Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 1 of 13 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

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1 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 1 of 13 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO ORIENTAL BANK CIVIL NO.: (FAB) Plaintiff, v. HON. ALEJANDRO GARCÍA PADILLA, in his official capacity as Governor of the Commonwealth of Puerto Rico; HON. JUAN C. ZARAGOZA GÓMEZ, in his official capacity as Secretary of the Treasury of the Commonwealth of Puerto Rico; GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO; HON. ALBERTO BACÓ BAGUÉ, in his official capacity as President of the Government Development Bank for Puerto Rico; PUERTO RICO HOUSING FINANCE AUTHORITY; HON. JOSÉ A. SIERRA MORALES, in his official capacity as Executive Director of the Puerto Rico Housing Finance Authority Defendants ORIENTAL BANK S OPPOSITION TO THE MOTION TO DISMISS FOR LACK OF JURISDICTION FILED BY CO-DEFENDANTS PUERTO RICO HOUSING FINANCE AUTHORITY AND JOSE A. SIERRA-MORALES TO THE HONORABLE COURT: COMES NOW Plaintiff, Oriental Bank ( Oriental ), through the undersigned attorneys, and respectfully submits this memorandum of law in opposition to the Motion to Dismiss for Lack of Jurisdiction and to Joint[sic] Commonwealth Defendant Motion to Dismiss, filed by co-

2 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 2 of 13 defendants Puerto Rico Housing Finance Authority and its Executive Director José A. Sierra- Morales (Dkt. No. 39). INTRODUCTION On December 22, 2016 co-defendants Puerto Rico Housing Finance Authority and its Executive Director José A. Sierra-Morales filed a Motion to Dismiss for Lack of Jurisdiction and to Joint[sic] Commonwealth Defendant Motion to Dismiss (Dkt. No. 39). These co-defendants argue that the Court lacks jurisdiction to entertain the claims made by Oriental for various reasons. They argue that to the extent PROMESA and Act 21 are inapplicable, then there exists no independent basis of federal jurisdiction. This motion is flawed as it misconstrues the basis of federal jurisdiction in this case. Section 405(e)(1)(2) of PROMESA confers exclusive jurisdiction to the United States District Court for the District of Puerto Rico to decide any action or motion seeking relief from the PROMESA stay. It naturally follows that the district court also has jurisdiction to decide whether a claim involves a Liability, as this term is defined in section 405 of PROMESA, and consequently, whether the PROMESA stay is applicable to a particular claim. The Complaint filed by Oriental in this case also involves federal constitutional challenges to the Moratorium Act and Executive Order under the Takings and Contracts Clauses of the United States Constitution. Therefore, because these claims arise under the United States Constitution, this court has jurisdiction to decide those challenges. 28 U.S.C.A. 1331; Empire Healthchoice Assur., Inc. v. McVeigh, 547 U.S. 677, (2006); Exxon Mobil Corp. v. Allapattah Servs., 545 U.S. 546, 552 (2005). The United States Supreme Court has also long recognized that federal jurisdiction will lie over some state-law claims that implicate significant federal issues such as the present case, see, e.g., Smith v. Kansas City Title & Trust 2

3 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 3 of 13 Co., 255 U.S. 180, 41 S.Ct. 243, 65 L.Ed. 577; Grable & Sons Metal Prod., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308, 308, 125 S. Ct. 2363, 2364, 162 L. Ed. 2d 257 (2005). In addition, [t]he Declaratory Judgment Act, 28 U.S.C , empowers a federal court to grant declaratory relief in a case of actual controversy. Ernst & Young v. Depositors Econ. Protection Corp., 45 F.3d 530, 534 (1st Cir.1995). The Act neither imposes an unflagging duty upon the courts to decide declaratory judgment actions nor grants an entitlement to litigants to demand declaratory remedies. El Dia, Inc. v. Hernandez Colon, 963 F.2d 488, 493 (1st Cir.1992). Consequently, federal courts retain substantial discretion in deciding whether to grant declaratory relief. Ernst & Young, 45 F.3d at 534. Diaz-Fonseca v. Puerto Rico, 451 F.3d 13, 39 (1st Cir. 2006). ARGUMENT A. Standard Motion to Dismiss Federal Rule of Civil Procedure 8(a)(2) requires only a short and plain statement of the claim showing that the pleader is entitled to relief, in order to give the defendant fair notice of what the... claim is and the grounds upon which it rests, Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ibid.; Sanjuan v. American Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (C.A ), a plaintiff's obligation to provide the **1965 grounds of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do, see Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986) (on a motion to dismiss, courts are not bound to accept as true a legal conclusion couched as a factual allegation ). Factual allegations must be enough to raise a right to relief above the speculative level, see 5 C. Wright & A. Miller, Federal Practice and Procedure 1216, pp (3d ed.2004) (hereinafter Wright & Miller) 3

