Autonomous Municipality of San Juan v. Financial Oversight and Management Board for Puerto Rico et al
Filing
72
ORDER denying 35 Motion for Preliminary Injunction. Signed by Judge Laura Taylor Swain on 09/27/2017. (RC)
UNITED STATES DISTRICT COURT
DISTRICT OF PUERTO RICO
-------------------------------------------------------x
AUTONOMOUS MUNICIPALITY OF SAN
JUAN,
Plaintiff,
-v-
No. 17 CV 2009-LTS
THE FINANCIAL OVERSIGHT AND
MANAGEMENT BOARD FOR PUERTO
RICO, et al.,
Defendants.
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OPINION AND ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION
092717 OPINION AND ORDER RE MOT PI
VERSION SEPTEMBER 27, 2017
1
APPEARANCES:
CHARLIE HERNÁNDEZ LAW OFFICES
NORTON ROSE FULBRIGHT US LLP
By:
Charlie M. Hernández
206 Tetuán St., Suite 701
Old San Juan, Puerto Rico 00901
By:
Attorneys for Plaintiff Autonomous
Municipality of San Juan
Lawrence A. Larose
Eric Daucher
1301 Avenue of the Americas
New York, New York 10019
Attorneys for Plaintiff Autonomous
Municipality of San Juan
MARIANI FRANCO LAW, P.S.C.
WINSTON & STRAWN LLP
By:
Raúl S. Mariani Franco
P.O. Box 9022864
San Juan, Puerto Rico 00902
By:
Attorneys for Plaintiff Autonomous
Municipality of San Juan
Julissa Reynoso
Aldo A. Badini
Marcelo M. Blackburn
Michael A. Fernández
200 Park Avenue
New York, New York 10166
Attorneys for Plaintiff Autonomous
Municipality of San Juan
PIETRANTONI MENDEZ & ALVAREZ
LLC
By:
Oreste R. Ramos
María Dolores Trelles Hernández
Popular Center, 19th Floor
208 Ponce de León Ave.
San Juan, Puerto Rico 00918
Attorneys for Defendants Government
Development Bank for Puerto Rico and
Puerto Rico Fiscal Agency and Financial
Advisory Authority
O’MELVENY & MYERS LLP
By:
John J. Rapisardi
Suzzanne Uhland
Peter Friedman
Daniel L. Cantor
Andrew Parlen
Brad M. Elias
Times Square Tower
7 Times Square
New York, New York 10036
Attorneys for Defendants Government
Development Bank for Puerto Rico and
Puerto Fiscal Agency and Financial Advisory
Authority
LAURA TAYLOR SWAIN, United States District Judge
092717 OPINION AND ORDER RE MOT PI
VERSION SEPTEMBER 27, 2017
2
The autonomous municipality of San Juan (“San Juan,” “Plaintiff,” or the
“Movant”), which is the largest municipality of the Commonwealth of Puerto Rico (the
“Commonwealth” or “Puerto Rico”) and the Commonwealth’s capital, moves pursuant to
Federal Rule of Civil Procedure 65 for a preliminary injunction enjoining, pending certain
structural changes and disclosures, the solicitation, disclosure and collection of votes in favor of
a proposed restructuring support agreement for the Government Development Bank for the
Commonwealth (“GDB”), dated May 15, 2017 (the “RSA”), under Title VI of the Puerto Rico
Oversight, Management, and Economic Stability Act (“PROMESA”), 48 U.S.C. § 2231 (the
“Motion”). The Court heard oral argument on the Motion on September 11, 2017, and has
considered thoroughly the parties’ oral arguments and written submissions. For the following
reasons, the Motion is denied. This Opinion constitutes the Court’s findings of fact and
conclusions of law for purposes of Federal Rules of Civil Procedure 52(a)(2) and 65.
I.
