff d in part, 318 F.3d 323 (1st Cir United States v. Rivera Torres, 826 F.2d 151 (1st Cir United States v. Sec. Indus. Bank, 459 U.S. 70 ( Vaqueria Tres Monjitas, Inc. v. Irizarry, 587 F.3d 464 (1st Cir Verizon New England Inc. v. Maine Public Utilities Commission, 403 F. Supp. 2d 96 (D. Me Wal-Mart P.R., Inc. v. Zaragoza-Gomez, 834 F.3d 110 (1st Cir Waldron v. George Weston Bakeries Inc., 570 F.3d 5 (1st Cir iii

5 Document Page 5 of 55 Watchtower Bible Tract Society of New York, Inc. v. Municipality of Aguada, 160 F.Supp.3d 440 (D.P.R West Indian Company, Ltd. v. Gov t of the Virgin Islands, 643 F. Supp. 869 (D.V.I Westernbank Puerto Rico v. Kachkar, No. 07-cv-1606, 2009 WL (D.P.R. Sept. 1, Statutes 9 L.P.R.A U.S.C. 101( U.S.C passim 11 U.S.C passim 11 U.S.C passim 11 U.S.C passim 11 U.S.C , U.S.C passim 11 U.S.C , U.S.C passim 48 U.S.C U.S.C , 22, U.S.C passim 48 U.S.C passim 48 U.S.C U.S.C , 6 Fiscal Plan Compliance Law, P. de la C , 11 Moratorium Act...4, 5, 28 Puerto Rico Financial Emergency and Fiscal Responsibility Act of , 11 iv

6 Document Page 6 of 55 Other Authorities COLLIER ON BANKRUPTCY [1] (16th ed COLLIER ON BANKRUPTCY [2] (16th ed , 16 David A. Skeel, Jr., What is a Lien? Lessons from Municipal Bankruptcy, 2015 U. ILL. L. REV. 675 ( , 16 David E. Lemke, Blake D. Roth & Courtney M. Rogers, Municipal Debtors: Cram Down of Special Revenue Debt (Apr. 18, FED. R. BANKR. P FED. R. CIV. P passim H.R. Rep. No ( Henry C. Kevane, Chapter 9 Municipal Bankruptcy: The New New Thing? Part II...16 Kevin A. Kordana, Tax Increases In Municipal Bankruptcies, 83 VA. L. REV. 1035, 1050 ( Mark N. Berman, What Municipal Bond Investors Can Learn From Detroit (Nov. 25, P.R. LBR S. Rep. No ( United States Constitution...11 v

7 Document Page 7 of 55 TO THE HONORABLE COURT: COME NOW, Plaintiff Peaje Investments LLC ( Plaintiff, by and through its attorneys, Dechert LLP and Monserrate Simonet & Gierbolini, LLC, respectfully states and prays as follows: Plaintiff is the owner of various bonds issued by Defendant Puerto Rico Highways & Transportation Authority ( HTA, a public corporation and government instrumentality of Defendant the Commonwealth of Puerto Rico (the Commonwealth. Also Defendants are the Executive Director of HTA, currently the Hon. Carlos Contreras Aponte (the Executive Director, the Governor of the Commonwealth, currently the Hon. Ricardo Rosselló (the Governor, the Puerto Rico Fiscal Agency and Financial Advisory Authority ( AAFAF and its Executive Director, currently the Hon. Gerardo Portela Franco (the AAFAF Director, and Hon. Raúl Maldonado Gautier and Hon. José Iván Marrero Rosado, who are Commonwealth officials (together with the Governor and AAFAF Director, the Officials, and collectively with HTA, its Executive Director, the Commonwealth, and AAFAF, Defendants. Plaintiff s bonds are secured by a lien on, among other things, certain special revenues consisting of tolls and other charges that HTA collects from its operation of highways PR-20, PR-52, and PR-53 (among other traffic facilities (the Toll Revenues. 1 The bonds are limited recourse in nature, meaning that, ordinarily, the bonds may be paid only from the collateral securing them as is relevant here, the Toll Revenues. Under a municipal resolution governing the terms of the bonds, HTA is required to pay the Toll Revenues to a fiscal agent (the Fiscal Agent for the bonds, and the Fiscal Agent is, in turn, required to make semi-annual payments 1 While Plaintiff is the beneficiary of additional liens on the proceeds of certain excise taxes and vehicle license fees pledged to payment of the bonds, this proceeding only seeks relief with respect to the Toll Revenues, and Plaintiff reserves its right to ensure the transfer and proper use of the other pledged revenues.