4 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 4 of 13 ( [T]he pleading must contain something more... than... a statement of facts that merely creates a suspicion [of] a legally cognizable right of action ),3 on the assumption that all the allegations in the complaint are true (even if doubtful in fact), see, e.g., Swierkiewicz v. Sorema N. A., 534 U.S. 506, 508, n. 1, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002); Neitzke v. Williams, 490 U.S. 319, 327, 109 S.Ct. 1827, 104 L.Ed.2d 338 (1989) ( Rule 12(b)(6) does not countenance... dismissals based on a judge's disbelief of a complaint's factual allegations ); Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) (a well-pleaded complaint may proceed even if it appears that a recovery is very remote and unlikely ); Bell Atl. Corp. v. Twombly, 550 U.S. 544, , 127 S. Ct. 1955, , 167 L. Ed. 2d 929 (2007) Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct (2009). The First Circuit has cautioned against equating plausibility with an analysis of the likely success on the merits, affirming that the plausibility standard assumes pleaded facts to be true and read in a plaintiff's favor even if seemingly incredible. SepúlvedaVillarini v. Dep't of Educ. of P.R., 628 F.3d 25, 30 (1st Cir.2010) (citing Twombly, 550 U.S. at 556); Ocasio Hernández, 640 F.3d at 12 (citing Iqbal, 556 U.S. 679); see Twombly, 550 U.S. at 556 ( [A] well-pleaded complaint may proceed even if it appears that a recovery is very remote and unlikely. )(internal quotation marks omitted); see Ocasio Hernández v. Fortuño-Burset, 640 F.3d 1, 12 (1 st Cir. 2011) (citing Twombly, 550 U.S. at 556)( [T]he court may not disregard properly pled factual allegations, even if it strikes a savvy judge that actual proof of those facts is improbable. ). Instead, the First Circuit has emphasized that [t]he make-or-break standard... is that the combined allegations, taken as true, must state a plausible, [but] not a merely conceivable, case for relief. Sepúlveda Villarini v. Dept. of Education, 628 F.3d 25, 29 (1 st Cir. 2010). Teamcare Infusion Orlando, Inc. v. Humana Health Plans of Puerto Rico, Inc., 2015 WL (D.P.R. Sept. 4, 2015). 4

5 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 5 of 13 B. Federal Jurisdiction Under Section 405 of PROMESA Co-defendants Puerto Rico Housing Finance Authority and its Executive Director José A. Sierra-Morales challenge the Court s jurisdiction to decide whether the PROMESA stay is applicable to the claims presented by Oriental in this case. The circular argument raised by these defendants lacks any substance. First, the fact that Oriental alleges that its claims in this case do not constitute a Liability, as the term is defined in PROMESA, and that, consequently, the PROMESA stay does not apply, is precisely the type of claim that Section 405 of PROMESA provides need be filed before this Court. Section 405(e) of PROMESA states as follows: (e) JURISDICTION, RELIEF FROM STAY. (1) The United States District Court for the District of Puerto Rico shall have original and exclusive jurisdiction of any civil action arising under or related to this section. (2) On motion of or action filed by a party in interest and after notice and a hearing, the United States District Court for the District of Puerto Rico, for cause shown, shall grant relief from the stay provided under subsection (b) of this section. (emphasis supplied) Thus, it is clear that the express language of PROMESA confers original and exclusive jurisdiction to this Court over any action arising under or related to section 405. To the extent that in this case Oriental seeks a declaration from the Court that the PROMESA stay is not applicable to its claims or, that in the event it applies that it grants relief from the stay, then it unquestionably follows that this Court has original and exclusive jurisdiction to decide both issues. One can only suppose that if Oriental would have filed this action in Puerto Rico courts, these same co-defendants would have sought removal to this Court based on the above-cited provision of PROMESA. In this respect, the motion to dismiss is nothing but a strategy to delay the court s adjudication of Oriental s claims and the holding of the hearing required by PROMESA. 5