FINDINGS OF FACT
San Juan has proffered very little in the way of evidentiary support for its
contentions, confining its submissions in support of the Motion to its Memoranda of Law, the
Declaration of its attorney Julissa Reynoso (“Reynoso Decl.”) proffering newspaper articles, and
the Declaration of Esperanza Ruiz (“Ruiz Decl.”), the City Administrator of San Juan (the “City
Administrator”), which proffers facts regarding San Juan’s municipal services and interactions
with GDB, the City Administrator’s opinions regarding the terms of the RSA, and authentication
092717 OPINION AND ORDER RE MOT PI
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of certain correspondence and additional documents.1 Defendants GDB and the Puerto Rico
Fiscal Agency and Financial Advisory Authority (“AAFAF”) also proffered limited factual
information in connection with their opposition to the motion, submitting the Declaration of
Christian Sobrino Vega in Support of GDB and AAFAF’s Opposition to Plaintiff’s Motion for a
Preliminary Injunction (“Vega Decl.”).2 There seems, however, to be little dispute regarding the
factual issues material to this motion practice. Accordingly, the Court makes the following
findings of fact based on uncontroverted non-hearsay evidentiary proffers, the content of
documents whose authenticity appears to be undisputed, and apparent concessions during oral
argument.
The Commonwealth is a territory of the United States that is currently suffering a
fiscal crisis that was decades in the making.3 GDB is a public corporation and instrumentality of
the Commonwealth, organized under Act No. 17-1948 (the “GDB Enabling Act”) that, until
recently, served as fiscal agent, depository bank, financial advisor, and lender to the
Commonwealth and its municipalities, and which issued bonds, backed by revenue streams
1
The following documents are attached to San Juan’s unverified complaint for declaratory
judgment and injunctive relief (Docket entry no. 1, (“Compl.”)): the investment policy of
the Municipal Public Debt Redemption Collection Center (“CRIM”) general trust
agreement, the RSA, various letters to and from San Juan’s counsel to counsel for the
Financial Oversight and Management Board (the “Oversight Board”) and AAFAF, the
Oversight Board’s unanimous written consent approving the RSA, and the bylaws of the
Oversight Board.
2
Although the Oversight Board is named as co-defendant with GDB and AAFAF in the
Complaint, San Juan is not seeking injunctive relief against the Oversight Board.
3
The Commonwealth suffered severe and widespread physical damage during the week of
September 18, 2017, due to the passage of Hurricane María. The effects of the storm will
not be discussed further in this Opinion, as they are not material to the legal issues raised
by the Motion.
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including repayment of municipal loans, to outside investors. GDB holds general deposits
belonging to, among other municipalities, San Juan.
On April 6, 2016, GDB’s fiscal agent responsibilities and obligations were
transferred to AAFAF, which had recently been created, pursuant to the Puerto Rico Emergency
Moratorium and Financial Rehabilitation Act, Act No. 21-2016 (the “Moratorium Act”). The
Moratorium Act granted AAFAF authority to oversee all matters in connection with the
restructuring of certain covered obligations designated by then Governor García-Padilla.
AAFAF supplanted GDB’s fiscal agent responsibilities, and the government of Puerto Rico
decided to wind down GDB’s operations and restructure its debts. Pursuant to the Moratorium
Act, executive orders were issued that stopped virtually all municipal transfers and withdrawals
out of the GDB. Actions taken pursuant to the Moratorium Act and subsequent forbearance
agreements in connection with the negotiation of the RSA have frozen payments to GDB
bondholders as well and stayed pending litigation.
On June 30, 2016, Congress enacted PROMESA, Title VI of which permits the
restructuring of bond debt through “Creditor Collective Action” under voluntary restructuring
support agreements certified by the Oversight Board4 as “Qualifying Modifications,” that are
then voted upon by pools of similarly-situated bondholders after mandated disclosures
concerning the terms of the proposed modifications. See generally, PROMESA § 601. Upon
approval of the proposed modifications by the holders of at least two-thirds of the outstanding
principal amount of each relevant pool, certification of the vote by the Oversight Board, and
submission of the Qualifying Modification and vote to the United States District Court for the
4
See supra note 1.