8 Document Page 8 of 55 to the bondholders. Since May of 2016, however, HTA and its Executive Director have been unlawfully diverting the Toll Revenues to other uses. Accordingly, the Fiscal Agent currently lacks sufficient funds to satisfy in full the next scheduled payment to the bondholders due this coming July, and will have no funds to make any further payments thereafter. Defendant HTA and its Executive Director have made it perfectly clear that, rather than use the Toll Revenues to pay Plaintiff s bonds, they now intend to continue to take the Toll Revenues indefinitely and spend them elsewhere, leaving the bonds unpaid all in conflict with representations previously made in the District Court and in the First Circuit Court of Appeals. Whereas the value of Plaintiff s collateral should be sufficient to pay Plaintiff s bonds in full, HTA and its Executive Director intend to misappropriate virtually all of that value, thereby destroying Plaintiff s lien rights and rendering Plaintiff effectively an unsecured creditor. Because HTA s conduct plainly violates applicable law and leaves Plaintiff without adequate protection of its interest, the Court s immediate intervention is warranted. Plaintiff brings this motion (the Motion as part of an adversary proceeding filed in HTA s reorganization case, as well as an adversary proceeding filed in the Commonwealth s reorganization case. Both of these cases are pending before this Court under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act, Pub. L ( PROMESA. In prescribing the relevant statutory scheme governing HTA s and the Commonwealth s reorganization efforts, Congress specifically incorporated into Title III, among other provisions, Section 922 of the Bankruptcy Code, which is normally applicable in a Chapter 9 bankruptcy case. See 48 U.S.C That provision is intended to ensure that the rights of special revenue bondholders, such as Plaintiff, are respected in bankruptcy by providing that the holders of such bonds are entitled to have their collateral used to pay their claims during the 2

9 Document Page 9 of 55 case. See 11 U.S.C. 922(d. Furthermore, while a bankruptcy filing ordinarily stays a wide range of collection activity, these provisions largely exempt special revenue bondholders from such stay. See id. As explained below, the Toll Revenues pledged as collateral for the payment of Plaintiff s bonds undoubtedly qualify as special revenues within the meaning of the statute. Notwithstanding this fact, HTA and its Executive Director have refused to turn over the Toll Revenues for application to Plaintiff s bonds, flouting the very law under which they seek shelter. Plaintiff agrees that HTA and the Commonwealth should restructure their financial affairs, but they may do so only in accordance with applicable law. Because HTA and its Executive Director continue to violate the law in a way that is causing Plaintiff irreparable harm; because Plaintiff is likely to succeed on the merits; because Defendants can suffer no legally cognizable harm from complying with the law or refraining from taking someone else s property without providing just compensation; and because the balance of the equities tips decidedly in Plaintiff s favor, as does consideration of the public interest, injunctive relief is warranted. Moreover, because the illegal conduct of HTA and its Executive Director is clearly proscribed by law, Plaintiff seeks a waiver of the requirement to post security in connection with the issuance of the injunction. 2 Finally, while Plaintiff submits that the bankruptcy stays are inapplicable to Plaintiff in this matter, to the extent that such stays are applicable, Plaintiff seeks, out of an abundance of caution, relief from the bankruptcy stays, or, in the alternative, adequate protection under Section 361 of the Bankruptcy Code. 2 In accordance with Local Rule (a of the Local Bankruptcy Rules of the Bankruptcy Court for the District of Puerto Rico and the case management procedures that are expected to be entered in these cases, Plaintiff has moved separately for the Court s expedition of the matters raised in this Motion. 3

10 Document Page 10 of 55 STATEMENT 3 Plaintiff is the beneficial owner of $65 million in uninsured bonds issued by Defendant HTA under a statutory enactment, Act No (the Enabling Act, and a binding municipal resolution adopted in 1968 (the Resolution, and the bonds issued thereunder, collectively, the Bonds. Under the Enabling Act and the Resolution, the Bonds are secured by a pledge of and lien on the Toll Revenues, along with certain other revenues and funds in addition to the Toll Revenues. See Resolution 401, 501, 601; 9 L.P.R.A. 2004(l; see also Peaje Investments LLC v. García-Padilla, 845 F.3d 505, 510 (1st Cir ( The bonds are secured by a lien on toll revenues, among other things.. The Resolution governing the Bonds explicitly requires HTA to deposit the pledged revenues on a monthly basis into a collateral account maintained with the Fiscal Agent for the Bonds. See Resolution 401. Typical of a special revenue financing, the Bonds are, as noted, limited-recourse obligations, meaning they are ordinarily payable solely from the pledged revenues, and no other source. In May 2016, the Commonwealth enacted a law known as the Moratorium Act, which purportedly authorized the Governor to issue executive orders to: (a declare various Commonwealth entities in a state of emergency ; and (b stop payment of those entities debt obligations. See Moratorium Act 201(a-(b. In May and June of that year, then-governor Alejandro García Padilla declared HTA in a state of emergency, and directed HTA and various Commonwealth officials to retain the Toll Revenues pledged to payment of the Bonds, instead of turning those revenues over to the Fiscal Agent as required under the Resolution. See 3 This Statement is drawn from the factual allegations of Plaintiff s Verified Complaint, the exhibits attached thereto, and the Stanford Affidavit (as defined below. For purposes of economy, Plaintiff recounts the most salient facts in summary fashion, and otherwise incorporates by reference the remainder of the Verified Complaint. Each capitalized term used but not defined herein shall have the meaning ascribed to it in the Verified Complaint. 4

