Opinion
No. 17 BK 3283-LTS (Jointly Administered)
2023-12-29
IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of The Commonwealth of Puerto Rico et al., Debtors.
Ricardo Burgos Vargas, Juan Carlos Ramirez-Ortiz, Josue N. Torres Crespo, San Juan, PR, Julia D. Alonzo, Ehud Barak, Martin J. Bienenstock, Bradley R. Bobroff, Margaret A. Dale, Carl Forbes, Jr., Mark D. Harris, Jeffrey W. Levitan, Peter D. Doyle, Matthew J. Morris, Kevin J. Perra, Stephen L. Ratner, Brian S. Rosen, Scott Rutsky, Chris Theodoridis, Jared D. Zajac, Proskauer Rose, LLP, New York, NY, Ginger D. Anders, Adele M. El-Khouri, Chad I. Golder, Rachel G. Miller Ziegler, Donald B. Verrilli, Munger, Tolles & Olson LLP, Washington, DC, Guy Brenner, Proskauer Rose LLP, Washington, DC, Hermann D. Bauer Alvarez, Ubaldo M. Fernandez Barrera, Carla Garcia Benitez, O'Neill & Borges LLC, San Juan, PR, Valerie Concepcion-Cintron, Wandymar Burgos Vargas, Susana I. Penagaricano-Brown, Puerto Rico Department of Justice, San Juan, PR, Lucia Chapman, Stephan E. Hornung, Michael Luskin, Luskin, Stern & Eisler LLP, White Plains, NY, William D. Dalsen, Michael R. Hackett, Timothy W. Mungovan, Laura Stafford, Proskauer Rose LLP, Boston, MA, Michael A. Firestein, Lary Alan Rappaport, Jennifer L. Roche, Steven O. Weise, Proskauer Rose LLP, Los Angeles, CA, Michel Mir Martinez, Barriada La Carmen, Salinas, PR, Paul V. Possinger, Proskauer Rose LLP, Chicago, IL, for Debtor Commonwealth of Puerto Rico. Ann M. Ashton, Ralph C. Ferrara, Proskauer Rose LLP, Washington, DC, Chantel L. Febus, Proskauer Rose LLP, New York, NY, for Debtor Puerto Rico Sales Tax Financing Corporation (COFINA). Katiuska Bolanos, Arturo Diaz-Angueira, Diaz & Vazquez Law Firm, PSC, San Juan, PR, Joseph P. Davis, III, Greenberg Traurig, LLP, Boston, MA, Maria J. Diconza, Daniel S. Shamah, O'Melveny & Myers LLP, New York, NY, Michael Kelly Malone, King & Spalding LLP, New York, NY, Hadassa R. Waxman, Proskauer Rose LLP, New York, NY, for Debtor Puerto Rico Electric Power Authority. Raul Castellanos-Malave, Development & Construction Law Group LLC, San Juan, PR, for Debtor Puerto Rico Highways and Transportation Authority.
Ricardo Burgos Vargas, Juan Carlos Ramirez-Ortiz, Josue N. Torres Crespo, San Juan, PR, Julia D. Alonzo, Ehud Barak, Martin J. Bienenstock, Bradley R. Bobroff, Margaret A. Dale, Carl Forbes, Jr., Mark D. Harris, Jeffrey W. Levitan, Peter D. Doyle, Matthew J. Morris, Kevin J. Perra, Stephen L. Ratner, Brian S. Rosen, Scott Rutsky, Chris Theodoridis, Jared D. Zajac, Proskauer Rose, LLP, New York, NY, Ginger D. Anders, Adele M. El-Khouri, Chad I. Golder, Rachel G. Miller Ziegler, Donald B. Verrilli, Munger, Tolles & Olson LLP, Washington, DC, Guy Brenner, Proskauer Rose LLP, Washington, DC, Hermann D. Bauer Alvarez, Ubaldo M. Fernandez Barrera, Carla Garcia Benitez, O'Neill & Borges LLC, San Juan, PR, Valerie Concepcion-Cintron, Wandymar Burgos Vargas, Susana I. Penagaricano-Brown, Puerto Rico Department of Justice, San Juan, PR, Lucia Chapman, Stephan E. Hornung, Michael Luskin, Luskin, Stern & Eisler LLP, White Plains, NY, William D. Dalsen, Michael R. Hackett, Timothy W. Mungovan, Laura Stafford, Proskauer Rose LLP, Boston, MA, Michael A. Firestein, Lary Alan Rappaport, Jennifer L. Roche, Steven O. Weise, Proskauer Rose LLP, Los Angeles, CA, Michel Mir Martinez, Barriada La Carmen, Salinas, PR, Paul V. Possinger, Proskauer Rose LLP, Chicago, IL, for Debtor Commonwealth of Puerto Rico.