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District of Puerto Rico for approval, the Qualifying Modification may be implemented. See
PROMESA §§ 601(j); 601(m).
On January 18, 2017, the Commonwealth’s legislature approved the Puerto Rico
Fiscal Agency and Financial Advisory Authority Act, Act 2-2017 (the “AAFAF Enabling Act”),
which was signed into law by the Governor on the same day. The AAFAF Enabling Act
expanded the powers of AAFAF, designating it as the only government entity authorized to
restructure, and negotiate with holders of, debt issued by the government or its instrumentalities,
and authorized AAFAF to compel any governmental entity to take action to comply with a fiscal
plan certified by the Oversight Board. AAFAF negotiated the RSA for GDB, which has since
been approved by numerous investor-bondholders and certain municipalities who have signed
the RSA. (See Vega Decl. ¶ 8.) San Juan alleges that it was not part of the discussions leading
to the proposed RSA and San Juan opposes the RSA. (See Compl. ¶ 5; Motion at 2.)
The Oversight Board has certified the RSA as a Qualifying Modification under
Title VI of PROMESA. See PROMESA § 601(g)(2). (Vega Decl. ¶ 14.) As relevant here, the
RSA treats the municipalities’ deposits currently held by GDB as unsecured claims and
accordingly classifies the municipalities into the same voting pool as holders of unsecured GDB
bonds. (Vega Decl. ¶¶ 9-10.)5 If the Court ultimately approves the Qualifying Modification and
makes it binding on all creditors, see PROMESA § 601(g); 601(m), the unsecured claims will be
mandatorily exchanged for securities issued by a new entity, with a face value substantially
smaller than that of the deposits and currently-outstanding bonds, and payment terms supported
by cash flow from the repayment of currently-outstanding loans to the municipalities, which will
5
GDB anticipates two unsecured voting pools — one for unsecured claims not guaranteed
by the Commonwealth and one for unsecured claims guaranteed by the Commonwealth.
(Vega Decl. ¶ 15.)
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remain payable in full. (Compl. Exhibit B, Docket Entry No. 1-7, ECF pp. 27-28; Vega Decl. ¶
9.) With a limited exception not relevant here, the RSA does not permit the setoff of the value of
any municipal assets held by GDB against the municipalities’ outstanding loan repayment
obligations. (Id.) By contrast, it appears that, in practice, GDB has historically debited the
municipalities’ deposits to cover biennial payments on the municipal loans as payments come
due. (Vega Decl. ¶ 12.)
GDB recognizes San Juan as the holder of $62,614,321.19 in deposits, of which
$39,864,542.54 are funds denominated as “trust funds,” the precise nature of which was not
briefed by the parties, and $6,415,724.47 in “Excess CAE” funds as to which the RSA proposes
a bilateral compromise agreement with San Juan. (Ruiz Decl. ¶¶ 8-10.) San Juan disputes the
computations of these amounts (see Motion at 6; Ruiz Decl. ¶¶ 8-10), but those disputes are not
material to the legal issues addressed in this Opinion. As explained below San Juan contends,
and GDB disputes, that San Juan and its fellow Puerto Rican municipalities have a right to setoff
the full amount of their respective deposits against their respective outstanding loan obligations,
that such setoff right constitutes security, and that the municipalities therefore should not be
pooled with the unsecured creditors for voting purposes. Instead, San Juan contends that the
municipalities should vote in their own pool, an arrangement that could give them the power to
defeat the Title VI restructuring proposal.