11 Document Page 11 of 55 Commonwealth of Puerto Rico, Administrative Bulletin No. OE ; Administrative Bulletin No. EO ; Administrative Bulletin No. EO (collectively, the Executive Orders. While the Commonwealth has since repealed the portions of the Moratorium Act that authorized then-governor García Padilla to issue these Executive Orders (and the Executive Orders further have expired by their terms, 4 HTA and its Executive Director have refused to resume depositing the pledged revenues into the Bondholders collateral account. As a result of the limited-recourse nature of the Bonds, the diversion of the pledged revenues reduces the limited pool of collateral available to satisfy those Bonds, thereby increasing the risk of nonpayment. See Affidavit of Thomas Stanford in Support of Motion of Plaintiff Peaje Investments LLC for Temporary Restraining Order and Preliminary Injunction, filed contemporaneously herewith (the Stanford Affidavit, at 10. To the extent the diversion continues, Plaintiff will not be paid when due the principal and interest that Plaintiff is entitled to be paid on its Bonds. Id. at 6-7. To the extent the diversion continues indefinitely, Plaintiff will not be paid at all (beyond the limited funds the Fiscal Agent currently has on hand, in violation of its rights. On June 30, 2016, President Obama signed into law PROMESA. PROMESA was intended to authorize a process for the reorganization of the Commonwealth s financial affairs, and created an Oversight Board to facilitate that process. Among other things, the enactment of PROMESA initiated an interim stay of certain creditor actions as specified under Section 405 of PROMESA, 48 U.S.C. 2194(b, which interim stay could have been lifted for cause shown 4 On January 27, 2017, the Commonwealth legislature enacted the Puerto Rico Financial Emergency and Fiscal Responsibility Act of 2017 (the Fiscal Responsibility Act. The Fiscal Responsibility Act repealed the portions of the Moratorium Act upon which former Governor García Padilla had relied when issuing his Executive Orders diverting the Toll Revenues. While the act authorized Governor Ricardo Rosselló to issue executive orders regarding the disbursement or disposition of funds held by [a] government entity, see Fiscal Responsibility Act 206(a(iii, the Governor declined to issue new executive orders regarding the Toll Revenues. On January 31, 2017, the Executive Orders expired by their terms. 5

12 Document Page 12 of 55 during the stay s effective period, see 48 U.S.C. 2194(e(2, but in any event the interim stay expired on May 1, 2017, see 48 U.S.C. 2194(d(2. In contrast, the debtor s filing of a Title III case initiates the stays normally applicable in a Chapter 9 bankruptcy proceeding. These bankruptcy stays are provided for in Sections 362 and 922 of the Bankruptcy Code and are incorporated into Title III under Section 301 of PROMESA, 48 U.S.C Once a Title III case is filed, creditors have markedly greater protections under the provisions governing the bankruptcy stays as compared to the former interim stay. First, as the First Circuit found in connection with prior litigation on the now-expired interim stay, creditors have a lower burden in seeking to lift the stay for cause in a bankruptcy case because there is an express-burden shifting framework whereby the debtor (here, HTA has the burden of proof on all issues other than the debtor s equity in property. See Peaje Investments, 845 F.3d at 513 (citing 11 U.S.C. 362(g. By contrast, the movant had the entire burden to show cause in seeking to lift the interim stay. Second, Section 922(d of the Bankruptcy Code affords special protection to special revenue bonds, largely exempting the holders of those bonds from the bankruptcy stays and providing that the debtor must turnover pledged special revenues in a manner consistent with Section [928] of [the Bankruptcy Code] to payment of indebtedness secured by such revenues. 11 U.S.C. 922(d. 5 The Toll Revenues are pledged special revenues within the meaning of this provision. Under PROMESA, the Commonwealth and any of its instrumentalities that are designated by the Oversight Board must submit a fiscal plan to the board that provide[s] a method to achieve fiscal responsibility and access to the capital markets, among several other 5 Section 922(d refers to Section 927 of the Bankruptcy Code, but this is a scrivener s error, and should instead be read as a cross-reference to Section 928. See COLLIER ON BANKRUPTCY at n.20. 6

13 Document Page 13 of 55 requirements. See 48 U.S.C. 2141(b(1. In many cases, the fiscal plan is intended to serve as the framework for a plan of adjustment to be submitted in a judicial reorganization under Title III of PROMESA. As a designated instrumentality, HTA developed its own fiscal plan and submitted it to the Oversight Board. On April 28, 2017, the Oversight Board approved and certified HTA s fiscal plan after making several modifications to it. See Resolutions Adopted at the Seventh Public Meeting of the Financial Oversight and Management Board for Puerto Rico Held on April 28, 2017 in New York, New York (the Oversight Board Resolutions, a copy of which is attached to the Verified Complaint as Exhibit A. Subsequently, the Oversight Board posted to its website the amended version of HTA s fiscal plan (the HTA Fiscal Plan, a copy of which is attached to the Verified Complaint as Exhibit B. 6 While the HTA Fiscal Plan outlines several measures to increase HTA s revenues and reduce operating expenses, the plan nonetheless takes the position that HTA has insufficient cash flows to service its debt. See HTA Fiscal Plan at 32. Another section of the HTA Fiscal Plan is explicit with respect to the intention of HTA and its Executive Director not to make payment on Plaintiff s Bonds, while continuing to divert Plaintiff s collateral, stating: Bondholders of the PRHTA would cease to receive money for debt repayment by July 2017, when the reserve funds that have been used until now run out. Although PRHTA stopped remitting payments to the trust, the trustee has been using a reserve fund to comply with bondholder payments. See HTA Fiscal Plan at 20. This represents a remarkable change of position on the part of Defendants. Only a few months earlier in litigation between the parties addressing whether the interim stay provided 6 Plaintiff does not seek relief with respect to the HTA Fiscal Plan at this time, but reserves its right to challenge the plan on the grounds, inter alia, that it does not comply with PROMESA. 7