6 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 6 of 13 C. The Complaint states a valid cause of action under the Takings Clause. The Puerto Rico Housing Finance Authority and its Executive Director José A. Sierra- Morales also dismiss the fact that Oriental is making claims for violation of its rights under the Takings and Contracts Clauses of the United States Constitution. The Takings Clause of the Fifth Amendment provides that private property [shall not] be taken for public use, without just compensation. U.S. Const. amend. V. The Takings Clause applies to the Commonwealth of Puerto Rico through the Fourteenth Amendment. Fideicomiso De La Tierra Del Caño Martin Peña v. Fortuño, 604 F.3d 7, 12 (1st Cir.2010). The purpose of the Takings Clause regime is to bar the government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole. Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537, 125 S.Ct. 2074, 161 L.Ed.2d 876 (2005) (quoting Armstrong v. United States, 364 U.S. 40, 49, 80 S.Ct. 1563, 4 L.Ed.2d 1554 (1960)). The United States Supreme Court identifies two categories of takings that require just compensation: (1) a direct taking, which includes either a direct government appropriation or physical invasion of private property, and (2) a regulatory taking, which is when a government regulation of private property... [is] so onerous that its effect is tantamount to a direct appropriation or ouster. Id. Contracts are a form of property for purposes of the Takings Clause. U.S. Trust Co., 431 U.S. at 19 n. 16, 97 S.Ct ( Contract rights are a form of property and as such may be taken for a public purpose provided that just compensation is paid. ); Lynch v. United States, 292 U.S. 571, 579, 54 S.Ct. 840, 78 L.Ed (1934) ( Valid contracts are property for purposes of the Takings Clause, whether the obligor be a private individual, a municipality, a state, or the United States. ); Adams v. United States, 391 F.3d 1212, (Fed.Cir.2004) ( When the Government and private parties contract...the private party usually acquires an intangible property interest within the meaning of the Takings Clause in the contract. The express rights 6

7 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 7 of 13 under this contract are just as concrete as the inherent rights arising from ownership of real property, personal property, or an actual sum of money. ). A regulatory taking transpires when some significant restriction is placed upon an owner's use of his property for which justice and fairness' require that compensation be given. Philip Morris, Inc. v. Reilly, 312 F.3d 24, 33 (1st Cir.2002) (citing Goldblatt v. Town of Hempstead, N.Y., 369 U.S. 590, 594, 82 S.Ct. 987, 8 L.Ed.2d 130 (1962)); Franklin California Tax-Free Trust v. Puerto Rico, 85 F. Supp. 3d 577, 612 (D.P.R.), judgment entered, No FAB, 2015 WL (D.P.R. Feb. 10, 2015), and aff'd, 805 F.3d 322 (1st Cir. 2015), cert. granted, 136 S. Ct. 582, 193 L. Ed. 2d 465 (2015), and cert. granted sub nom. Acosta-Febo v. Franklin California Tax-Free Trust, 136 S. Ct. 582, 193 L. Ed. 2d 465 (2015), and aff'd, 136 S. Ct. 1938, 195 L. Ed. 2d 298 (2016). Oriental s contractual rights under the Participation Agreement constitute property within the meaning of the Takings Clause. In this case, by virtue of the Participation Agreement which, in turn, grants Oriental the right to collect a share of the payments made by the PRHFA under the PRHFA Loan, also grants it property rights over the abandoned and uncollected funds that serve as the source of repayment of the PRHFA. The provisions of the Participation Agreement are pellucid in this regard when they describe the flow of funds for the payment of Oriental s participation. Section 7 of the Participation Agreement provides: 7. Flow of Funds. All moneys from the abandoned and unclaimed funds and liquid assets deposited in the Special Fund pursuant to Act No. 122, as amended, shall remain in the Special Fund until each Principal Payment Date. On each Principal Payment Date, the moneys in the Special Fund shall be distributed according to the following flow of fuds: a. First, Lender shall apply any available moneys from the Special Fund to pay any accrued and unpaid interest on the Participation; b. Second, Lender shall deposit to the Interest Reserve Account, amounts sufficient to satisfy the Interest Reserve Requirement pursuant to Section 5 above. 7