Ann M. Ashton, Ralph C. Ferrara, Proskauer Rose LLP, Washington, DC, Chantel L. Febus, Proskauer Rose LLP, New York, NY, for Debtor Puerto Rico Sales Tax Financing Corporation (COFINA).
Katiuska Bolanos, Arturo Diaz-Angueira, Diaz & Vazquez Law Firm, PSC, San Juan, PR, Joseph P. Davis, III, Greenberg Traurig, LLP, Boston, MA, Maria J. Diconza, Daniel S. Shamah, O'Melveny & Myers LLP, New York, NY, Michael Kelly Malone, King & Spalding LLP, New York, NY, Hadassa R. Waxman, Proskauer Rose LLP, New York, NY, for Debtor Puerto Rico Electric Power Authority.
Raul Castellanos-Malave, Development & Construction Law Group LLC, San Juan, PR, for Debtor Puerto Rico Highways and Transportation Authority.
PROMESA
Title III
MEMORANDUM ORDER DENYING THE MOTION TO DISQUALIFY THE LAW FIRM O'NEILL & BORGES, LLC FOR UNRESOLVABLE CONFLICTS OF INTEREST INCURRED IN VIOLATION OF THE PUERTO RICO RECOVERY ACCURACY IN DISCLOSURES ACT OF 2021, 48 U.S.C. 2101 ET SEQ.
LAURA TAYLOR SWAIN, United States District Judge.
Before the Court is the Motion to Disqualify the Law Firm O'Neill & Borges,
LLC for Unresolvable Conflicts of Interest Incurred in Violation of the Puerto Rico Recovery Accuracy in Disclosures Act of 2021, 48 U.S.C. 2101 et seq. (Docket Entry No. 23285 in Case No. 17-3283) (the "Motion"), filed by R&D Master Enterprises, Inc. ("Movant" or "R&D"). The Motion alleges that O'Neill & Borges LLC ("O&B"), which represents the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board"), acting as the statutory representative of the debtors (the "Title III Debtors") in the above-captioned cases (the "Title III Cases") under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"), has failed to disclose material conflicts of interest arising from its alleged representation of "private sector clients that ... hold interests which by their nature are adverse to the Oversight Board and to the Commonwealth of Puerto Rico and its instrumentalities, including the Puerto Rico Electric Power Authority." (Mot. ¶ 22.) Movant alleges that O&B's conflicts include (i) representation of certain entities involved in an allegedly unlawful and ill-advised sale of a loan portfolio owned by the Economic Development Bank of Puerto Rico (the "EDB") to private entities, and (ii) client relationships with certain entities that have contracts with the Puerto Rico Electric Power Authority ("PREPA"). (Mot. ¶ 25-26, 30, 33-46.) Movant requests entry of an order permanently disqualifying O&B from serving as local counsel to the Oversight Board, ordering the disallowance and disgorgement of O&B's fees, and nullifying the Loan Sale Agreement executed by the EDB on September 7, 2018. (Mot. ¶ 111.)
All docket entry references herein are to entries in Case No. 17-3283, unless otherwise specified.