On August 24, 2017, the Puerto Rico legislature passed the GDB Debt
Restructuring Act, Act No. 109-2017 (the “GDB Debt Act”) for the purpose of enabling
implementation of the Qualifying Modification under Title VI of PROMESA. (Vega Decl. ¶
10.) Article 703 of the GDB Debt Act expressly provides that, “[n]otwithstanding any other law
of the Government of Puerto Rico, no Government Entity shall have the authority or standing to
092717 OPINION AND ORDER RE MOT PI
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challenge [the] Act, the Restructuring Transaction, or the other transactions contemplated by
[the] Act in any local or federal court.” (See GDB Debt Act, “Article 703,” Exhibit B to
Declaration of Brad M. Elias, Esq. in Support of GDB and AAFAF’s Opposition to Plaintiff’s
Motion for a Preliminary Injunction (“Elias Decl.”).)
Citing newspaper reports, San Juan claims that it and other municipalities are
being pressured by unspecified persons to commit to supporting the RSA prior to voting-related
disclosures, and asserts that such early solicitation for a single voting pool, combined with public
disclosure of the positions of the solicited municipalities, could taint the results of a re-vote were
San Juan to prevail at a later date on a challenge to the voting structure. (Motion at 8; Exhibit 2
to Reynoso Decl.) San Juan has not proffered any affidavits or other admissible evidence
concerning the voting intentions of any municipality or the likely voting patterns in the current
pool scenario, a multiple-pool scenario, or a re-vote.
The RSA is not self-executing and cannot be put into effect until it has been
approved by this Court after a favorable vote of the bondholders. See PROMESA §
601(m)(1)(D). The RSA includes an agreed timetable, which requires disclosures and
commencement of voting solicitation by mid-September 2017, completion of voting by October
20, 2017, and submission to the Court for approval by November 9, 2017. (Opp. at 7; Vega
Decl. ¶ 13, 15.) Failure to meet these deadlines would relieve the creditor parties of their
obligation to support the proposed restructuring, and, if a sufficient number of creditors retract
their support, lead to termination of the RSA. (Vega Decl. ¶ 17.) If the RSA were terminated,
debt collection forbearance elements of the RSA would also terminate, currently stayed litigation
by bondholders could recommence, and GDB might be forced to start the Title VI process anew
or file a petition under Title III of PROMESA to effectuate a debt restructuring. (Vega Decl. ¶¶
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18-19.) Title III proceedings are more complex and expensive than Title VI proceedings, and
much time and public expense have already been invested in negotiating the current Title VI
proposal. (Vega Decl. ¶¶ 7-8.)
II.
CONCLUSIONS OF LAW
San Juan’s effort to halt the RSA solicitation, disclosure, and voting process
focuses on contentions regarding its rights in connection with the deposits San Juan holds with
GDB. San Juan argues that it has a right to set off the value of its deposits against its future
payment obligations under loans it has outstanding from GDB. Pointing to PROMESA’s
requirement that “separate Pools shall be established corresponding to the relative priority or
security arrangements of each holder of Bonds against each issuer . . . ,”6 San Juan further argues
that because, the purported setoff rights amount to security for its deposit claim, it should, with
the other depositing municipalities, vote in its own pool of municipalities, separate from the
unsecured creditors of GDB. San Juan further argues that the balance of harms tips in its favor
and it would suffer irreparable harm if the unsecured pool-only voting process is not halted,
because any re-vote would be “tainted.”
Subject Matter Jurisdiction
GDB raises the issue of subject matter jurisdiction, arguing that Article 703 of the
GDB Debt Act deprives San Juan and the other Puerto Rican municipalities of standing and
6
See PROMESA § 601(d)(3)(A).
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authority to challenge the GDB restructuring, thus depriving this Court, for lack of a party with
standing, of subject matter jurisdiction over San Juan’s claims. (See GDB Debt Act, Article
703.) GDB also directs the Court’s attention to a Ninth Circuit decision, Burbank-GlendalePasadena Airport Auth. v. City of Burbank, 136 F.3d 1360, 1363-64 (9th Cir. 1998), which held
that political subdivisions of states have no standing to challenge the constitutionality of their
states’ actions in federal court, since the existence and authority of the subdivisions are derived
from the states themselves, although GDB acknowledges that other circuit courts have applied
that principle more narrowly.