14 Document Page 14 of 55 under PROMESA should be lifted, Defendants represented to the Court that Plaintiff s interest in the Toll Revenues was adequately protected because there will be sufficient Toll Revenues in the future to pay Plaintiff s Bonds. See Peaje Investments, 845 F.3d at 514 ( [T]he Commonwealth responded that [a]ny particular toll revenue not allocated to the bonds today could simply be made up for by toll revenues collected tomorrow. ; Peaje Investments LLC v. García-Padilla, 3:16-cv FAB, [Dkt. No. 60] (motion of HTA and its former Executive Director to join the Commonwealth s brief opposing Plaintiff s motion to lift the interim stay. On April 29, 2017, the Commonwealth enacted the Fiscal Plan Compliance Law, P. de la C. 938 (the Fiscal Plan Act. 7 This statute is meant to effectuate the Commonwealth s own fiscal plan (the Commonwealth Fiscal Plan 8 and harms Plaintiff in a number of ways. Among other things, the Commonwealth Fiscal Plan prioritizes the Commonwealth s general expenses over the payment of debt service on Plaintiff s Bonds, disregarding the Bondholders lien on the Tax Revenues and the priority of such lien under applicable law. In implementing this scheme, the Fiscal Plan Act also purportedly authorizes the Commonwealth to expropriate surplus revenues from HTA after payment of its operating expenses, without making payment or provision for payment of debt service to the Bondholders out of the Toll Revenues. See Fiscal Plan Act, art. 4.01, The Fiscal Plan Act establishes a committee comprised of Commonwealth officials, and purportedly gives them discretion to determine the extent to which bondholder collateral will be expropriated as surplus revenues. See id. at art On May 3, 2017, the Commonwealth and the Puerto Rico Sales Tax Financing Corporation (a/k/a COFINA filed petitions for relief under Title III of PROMESA in this 7 A copy of the Fiscal Plan Act, along with a certified translation of Chapters 4 and 6 of that act, is attached to the Verified Complaint as Exhibit C. 8 A copy of the Commonwealth Fiscal Plan is attached to the Verified Complaint as Exhibit D. 8

15 Document Page 15 of 55 Court. On May 21, 2017, HTA filed its own Title III petition in this Court. The filing of HTA s petition, as noted, initiated the bankruptcy stays incorporated into Title III under Section 301 of PROMESA, 48 U.S.C with respect to certain creditor actions against HTA and its Executive Director, but not as to the enforcement of special revenue pledges under Section 922(d of the Bankruptcy Code. Shortly thereafter, Plaintiff brought the above-captioned adversary proceedings, and likewise filed the present Motion seeking temporary and preliminary injunctive relief to enforce and protect its lien and other rights in the pledged Toll Revenues in the manner provided under PROMESA. Additionally, while Plaintiff submits that the bankruptcy stays are inapplicable to Plaintiff in this matter, to the extent that such stays are applicable, this Motion seeks relief from the stays, or, alternatively, an order requiring HTA to provide Plaintiff with adequate protection. ARGUMENT I. The Court Should Temporarily and Preliminarily Enjoin HTA and its Executive Director From Diverting the Toll Revenues. Plaintiff meets the standards for obtaining a temporary restraining order and preliminary injunction. Under Rule 65 of the Federal Rules of Civil Procedure, 9 the issuance of a preliminary injunction is appropriate where the plaintiff shows: a likelihood of success on the merits; the potential for irreparable harm to plaintiff absent granting of the injunction; the balance of the hardships (and the equities tips in plaintiff s favor; and 9 Rule 65 governs here. Section 310 of PROMESA provides that [t]he Federal Rules of Bankruptcy Procedure shall apply to a case under [Title III of PROMESA] and to all civil proceedings arising in or related to cases under [Title III]. 48 U.S.C Rule 7065 of the Federal Rules of Bankruptcy Procedure, in turn, provides that Rule 65 of the Federal Rules of Civil Procedure applies in adversary proceedings such as this one, except that a temporary restraining order or preliminary injunction may be issued on application of a debtor, trustee, or debtor in possession without compliance with Rule 65(c [i.e., posting a bond]. FED. R. BANKR. P