The Title III Debtors are comprised of the Commonwealth of Puerto Rico (the "Commonwealth" or "Puerto Rico"), the Puerto Rico Sales Tax Financing Corporation, the Puerto Rico Highways and Transportation Authority, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, the Puerto Rico Electric Power Authority, and the Puerto Rico Public Buildings Authority.
The Court has carefully reviewed the papers submitted in connection with the Motion and, for the following reasons, the Motion is denied.
Objections to the Motion were filed by the Oversight Board (Docket Entry No. 23467) (the "FOMB Objection") and O&B (Docket Entry No. 23552) (the "O&B Objection"). Movant filed a reply in support of the Motion (Docket Entry No. 23609) (the "Reply"). Following the close of briefing, Movant filed R&D Master Enterprises, Inc.'s Petition for the Issuance of a Final and Definitive Ruling on the Disqualifying Conflicts of Interest Incurred by Professionals Employed by the Financial oversight and Management Board for Puerto Rico in Violation of the Puerto Rico Recovery Accuracy and Disclosures Act (Docket Entry No. 25134) (the "R&D Petition").
BACKGROUND
Overview of Title I, Title II, and Title III of PROMESA
PROMESA was enacted on June 30, 2016, with the stated purpose of addressing the Commonwealth's fiscal crisis through "[a] comprehensive approach to fiscal, management, and structural problems and adjustments that exempts no part of the Government of Puerto Rico..., involving independent oversight and a Federal statutory authority for the Government of Puerto Rico to restructure debts in a fair and orderly process." 48 U.S.C. § 2194(m)(4).
PROMESA comprises seven titles; three of them are relevant to resolution of the instant dispute. First, Title I of PROMESA establishes the Oversight Board within
Puerto Rico's territorial government and provides a framework for the Oversight Board's formation and operation. Section 101(d)(1) of PROMESA permits the Oversight Board to "designate any territorial instrumentality" (defined in PROMESA to include all political subdivisions, public agencies, and instrumentalities of Puerto Rico) as subject to the requirements of PROMESA. 48 U.S.C. § 2121(d)(1)(A). The Oversight Board's powers under Title I include authority to retain attorneys. See 48 U.S.C. § 2128(b).
Title II of PROMESA contains several provisions that govern the relationship between the Oversight Board and the "covered territory" (i.e., the Commonwealth) and instrumentalities that are designated by the Oversight Board pursuant to section 101 of PROMESA. These provisions, which afford the Oversight Board a substantial role in the fiscal governance of the Commonwealth and its instrumentalities, provide the Oversight Board with the power to "develop, review, approve, and certify fiscal plans that ... in turn dictate the bounds of any annual budgets adopted by" the Commonwealth and its instrumentalities. Fin. Oversight & Mgmt. Bd. for P.R. v. Federación de Maestros de P.R., Inc. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 32 F.4th 67, 75 (1st Cir. 2022) ("Federación de Maestros"); see also Rosselló Nevares v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 330 F. Supp. 3d 685, 701 (D.P.R. 2018) (describing the "awkward power-sharing arrangement" created by the substantial but not unconstrained powers provided to the Oversight Board in Title II of PROMESA), aff'd, 945 F.3d 3 (1st Cir. 2019). Of particular relevance to the Motion, section 204(b)(2) grants the Oversight Board authority to "establish policies to require prior Oversight Board approval of certain contracts ... to ensure such proposed contracts promote market competition and are not inconsistent with the approved Fiscal Plan." 48 U.S.C. § 2144(b)(2).