San Juan contends that Article 703 is preempted by federal law. In aid of that
counterargument, San Juan points to Section 601(n)(2) of PROMESA, which provides that
“there shall be a cause of action to challenge unlawful application of this section,” and Section 4
of PROMESA, which provides that PROMESA “shall prevail over any general or specific
provisions of territory law, State law, or regulation that is inconsistent with this Act.” San Juan
also seeks to parse Article 703 more narrowly than does GDB, arguing that, while the GDB Debt
Act purports to preclude challenges of the substantive aspects of the restructuring support
agreements, it does not speak to preliminary procedural issues such as the voting pool structure
San Juan raises here.
The Court must address the issue of subject matter jurisdiction prior to engaging
with the merits of an action, as federal courts are ones of limited jurisdiction and, indeed, the
Federal Rules of Civil Procedure instruct that if a federal “court determines at any time that it
lacks subject-matter jurisdiction, the court must dismiss the action.” Fed. R. Civ. P. 12(h)(3); see
Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). Here, however, the
parties have raised, but have not explored fully, the complex and nuanced issues of state and
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federal law interpretation, supremacy, and preemption that will have to be analyzed thoroughly
to determine the issue of subject matter jurisdiction. Those issues have been revisited, in greater
depth, in a recently-filed motion to dismiss this case. Because resolution of San Juan’s request
for a provisional remedy does not require the Court to determine the merits of Plaintiff’s claims,
instead requiring only that the Court examine likelihood of success on the merits and related
issues, and because a federal court in any event has “very broad discretion in determining the
manner in which it will consider the issue of jurisdiction,” the Court will defer the determination
of the subject matter jurisdiction question to the dismissal motion practice and instead confine its
analysis in this proceeding to the question of whether Plaintiff has demonstrated an entitlement
to preliminary injunctive relief. See Valedon Martinez v. Hosp. Presbiteriano de la Cumunidad,
Inc., 806 F.2d 1128, 1132 (1st Cir. 1986).
Preliminary Injunction Standard
In determining a motion for a preliminary injunction, the Court considers: “(1) the
plaintiff’s likelihood of success on the merits; (2) the potential for irreparable harm in the
absence of an injunction; (3) whether issuing the injunction will burden the defendants less than
denying an injunction would burden the plaintiffs and (4) the effect, if any, on the public
interest.” Sindicato Puertorriqueno de Trabajadores v. Fortuno, 699 F.3d 1, 10 (1st Cir. 2012)
(quoting Jean v. Mass. State Police, 492 F.3d 24, 26-27 (1st Cir. 2007)). “The sine qua non of
this four-part inquiry is likelihood of success on the merits: if the moving party cannot
demonstrate that he is likely to succeed in his quest, the remaining factors become matters of idle
curiosity.” New Comm. Wireless Servs., Inc. v. SprintCom, Inc., 287 F.3d 1, 9 (1st Cir. 2002).
In order to establish likelihood of success on the merits, “plaintiffs must show ‘more than mere
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possibility’ of success—rather, they must establish a ‘strong likelihood’ that they will ultimately
prevail.” Sindicato Puertorriqueno, 699 F.3d at 10 (quoting Respect Main PAC v. McKee, 622
F.3d 13, 15 (1st Cir. 2010)).
Likelihood of Success on the Merits
Plaintiff’s claim in this motion practice of entitlement to a separate voting pool
for municipalities turns on its assertion that it has a legal right to set off its deposits at GDB
against payment obligations on its loans from GDB as they come due. Such a right of setoff, San
Juan contends, constitutes a difference in “the relative . . . security arrangements” of the
municipalities’ rights to GDB’s repayment of their deposits7 and the unsecured rights of general
GDB bondholders to payments on their GDB bonds that requires different voting pools under
Section 601(d)(3)(A) of PROMESA. In support of this proposition, San Juan cites two
Commonwealth statutes and historical practice.