16 Document Page 16 of 55 granting the relief is in the public interest. See, e.g., Vaqueria Tres Monjitas, Inc. v. Irizarry, 587 F.3d 464, 482 (1st Cir. 2009; TLS Mgmt. & Mktg. Servs. LLC v. Rodriguez-Toledo, No. 15-cv-2121, 2017 WL , at *2 (D.P.R. Mar. 30, The first factor of this analysis likelihood of success on the merits normally will weigh the heaviest in [the] four-part decisional calculus. Waldron v. George Weston Bakeries Inc., 570 F.3d 5, 9 (1st Cir At the preliminary injunction stage, the trial court need not predict the eventual outcome on the merits with absolute assurance, and instead should only consider the probable outcome based on the facts before it. See Ross-Simons of Warwick, Inc. v. Baccarat, Inc., 102 F.3d 12, 16 (1st Cir Appling the same factors, the Court may grant a temporary restraining order pending the hearing on the requested preliminary injunction, provided that: (A specific facts in an affidavit or a verified complaint clearly show that immediate and irreparable injury, loss, or damage will result to the movant before the adverse party can be heard in opposition; and (B the movant s attorney certifies in writing any efforts made to give notice and the reasons why it should not be required. FED. R. CIV. P. 65(b; see also Harris v. Wall, No. 16-cv-80, 2016 WL , at *7 (D.R.I. Nov. 18, 2016 ( The basic four-factor legal standard is the same for a temporary restraining order and a preliminary injunction.. as follows: A. Plaintiff is Likely to Succeed on the Merits. Plaintiff s Verified Complaint seeks complete relief in the form of an order and judgment determining and declaring that the Toll Revenues serving as collateral for the payment of Plaintiff s Bonds qualify as pledged special revenues under Section 922(d of the Bankruptcy Code; determining and declaring that, pursuant to Section 922(d of the Bankruptcy Code, the stays provided for under Sections 362 and 922(a of the Bankruptcy 10

17 Document Page 17 of 55 Code do not apply to Plaintiff s efforts to prevent Defendants from diverting the Toll Revenues, or prevent Plaintiff from otherwise enforcing rights and remedies with respect to its Bonds; to the extent the stays under Sections 362 and 922 apply, directing HTA to provide Plaintiff with adequate protection pursuant to Section 361 of the Bankruptcy Code in the form of HTA depositing a sufficient amount of Toll Revenues with the Fiscal Agent to ensure the timely payment of principal and interest on Plaintiff s Bonds, or failing that, lifting the bankruptcy stays to allow Plaintiff to enforce its rights and remedies with respect to its Bonds; determining and declaring that Section 922(d of the Bankruptcy Code requires HTA and its Executive Director to turn over the Toll Revenues to the Fiscal Agent in the manner provided under the Resolution governing Plaintiff s Bonds; determining and declaring that neither Section 552(a nor Section 928(b of the Bankruptcy Code apply to Plaintiff s Bonds because, among other things, the Bonds are secured by a statutory lien on the Toll Revenues; determining and declaring that, to the extent Section 928(b applies to Plaintiff s Bonds, the expropriation of the Bondholders lien on the Toll Revenues to pay the necessary operating expenses of HTA violates the Fifth Amendment of the U.S. Constitution, or, in the alternative, that the Bondholders lien can only be subordinated to the expenses necessary to preserve the project or system that generates the specific collateral securing the Bonds i.e., the toll roads generating the Toll Revenues; determining and declaring that the special revenue protections of the Bankruptcy Code in particular, Section 922(d preempt the Commonwealth Fiscal Plan (as implemented by the Fiscal Plan Act, the former Governor s unlawful Executive Orders (insofar as they have not expired, and Section 208(e of the Fiscal Responsibility Act; lifting the stays provided for under Sections 362 and 922 of the Bankruptcy Code (to the extent applicable to allow Plaintiff to commence and prosecute an action challenging on constitutional grounds, among other things, the unlawful diversion of the Toll Revenues under color of the Commonwealth Fiscal Plan (as implemented by the Fiscal Plan Act, the unlawful Executive Orders, and Section 208(e of the Fiscal Responsibility Act; enjoining HTA and its Executive Director from continuing to divert the Toll Revenues in violation of Section 922(d of the Bankruptcy Code and other applicable law, and otherwise prohibiting the Commonwealth, AAFAF, and their respective Officials from interfering with the obligation of HTA and its Executive Director to deposit the Toll Revenues with the Fiscal Agent; 11

18 Document Page 18 of 55 directing HTA and its Executive Director to resume depositing the Toll Revenues as required under Section 922(d of the Bankruptcy Code and other applicable law, and otherwise prohibiting the Commonwealth, AAFAF, and their respective Officials from interfering with that judgment; and directing HTA and its Executive Director to deposit sufficient funds with the Fiscal Agent in advance of the semi-annual debt service payment dates under the Resolution to ensure the timely payment of all principal and interest on Plaintiff s Bonds, and otherwise prohibiting the Commonwealth, AAFAF, and their respective Officials from interfering with that judgment. At the heart of the Verified Complaint, and the specific issue that is the subject of this Motion, is Plaintiff s request for an injunction requiring HTA and its Executive Director to deposit the Toll Revenues with the Fiscal Agent, and an order prohibiting the Commonwealth, AAFAF, and their respective Officials from interfering with that judgment. Plaintiff is likely to succeed on this relief because what Plaintiff requests is nothing more than what is already mandated under Section 922(d of the Bankruptcy Code which relief will also preserve the status quo that existed prior to HTA s and its Executive Director s unlawful taking of Plaintiff s collateral pending a trial on the merits. This is the narrowest relief necessary to prevent irreparable harm to Plaintiff pending the outcome of this litigation. Section 922(d provides that, notwithstanding the bankruptcy stays applicable in a Title III case, a petition filed under this chapter does not operate as a stay of application of pledged special revenues in a manner consistent with section [928] of this title to payment of indebtedness secured by such revenues. 10 That provision is part of a set of amendments to the Bankruptcy Code intended to protect a bondholder s lien on pledged special revenues in the event the debtor becomes bankrupt, and mandates that the debtor turn over those revenues to the bondholder during the bankruptcy case. In this case, that directive applies squarely to HTA and 10 As noted, Section 922 s reference to Section 927 is a scrivener s error, and should instead be read as a cross-reference to Section 928 of the Bankruptcy Code. 12