8 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 8 of 13 c. Third, the Lender shall pay to the Participant the corresponding principal amount according to the following table, and subject to any adjustments to said amount pursuant to Section 6(f) below: Principal Payment Date Principal Amount Due September 30, 2014 $4,285, September 30, 2015 $4,285, September 30, 2016 $4,285, September 30, 2017 $4,285, September 30, 2018 $4,285, September 30, 2019 $4,285, September 30, 2020 $4,285, d. Fourth, Lender shall apply any available funds in the Special Fund to cover accrued and unpaid interest due to Lender. e. Fifth, Lender shall apply any available funds in the Special Fund to cover scheduled principal payments owed to the Lender pursuant to the GDB resolution; and f. Finally, any moneys remaining in the Special Fund after payments described in Sections 6(a) through 6(e) above, shall be disbursed to the Participant and the Lender on a pro-rat basis, according to each parties outstanding principal balance under the Loan, as a prepayment of the principal of the Loan, and shall be applied against the principal payment schedule set forth in Section 6 (c) in direct order of maturity. It is evident from this section of the Participation Agreement that on September 30, 2016 Oriental had a preferential property interest over the accrued and unpaid interests payments and the corresponding principal amount due of $4,285, Oriental had a property interest over these funds which were, in turn, to be deposited in the Special Fund which, in turn, was nurtured from the abandoned and unclaimed funds and liquid assets as provided in Act No The moneys deposited in the Special Fund and, in the same respect the abandoned and unclaimed funds that under Act No. 122 had to be deposited in that Special Fund, were earmarked for a single purpose and the Participation Agreement provides that the Oriental has a property right over such funds once the Payment Due Date accrued, which happened on September 30, Moreover, Oriental contends that Act No. 21 and Executive Order violate the Contract Clause of the United States Constitution. The Contract Clause of the United States Constitution provides that No State shall... pass any... Law impairing the Obligation of 8

9 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 9 of 13 Contracts... U.S. Const. art. I, 10, cl. 1. Despite its unequivocal language, this constitutional provision does not make unlawful every state law that conflicts with any contract. UAW v. Fortuño, 633 F.3d 37, 41 (1 st Cir. 2011) (internal quotation marks and citation omitted). Rather, courts must reconcile the strictures of the Contract Clause with the state's sovereign power to safeguard the welfare of its citizens. Id. (internal quotation marks and citation omitted). Accordingly, Contract Clause claims are analyzed pursuant to a two-pronged test. Id. The first question is whether the state law operate[s] as a substantial impairment of a contractual relationship. Id. (quoting Energy Reserves Grp., Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411, 103 S.Ct. 697, 74 L.Ed.2d 569 (1983)). If the contractual relationship is substantially impaired, then the second question is whether that impairment is reasonable and necessary to serve an important public purpose. Id. (quoting U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 25, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977)). See also, Parella v. Retirement Bd. of Rhode Island Employees Retirement System, 173 F.3d 46, 59 (1 st Cir. 1999). Act No. 21 impairs Oriental s rights under the Participation Agreement. On September 30, 2016 Oriental was entitled to receive the principal sum of $4,285, and did not receive the benefit of its rights. Hence, Oriental s property rights were substantially impaired. Moreover, the failure of the Office of the Commissioner of Financial Institutions ( OCFI ) and Zaragoza as Secretary of the Department of Treasury to distribute the abandoned and unclaimed funds and deposit them in the Special Fund also impaired Oriental s rights as it has no knowledge about the location of such funds, which under Puerto Rico law were earmarked for the benefit of the PRHFA and to pay its loans. Moreover, García Padilla and Bacó s decision not to distribute to Oriental its property, as provided in the Participation Agreement and, instead, use these funds for other unknown purposes also constituted an impairment of Oriental s property rights under the Participation Agreement. At this time, these government officials, with the acquiescence of the 9

10 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 10 of 13 Puerto Rico Housing Finance Authority and its Executive Director Sierra-Morales, simply took Oriental s property and have failed to account for it. Oriental highlights the fact that the contract at stake in this case, the Participation Agreement, is a public contract. Therefore, because the State's self-interest is at stake [,] U.S. Trust v. New Jersey, 431 U.S. 1, 97 S.Ct (1977), less deference is afforded to a state's decision to alter its own contractual obligations. See, e.g., Parella v. Retirement Bd. of Rhode Island Employees Retirement System, supra at page 59; Parker v. Wakelin, 123 F.3d 1, 5 (1st Cir.1997). ( [A] state must do more than mouth the vocabulary of the public weal in order to reach safe harbor... McGrath v. R.I. Ret. Bd., 88 F.3d 12, 16 (1st Cir.1996)). Where the state is alleged to have impaired a public contract, at least where the impairment operates for the state's benefit, less deference to a legislative determination of reasonableness and necessity is required, because the State's self-interest is at stake. Parker, 123 F.3d at 5 (quoting United States Trust Co., 431 U.S. at 26, 97 S.Ct. 1505); see also McGrath, 88 F.3d at 16 ( [W]hen a state is itself a party to a contract, courts must scrutinize the state's asserted purpose with an extra measure of vigilance. ). In the Participation Agreement, the GDB made a promise to Oriental to distribute to Oriental, on certain dates, the principal amount due to Oriental under the agreement. The impairment caused by the enactment of Act No. 21 and Executive Order , together with the acts of all, of the defendants in this case not to comply with their legal obligation to distribute and flow the abandoned and unclaimed funds and liquid assets to a Special Fund of the PRPHA which is ear-marked to pay its obligations, including those under the PRHFA Loan that are, thereafter distributed to Oriental under the Participation Agreement, have significantly impaired Oriental s rights. Oriental not only failed to receive the principal payment that was due on 10