In addition to the governance and fiscal oversight provisions in Title II of PROMESA, the Act "also create[s] in Title III a modified version of the municipal bankruptcy code for territories and their instrumentalities." Federación de Maestros, 32 F.4th at 75. Title III therefore "authorize[s] the [Oversight] Board to place the Commonwealth and its instrumentalities into bankruptcy proceedings and to develop a plan of adjustment for restructuring" their debts. Id. The undersigned was designated as the presiding judge to conduct the Title III Cases of Puerto Rico and its instrumentalities, see 48 U.S.C. § 2168, and the Oversight Board is designated by PROMESA as the representative of the Title III Debtors in their respective Title III Cases. 48 U.S.C. § 2175. In its capacity as the representative of the Title III Debtors, the Oversight Board is able to retain, and seek court approval of compensation for, the services of attorneys and other professionals. See 48 U.S.C. §§ 2176, 2177.
Commencement of the Title III Cases and the Promulgation of the Contract Review Policy
The Oversight Board was formed in 2016 following the enactment of PROMESA. Soon after its formation, the Oversight Board designated a number of instrumentalities, including the EDB, as "covered instrumentalities" subject to fiscal oversight under PROMESA. In 2017, the Oversight Board filed petitions to commence Title III Cases for the Commonwealth and four instrumentalities: the Puerto Rico Sales Tax Financing Corporation, the Puerto Rico Highways and Transportation Authority, the Employees Retirement System of the Government of the Commonwealth
of Puerto Rico, and PREPA. It filed one additional petition, in 2019, for the Puerto Rico Public Buildings Authority. The Oversight Board has never filed a Title III petition for the EDB.
Pursuant to the authority in section 204(b)(2) of PROMESA, the Oversight Board established a policy mandating the review of any contract that the Commonwealth or any covered instrumentality proposes to enter with an expected value of over $10 million. R&D Master Enterprises, Inc. v. Fin. Oversight & Mgmt. Bd. for P.R., 75 F.4th 41, 45 (1st Cir. 2023) ("R&D Master"); FOMB Policy: Review of Contracts, Fin. Oversight & Mgmt. Bd. for P.R., https://perma.cc/VJD4-QN9E (last visited December 29, 2023) (the "Contract Review Policy"). As explained by the First Circuit in a decision concerning claims brought by Movant (and others) against the Oversight Board,
If a contract subject to the Policy "fails to comply" with the same — that is, the FOMB's review determines that it does not promote market competition and is inconsistent with the applicable fiscal plan — the FOMB 'may take such actions as it considers necessary to ensure that such contract ... will not adversely affect [Puerto Rico's] compliance with the Fiscal Plan, including by preventing the execution or enforcement of the contract....' Id. § 2144(b)(5).
R&D Master, 75 F.4th at 45 (alterations in original).
The EDB and the Loan Sale Transaction
The EDB is an entity that was established by statute as a "corporate and political body" with the purpose of "promot[ing] the development of the private sector of the economy of Puerto Rico." 7 L.P.R.A. § 611a(a). Under its enabling statute, the EDB "ha[s] its own legal personality and existence apart from the Commonwealth of Puerto Rico and any of its agencies, instrumentalities or public corporations," 7 L.P.R.A. § 611a(b), and its "debts, obligations, contracts, notes, receipts, expenses, accounts, funds, enterprises and properties" are "its sole responsibility and not the responsibility of the Commonwealth of Puerto Rico, its agencies, instrumentalities and public corporations." 7 L.P.R.A. § 611a(c).
On or about September 7, 2018, the EDB entered into a Loan Sale Agreement (Docket Entry No. 23285-1) (the "Sale Agreement") with PR Recovery and Development JV, LLC and PR Recovery and Development REO, LLC (together, the "Purchasers") pursuant to which the EDB sold a commercial loan portfolio to the Purchasers (the "Loan Sale Transaction"). (Mot. ¶¶ 21, 25-26; Sale Agreement at 1.) Movant is a borrower whose loan was part of the loan portfolio that was sold by the EDB. See R&D Master, 75 F.4th at 44, 47. Movant alleges that O&B represented one of the Purchasers, PR Recovery and Development JV, LLC, with respect to the Loan Sale Transaction. (See Mot. ¶¶ 26-27.) O&B, however, both denies that it represented the Purchasers and denies that it has ever represented the Oversight Board in any matters concerning the Sale Agreement. (O&B Obj. at 9.)