19 Document Page 19 of 55 its Executive Director because the Toll Revenues securing the payment of Plaintiff s Bonds undoubtedly qualify as pledged special revenues under the statute if they did not so qualify, it would be hard to imagine what would. Finally, although Section 922(d provides further that the application of pledged special revenues [must be] in a manner consistent with section [928], and Section 928 in turn provides for a limited subordination of a bondholder s lien rights in some situations, that provision does not and cannot apply to Plaintiff s Bonds in this case. 1. Section 922(d Requires HTA and its Executive Director to Resume Depositing the Toll Revenues. As noted, Section 922(d of the Bankruptcy Code affords special protection to holders of special revenue bonds, providing that, notwithstanding the bankruptcy stays, the debtor must turnover pledged special revenues in a manner consistent with Section [928] to payment of indebtedness secured by such revenues. This protection applies not only to those pledged special revenues within the creditor s possession as of the bankruptcy filing, but encompasses all revenues of the system or project against which the bondholder has a lien of any sort. In re Jefferson County, 474 B.R. 228, 269 (Bankr. N.D. Ala Congress adopted Section 922(d as part of the 1988 Amendments to the Bankruptcy Code to fix potential problems created by the incorporation of general commercial finance concepts into the municipal bankruptcy provisions that could run[] afoul of the traditional structure of revenue bond finance. See S. Rep. No (1988 (the Senate Report, at 14. At the time, there was a concern that revenues dedicated to the repayment of municipal and local obligations [could] be diverted to other purposes once a municipality or local government enter bankruptcy. Id. at 5. If that happened, [s]pecial revenue bonds of a bankrupt municipality would essentially be turned into general obligation bonds but without 13

20 Document Page 20 of 55 the authorization by popular vote usually required before a municipality can issue a general obligation bond. See H.R. Rep. No (1988, at 3-4. This concern was partly due to uncertainty whether Section 552 of the Bankruptcy Code could impair a bondholder s lien on special revenues acquired by the debtor after its bankruptcy filing. 11 As part of the 1988 Amendments, Congress also adopted Section 928 of the Bankruptcy Code, providing that, notwithstanding Section 552(a, special revenues acquired by the debtor after the commencement of the case shall remain subject to any lien resulting from any security agreement[,] see 11 U.S.C. 928(a. The amendments also inserted a definition of special revenues to aid in the interpretation of these new provisions. See 11 U.S.C. 902(2. The 1988 Amendments were intended to 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. Senate Report at 12. In particular, Congress recognized that the automatic stay was overly broad in Chapter 9, requiring the delay and expense arising from a request for relief from stay to accomplish what many state statutes mandate: the application of pledged revenues after payment of operating expenses to the payment of secured bonds. Senate Report at Section 552 generally provides that a lien arising from a security agreement on after-acquired property does not attach to property acquired post-bankruptcy, unless the property constitutes proceeds of property held at the time of the bankruptcy filing. See 11 U.S.C One of the reasons Congress felt it was necessary to provide special revenue bondholders with greater protection was to ensure that municipalities could continue accessing the capital markets. The Senate Report voices concern that the City of Cleveland was unable to obtain needed financing during its fiscal crisis in the late 1970s because banks were unwilling to lend. See Senate Report at 4. According to the Senate Report, this problem was mostly due to the potential lenders uneasiness about being paid in full if Cleveland later filed bankruptcy. Id. While Cleveland avoided bankruptcy, Congress felt it necessary to address this problem for future situations, and recognized elsewhere in the Senate Report that the [r]easonable assurance of timely payment is essential to the orderly marketing of municipal bonds and notes and continued municipal financing. Senate Report at