The Statutes
San Juan turns first to section 559a(c) of title 7 of the Laws of Puerto Rico, which
is part of the GDB Enabling Act and provides that “a depositor or receiver may offset the amount
of its deposit against any outstanding balance of a loan from the Bank as full and final payment
up to the amount of the deposit.” San Juan contends that the statute unambiguously provides
7
Puerto Rico law treats bank deposits as loans by the borrower to the bank. Santos de
Garcia v. Banco Popular, 172 D.P.R. 759, 774 (2007). Deposits thus fall into the broad
category of “bonds” that can be restructured under Title VI of PROMESA. See
PROMESA section 5(2) (defining “bond” to include, inter alia, loans “or other financial
indebtedness for borrowed money . . . of which the issuer, obligor, or guarantor is the
territorial government.”)
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municipal depositors/borrowers with an absolute right of setoff. San Juan, in advancing this
interpretation, dismisses as insignificant the fact that section 559a is titled “Priority of Expenses
and Claims in a Receivership,” arguing that “the title of a statute and the heading of a section
cannot limit the plain meaning of the text.” (See Docket Entry No. 44 at 8 (quoting Bhd. of R.R.
Trainmen v. Balt. & Ohio R.R. Co., 331 U.S. 519, 528-29 (1947))). While San Juan’s
proposition is based on the well-recognized principle that a court may not rely on titles or
headings to interpret an otherwise unambiguous statute, an examination of the other substantive
provisions of the statute, in light of the context of its enactment and specific statements of the
legislature, makes clear that the offset rights granted by section 559a(c) arise only in the context
of a GDB receivership and are inoperative here, since GDB is not in receivership. Cf. Pa. Dep’t
of Corrs. v. Yeskey, 524 U.S. 206, 212 (1998) (declining to rely on a statute’s title where the text
was not susceptible to multiple constructions).
Section 559a was enacted as part of Chapter 3 of the Moratorium Act, which was
entitled “Amendments to GDB Organic Act Related to Receivers.” (Parte II – English Version
of the Moratorium Act, Chapter 3, Docket Entry No. 41-3, at 26-31, attached as Exhibit A to
Elias Decl.) The legislature explained in a summary introduction to the uncodified version of the
legislation that Chapter 3 was enacted to update GDB’s outdated receivership provisions by
“modifying the process for the appointment of a receiver, clarifying the receiver’s powers, and
establishing priorities of expenses and unsecured claims in a receivership.” (Id. at 10.) Chapter
3 added provisions that were ultimately codified as sections 559, 559a, and 559b of Title 7 of the
Laws of Puerto Rico. Section 559 provides procedures for the appointment of a receiver and
section 559b comprises provisions relating to the treatment of pre-receivership contracts.
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Section 559a includes several subsections that, like subsection (c), include references to a
receiver or to receivership.
In interpreting statutes, courts must examine the plain meaning of the statutory
language in the context of the entire statutory scheme. GMC v. Darling’s, 444 F.3d 98, 108 (1st
Cir. 2006) (quoting Darling’s v. Ford Motor Co., 2003 ME 21, 825 A.2d 344, 346 (2003) (Courts
“examine[] the plain meaning of the statutory language and consider[] the language the context
of the whole statutory scheme.”) (internal quotations marks and citations omitted)); see also
Yates v. United States, 135 S. Ct. 1074, 1083-84 (2015) (interpreting the breadth of a ban on the
destruction of tangible objects to obstruct a federal investigation based, in part, on the section’s
placement in the relevant statute and the United States Code). Here, such examination leads
inescapably to the conclusion that Movant has failed to carry its burden of demonstrating that it
is likely to succeed on the merits of its argument that the offset right granted by section 559a(c)
applies outside the context of a receivership of GDB and thus requires a separate voting pool for
municipalities.