11 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 11 of 13 September 30, 2016, but also does not know where the abandoned and unclaimed funds have been deposited and if they will be available to pay Oriental in the future. The defendants argue that the dire financial condition of the Commonwealth of Puerto Rico warranted the actions taken against Oriental. But, it is uncontested that the GDB s liquidity would certainly improve if, as creditor of the PRHFA under the PRHFA Loan, it makes sure that the abandoned and unclaimed funds are deposited in a Special Fund and made available for repayment of the PRHFA. That is, if Oriental receives its property when due under the Participation Agreement, then the receipt of those funds presupposes that the GDB has also collected as creditor of the PRHFA. The conflict arises when the GDB collects under the PRHFA Loan but fails to distribute to Oriental its property and, instead, takes it and uses it for other purposes. Therein lies the unconstitutional acts of all defendants. The situation becomes more serious and grave when none of the defendants in this action, including the original debtor and co-defendants Puerto Rico Housing Finance Authority and its Executive Director, Sierra- Morales, have taken any steps to ensure the flow of funds as required under the law and, instead, recklessly abandon such obligations to the detriment of Oriental. This action seeks to further PROMESA s purpose of not allowing the Commonwealth and the defendants to use the protection of the stay as a blanket protection for violations of the law and the United States Constitution. Moreover, precisely because there exist no assurances about the whereabouts of the abandoned and unclaimed funds that are the source of repayment to Oriental, or that defendants have met their legal obligations under Act , this is precisely the type of litigation the PROMESA provided should not be stayed. As previously stated, contrary to other cases decided by this Court, in this action Oriental has no assurance that there exists a recurring source of income that will eventually provide funds for the repayment of Oriental s participation under the Participation Agreement. Oriental does 11

12 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 12 of 13 not know, and defendants have failed to provide any assurances, about the remittances of the abandoned and unclaimed funds by the OCFI to the Department of the Treasury and thereafter to the special account at the GDB. There exists absolutely no assurance from the GDB that the special account required by Act has even been established, and the defendants silence indicates that it has not been established. Hence, Oriental seeks compliance with the law by the defendants. After all, the existence, remittance and deposit of the abandoned and unclaimed funds is the only assurance that Oriental will have that the source of repayment for its participation currently exists and will eventually provide for its repayment. The purposes of PROMESA do not allow for the unprotected impairment by the defendants of Oriental s contractual rights or to serve as protection from the fraudulent conduct of the defendants. A State cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money to promote the public good rather than the private welfare of its creditors. U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 29, 97 S. Ct. 1505, 1521, 52 L. Ed. 2d 92 (1977). In this case, defendants have failed to state where are the abandoned and unclaimed funds that must have been deposited in the Special Fund. They have also failed to articulate a valid reason that justifies the impairment of Oriental s rights under the Participation Agreement. The theoretical argument presented by defendants that the impairment is justified because the GDB and the Commonwealth required more liquidity in the face of the economic conditions of Puerto Rico is insufficient to justify the reasonableness of the impairment or its necessity to satisfy the public good. The total lack of transparency on the part of the defendants raises serious suspicion as to their real intentions when they decided to take Oriental s property and impair existing rights under the Participation Agreement. The fact that the impairment occurred in a contract where the GDB is a party, lowers the bar to establish that a Contract Clause violation has occurred. 12

13 Case 3:16-cv FAB Document 46 Filed 01/05/17 Page 13 of 13 WHEREFORE, Oriental Bank respectfully requests that the Court deny co-defendants Puerto Rico Housing Finance Authority and its Executive Director José A. Sierra-Morales Motion to Dismiss for Lack of Jurisdiction and to Joint[sic] Commonwealth Defendant Motion to Dismiss (Dkt. No. 39) and order them to file their answer to the Complaint without further delay. RESPECTFULLY SUBMITTED. In San Juan, Puerto Rico, this 5 th day of January, DELGADO & FERNÁNDEZ, LLC PO Box Fernández Juncos Station San Juan, PR Tel. (787) Fax: (787) s/alfredo Fernández Martínez ALFREDO FERNÁNDEZ MARTÍNEZ USDC-PR # afernandez@delgadofernandez.com s/pedro Hernández Freire PEDRO HERNÁNDEZ FREIRE USDC-PR # phernandez@delgadofernandez.com 13