21 Document Page 21 of 55 The cases decided under Section 922(d support Plaintiff s position. In discussing the special revenue protections, the court in In re Heffernan Mem l Hosp. Dist., 202 B.R. 147, (Bankr. S.D. Cal. 1996, found that the 1988 Amendments were intended to preserve the dichotomy between general obligation and special revenue bonds for the collective benefit of bondholders (to secure the benefit of their bargain, municipalities (to maintain the effectiveness of the revenue bond financing vehicle, and taxpayers (to ensure that revenue obligations were not transformed into general obligations. In In re Jefferson County, 474 B.R. 228, 274 (Bankr. N.D. Ala. 2012, the court did not directly address the issue, but suggested in dictum that pledged special revenues should be turned over for the benefit of the secured creditor. In particular, the court found that the structure and intent of what Congress enacted by its 1988 amendments to chapter 9 was to provide a mechanism whereby the pledged special revenues would continue to be paid uninterrupted to [the secured creditor]. Id. 13 The academic literature also supports the view that the 1988 Amendments (and in particular Section 922(d were intended to provide near bulletproof protection for holders of bonds secured by a lien on pledged special revenues. In a 2015 law review article, Professor David A. Skeel, Jr., who is one of the seven members of the Puerto Rico Oversight Board, wrote that although revenue bondholders do not have further recourse if the revenue stream is not sufficient to ensure repayment, their lien on the revenue stream itself is fully protected. See David A. Skeel, Jr., What is a Lien? Lessons from Municipal Bankruptcy, 2015 U. ILL. L. REV. 675 ( Thus, so long as the project or system generates sufficient revenues subject to the 13 In Detroit s Chapter 9 case, the city avoided a similar dispute by choosing to voluntarily reinstate or pay in full holders of its water and sewer bonds, who likewise benefited from a lien on special revenues. See Mark N. Berman, What Municipal Bond Investors Can Learn From Detroit, LAW360 (Nov. 25, Other published works take a similar approach. See, e.g., David E. Lemke, Blake D. Roth & Courtney M. Rogers, Municipal Debtors: Cram Down of Special Revenue Debt (Apr. 18, 2014; Henry 15

22 Document Page 22 of 55 bondholder s lien, the bonds should continue to be paid. Notably, as Professor Skeel indicates, protection extends to the stream of revenues, a point reinforced by the fact that Section 928(a explicitly disables the provisions of Section 552 with respect to special revenue liens. 2. The Toll Revenues Qualify as Special Revenues. The Toll Revenues securing the Bonds undoubtedly qualify as special revenues under the statute. Section 902(2 of the Bankruptcy Code defines special revenues as any of the following: (A receipts derived from the ownership, operation, or disposition of projects or systems of the debtor that are primarily used or intended to be used primarily to provide transportation, utility, or other services, including the proceeds of borrowings to finance the projects or systems; (B special excise taxes imposed on particular activities or transactions; (C incremental tax receipts from the benefited area in the case of tax-increment financing; (D other revenues or receipts derived from particular functions of the debtor, whether or not the debtor has other functions; or (E taxes specifically levied to finance one or more projects or systems, excluding receipts from general property, sales, or income taxes (other than tax-increment financing levied to finance the general purposes of the debtor[.] 11 U.S.C. 902(2 (emphasis added. The Toll Revenues fit squarely within clause (A s definition of special revenues as receipts derived from the ownership [or] operation of projects or systems of the debtor that are primarily used or intended to be used primarily to provide transportation, utility, or other C. Kevane, Chapter 9 Municipal Bankruptcy: The New New Thing? Part II, 2011 BUS. L. TODAY 1, 2 (2011; Kevin A. Kordana, Tax Increases In Municipal Bankruptcies, 83 VA. L. REV. 1035, 1050 (1997. One source, Collier, suggests that Section 922(d does not compel[] payment of special revenues in the possession of the municipality because it is merely an exception from the automatic stay. COLLIER ON BANKRUPTCY [2] (16th ed That interpretation of the statute does not offer a good reading in light of the statute s specific terms, context, and purpose, and in reality would make little practical sense. 16

23 Document Page 23 of 55 services. 11 U.S.C. 902(2(A. That is because the Toll Revenues are derived from HTA s operation of several highways and roads, which clearly constitute a project or system of the debtor that is primarily used for transportation, among other services. Likewise, the Toll Revenues qualify under clause (D as other revenues or receipts derived from particular functions of the debtor (i.e., the collection of Toll Revenues by HTA, whether or not the debtor has other functions. See 11 U.S.C. 902(2(D. While the text of the relevant statute is sufficiently clear, the legislative history removes any doubt as to whether the Toll Revenues qualify as special revenues. In describing Section 902(2 generally, the Senate Report to the 1988 Amendments explicitly identifies revenues from a toll, highway or bridge or other projects or systems which impose user fees as examples of special revenues. See Senate Report at 13. The Senate Report goes on to include tolls as an example of special revenues within clause (D of Section 902(2, stating that [e]xamples of revenues from particular functions under clause (D would include any identified function and related revenues identified in the municipality s financing documents such as tolls or fees relating to a particular service or benefit. Senate Report at 21 (emphasis added. Notably, the legislative history likewise reinforces the point that the protection afforded holders of liens on special revenues extends to the stream of revenues. Otherwise, the reference to revenues from a toll, highway or bridge would make little sense. Finally, the testimony before Congress supports the conclusion that the Toll Revenues qualify under clause (A of Section 902(2. In particular, [t]he National Bankruptcy Conference, which was one of the principal architects of the 1988 Amendments, stated in its testimony that revenues from a toll highway or bridge or other project or system which imposes user fees would also qualify as receipts from transportation, utility or other services. COLLIER 17