San Juan also contends that it has a setoff right based on a general provision of the
Puerto Rico Civil Code that permits setoff (characterized in the English version of the statute as
“compensation”) where several criteria are met. See 31 L.P.R.A. §§ 3221 (“When
Compensation Takes Place”) and 3222 (“Requisites”); see also Phico Ins. Co. v. Pavia Health,
Inc., 413 F. Supp. 2d 76, 83 n.5 (D.P.R. 2006) (Compensation is “the Commonwealth equivalent
of setoff.”). Section 3222 of the Puerto Rico Civil Code requires, inter alia, that “both debts are
due” at the time of the “Compensation” determination. According to San Juan, it meets this
criterion notwithstanding the fact that its deposits at GDB are, presumably, payable on demand
but no payment on its loans from GDB, which require biennial payments, is currently due,
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because its loan payments will come due at regular future intervals and because San Juan has a
right to accelerate its payments under the loan. The statutory language appears to speak,
however, of a current mutual obligation, and must be applied in accordance with its terms. See
United States v. Rivera, 131 F.3d 222, 224 (1st Cir. 1997) (“When the plain meaning is clear on
its face, the sole function of the courts is to enforce [the statute] according to its terms.”)
(citations and internal quotation marks omitted). Metco Mining & Minerals v. PBS Coals (In re
Metco Mining & Minerals), 171 B.R. 210, 218 (Bankr. W.D. Pa. 1994), relied upon by Plaintiff
in support of its argument that a firm obligation with a future payment date is sufficient to
support a setoff right, is not persuasive here, as it interpreted section 553 of the Bankruptcy Code
(which is inapplicable in a PROMESA Title VI proceeding) rather than the Puerto Rico statute at
issue here. On the current record, Movant has failed to demonstrate that it is likely to succeed on
the merits of its claim that it is secured under Section 3222 of the Puerto Rico Civil Code
because it has not established that its future loan payment obligations, although potentially
dischargeable through accelerated payments, represent a current obligation that parallels GDB’s
current obligation to repay San Juan’s deposit on demand.8
Historical Practice
Finally, San Juan proffers evidence, and GDB does not dispute, that GDB has
until recently followed a practice of debiting municipality deposit holdings to cover loan
repayment obligations as those obligations of the municipality have come due. (See Tr. of
8
Finding that Plaintiff fails to demonstrate a likelihood that it will establish that “both
debts are due,” the Court declines to consider Defendants’ argument that pending
lawsuits by other GDB creditors preclude San Juan from meeting another of the statutory
criteria – “[t]hat none [of the debts] is subject to any retention or suit instituted by a third
person . . . .” 31 L.P.R.A. § 3222(5).
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September 11, 2017 Hr’g at 13:25, 14:1-18 and Exhibit of Minutes of November 28, 2016 CRIM
Board Meeting.) In the absence of a legal basis for San Juan’s claim of a setoff right, this
practice, which is just as consistent with a convenient method of payment under circumstances in
which each party is confident that the other is able to uphold its part of the bargain at the time as
it is with a right to setoff of current mutual obligations, is insufficient to show that San Juan is
likely to succeed on the merits of its claim that it has a legal right to setoff of its deposits against
its loan repayment obligations.
San Juan has thus failed to carry its burden of demonstrating that it is likely to
succeed on its claim that it is a secured creditor entitled to be classified separately from
unsecured bondholders for purposes of voting on the proposed RSA.
Irreparable Harm
San Juan, while identifying the vital municipal services affecting a substantial
portion of the population of Puerto Rico that San Juan uses its available funds to provide for,
does not attack the ultimate goal of the restructuring proposed as a prospect of irreparable harm.
Rather, San Juan’s focus here is more narrow, amounting to a claim that, if the municipalities’
votes are solicited on the basis of a combined unsecured creditors’ pool as currently proposed,
the message that the municipalities can only vote in a class with the unsecured creditors, and
political pressure to go along with the RSA, will constrain municipalities to take positions on the
restructuring that they might not otherwise take if given the opportunity to vote in a separate
pool. San Juan does not specify the outcome that it thinks might be achieved by separate pool
voting, and the record contains no evidence as to the voting intentions of any municipalities other
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than the few that have already signed on as supporters of the RSA. San Juan nonetheless argues
that the absence of an opportunity to vote in a separate pool in the first instance will inflict harm
that cannot be remedied by a second opportunity to vote if the Court determines, at the time that
the Qualifying Modification is put before it for final approval, that the voting procedures were
improper. According to San Juan, there will be a “taint” from the initial vote that will
irreparably distort the result of the second vote, so that the only effective relief is an injunction
preventing any vote and even any further solicitation until the voting pool question is resolved.
Instead of offering evidence showing that there is a specific prospect of this sort
of problem in Puerto Rico in connection with the transaction contemplated by the RSA, San Juan
points to judicial decisions from other jurisdictions arising from different factual contexts. The
Court finds those decisions unpersuasive as predictors of the likelihood of irreparable harm here.
San Juan relies on Berkman v. Rust Craft Greeting Cards, Inc., 454 F. Supp. 787, 794 (S.D.N.Y.
1978), for the proposition that an injunction to prevent a tainted vote for corporate directors is
preferable to ordering a new election. In Berkman, the court found that certain of the candidates
had failed to disclose information that was material to their fitness for office, and that a corporate
merger might have to be unwound were the vote to go forward in the absence of proper pre-vote
disclosure. Id. at 794. Here, by contrast, San Juan has failed to make a showing of likelihood of
success on its claim of an improper voting structure, and the record is devoid of evidence of
harm that could taint a re-vote or that would persist if San Juan were to prevail upon a re-vote.
Morris v. Int’l Bhd. of Locomotive Eng’rs, 165 F. Supp. 2d 662, 672 (N.D. Ohio 2001), relied
upon by San Juan to establish that the early release of election results and the public knowledge
of voters’ positions gleaned from a judicially voided vote in the first instance could cause a
different result upon a re-vote than if the initial vote were enjoined, is also inapposite. The
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Morris court’s decision to enjoin a vote on a labor union merger based on the prospect that a
procedurally deficient vote could rationally “poison[] the electoral well,” was supported by
credible affidavit evidence. Here, Movant offers nothing more substantial than speculation,
unsupported by any evidence, in aid of its assertion that irreparable harm will flow from failure
to enjoin the voting process, and has not carried its burden of demonstrating that injunctive relief
is necessary to prevent such harm. See Nw. Bypass Grp. v. United States Army Corps of Eng’rs,
453 F. Supp. 2d 333 (D.N.H. 2006) (Irreparable harm must be “immediate and serious rather
than merely remote and speculative.”).
Balance of Harms
For substantially the same reasons, Movant has failed to demonstrate that the
balance of harms tilts in its favor. Movant only speculates as to voting outcomes. Defendants,
on the other hand, have proffered clear evidence of concrete harm attendant to a delay in the
process of voting on the RSA. Under the unambiguous terms of the negotiated and certified
RSA, any delay in the delivery of solicitation material or voting would allow any signatory to
that agreement to withdraw. In other words, if the process were delayed, GDB would lose the
power to hold signatories to their contractual commitments to support the current restructuring,
which was the product of substantial negotiations and investments of time and limited public
assets. If sufficient signatories were to withdraw their commitments, the RSA would collapse,
leaving open the potential for chaotic litigation, requiring a restart of negotiations for a Title VI
restructuring, or leading GDB into the much more complicated and expensive process of
restructuring under Title III of PROMESA. On this record, the balance of harms tips decidedly
in favor of Defendants.
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CONCLUSION
San Juan’s motion for a preliminary injunction is, accordingly, denied in its
entirety. This Opinion resolves docket entry no. 35 in case 17-CV-2009.
SO ORDERED.
Dated: September 27, 2017
/s/ Laura Taylor Swain
LAURA TAYLOR SWAIN
United States District Judge
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