24 Document Page 24 of 55 ON BANKRUPTCY [1] (16th ed Accordingly, the Toll Revenues serving as collateral for Plaintiff s Bonds qualify as pledged special revenues under the statute. 3. Section 928(b of the Bankruptcy Code Does Not Affect Plaintiff s Bonds. Section 922(d of the Bankruptcy Code provides that the application of pledged special revenues must be done in a manner consistent with Section 928 of the Bankruptcy Code. See 11 U.S.C. 922(d. While Section 928(b provides that certain liens on special revenues derived from a project or system shall be subject to the necessary operating expenses of such project or system. (see 11 U.S.C. 928(b, that provision does not (and cannot apply here. First, whereas Section 922(d applies broadly to pledged special revenues, see 11 U.S.C. 922(d meaning it reaches liens of any type the application of Section 928(b is limited to liens resulting from any security agreement entered into by the debtor before the commencement of the case, see 11 U.S.C. 928(b. In this instance, the Bondholders lien on the Toll Revenues is unaffected by Section 928(b because that lien does not result from a security agreement within the meaning of the provision. Instead, the lien results from the Enabling Act (i.e., the Commonwealth statute that created HTA and a binding municipal Resolution of HTA. Thus, that lien is a statutory lien within the meaning of Section 101(53 of the Bankruptcy Code, see 11 U.S.C. 101(53. That section makes clear that statutory liens are distinct from security interests created under a security agreement, explicitly providing that a statutory lien does not include [a] security interest or judicial lien. See 11 U.S.C. 101(53. This understanding of the statute makes sense in context. Congress adopted Section 928 to resolve concerns that Section 552 of the Bankruptcy Code could impair a bondholder s lien on special revenues in the event the municipality filed bankruptcy. It has always been the case, 18

25 Document Page 25 of 55 however, that Section 552 does not apply to statutory liens, see, e.g., Alliance Capital Management L.P. v. County of Orange, 189 B.R. 499, 502 (C.D. Cal. 1995, and instead only applies to security agreements, see 11 U.S.C. 552(a. Because statutory lienholders never needed Section 928 s protection, it is logical that Congress excluded them from the corresponding burden under the statute. Second, the application of Section 928(b in this instance would be unconstitutional under the Fifth Amendment as a retroactive taking. As noted, the Bondholders are the beneficiaries of a gross lien on the Toll Revenues. In accordance with the terms of that lien, HTA must first deposit sufficient funds into the Bondholders collateral account to meet the debt service and reserve requirements under the Resolution before it can spend the funds elsewhere. Expropriating the Bondholders lien to pay the necessary operating expenses of HTA would effectively convert that lien from a gross lien into a net lien, and thereby drastically change the nature of the security. Indeed, the facts of this case illustrate exactly how dramatic a change that would be. Although the value of Plaintiff s collateral should be sufficient to render Plaintiff an oversecured creditor, it is HTA s current position that, after frontloading all kinds of expenses ahead of Plaintiff s lien rights, there will be virtually nothing left to pay Plaintiff at all. This complete destruction of Plaintiff s lien rights would result in a taking of Plaintiff s property without just compensation, and is thus prohibited under the U.S. Constitution, because Plaintiff s lien rights were already in place before the relevant legislation was enacted. More specifically, the Bondholders lien was granted before the enactment of PROMESA and Puerto Rico was ineligible for Chapter 9 relief during the relevant period before PROMESA was enacted. Thus, the application of Section 928(b in this matter would run headfirst into the Fifth Amendment s 19

26 Document Page 26 of 55 command[] that, however great the Nation s need, private property shall not be taken even for a wholly public use without just compensation. United States v. Sec. Indus. Bank, 459 U.S. 70, 77 (1982 (quoting Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 602 (1935; see also Kaiser Aetna v. United States, 444 U.S. 164, 180 (1979 ( [E]ven if the Government physically invades only an easement in property, it must nonetheless pay just compensation. (citations omitted; Armstrong v. United States, 364 U.S. 40, 48 (1960 ( The total destruction by the government of all compensable value of these liens, which constitute compensable property, has every possible element of a Fifth Amendment taking. ; Kener v. La Grange Mills, 231 U.S. 215, 218 (1913. Accordingly, Section 928(b does not apply to the Bondholders lien on the Toll Revenues. Alternatively, if the Court determines that Section 928(b does apply, the application of that provision to Plaintiff s Bonds would be unconstitutional as a violation of the Fifth Amendment which, under the canon of constitutional avoidance, is another reason to avoid any interpretation of Section 928(b as applicable to Plaintiff s lien rights. See United States v. Sec. Indus. Bank, 459 U.S. at (applying the canon of constitutional avoidance to conclude that a lien avoidance provision of the Bankruptcy Code applied only to liens that came into existence after the enactment of the provision; Crowell v. Benson, 285 U.S. 22, 62 (1932 (citing the cardinal principle that this Court will first ascertain whether a construction of the statute is fairly possible by which the constitutional question may be avoided. Thus, Section 922 of the Bankruptcy Code requires HTA and its Executive Director to deposit the Toll Revenues in the manner provided under the Resolution governing the Bonds, without any adjustment for HTA s expenses. 4. PROMESA Does Not Prevent the Requested Relief. Finally, Section 305 of PROMESA, 48 U.S.C. 2165, does not prevent the Court s entry 20