It appears undisputed among the parties that the Contract Review Policy applied to the Sale Agreement, and that the EDB did not submit the Sale Agreement to the Oversight Board for approval under the Contract Review Policy prior to its execution or at any point thereafter. (See Mot. ¶ 27; FOMB Obj. ¶ 9.) In 2019, the EDB commenced suit in Commonwealth court seeking to invalidate the Sale Agreement (Mot. ¶ 30; FOMB Obj. ¶ 9), and the Oversight Board represents that it decided to not take action with respect to the Sale
Agreement due to the pendency of that litigation. (See FOMB Obj. ¶ 9.)
The Motion and the Objections to the Motion
R&D filed the Motion on January 19, 2023. The Motion alleges that O&B has "intentionally incurred ... unresolvable conflicts of interest to financially benefit" itself "to the corresponding economic detriment of the bankruptcy estate of the debtors in this Title III Case, the Commonwealth of Puerto Rico and the Puerto Rico Electric Power Authority." (Mot. ¶ 11.) Specifically, Movant appears to contend that the consideration paid by the Purchasers under the Sale Agreement represented a substantial discount from the true value of the loan portfolio and that the unwarranted discount created a windfall for the Purchasers at the EDB's expense (Mot. ¶ 26), but Movant has not explained how any such windfall has harmed the Commonwealth. The Motion further alleges that O&B is conflicted due to its alleged representation of several entities that have interests in PREPA's Title III Case that are "materially adverse to the Oversight Board and to the debtors" (Mot. ¶¶ 21-24), although Movant has not described any particular action or omission of O&B that has harmed PREPA or its stakeholders. (See, e.g., Mot. ¶¶ 34-46.) The Motion requests that the Court (i) enter an order disqualifying O&B, disallowing O&B's compensation, and requiring O&B to disgorge the compensation it has received to date, and (ii) declare that the Sale Agreement is null and void ab initio. (Mot. ¶ 111.)
The Oversight Board and O&B filed objections to the Motion on February 2, 2023, and February 16, 2023, respectively. In its objection, the Oversight Board argues that O&B has complied with its disclosure obligations under the Puerto Rico Recovery Accuracy in Disclosures Act (FOMB Obj. ¶ 23), that the EDB is not part of the Commonwealth and the Loan Sale Transaction bears no relationship to the Title III Cases (FOMB Obj. ¶¶ 27-28), that Movant has not demonstrated that O&B has a disqualifying conflict (FOMB Obj. ¶¶ 30-34), and that the allegations in the Motion should have been asserted in an objection to O&B's fee applications rather than as a separate motion (FOMB Obj. ¶ 25). O&B's objection argues that R&D's allegations concerning the EDB lack a meaningful nexus to the Title III Cases (O&B Obj. at 8-13), that R&D lacks Article III standing to prosecute the Motion (O&B Obj. at 8-13), and that O&B does not have any disqualifying conflicts of interest. (O&B Obj. at 13-14.)
DISCUSSION
The Court will first address Movant's standing to seek disqualification of O&B and disallowance and disgorgement of O&B's compensation in the Title III Cases. Then, the Court will take up the question of whether it has jurisdiction to entertain Movant's request for a declaration invalidating the Sale Agreement.
Movant's Standing to Seek Disqualification of O&B and Disallowance and Disgorgement of O&B's Fees
Movant has failed to plausibly allege, much less demonstrate, that it has standing to pursue an order disqualifying O&B and disallowing and requiring the disgorgement of O&B's fees. To have standing to participate in a proceeding in the Title III Cases, a party must satisfy
The term "proceeding" in the bankruptcy context refers to "a 'particular dispute or matter arising within a pending case—as opposed to the case as a whole.'" Assured Guaranty Corp., 872 F.3d at 63 (noting support in both case law and the leading treatise for the "distinction between the larger case and the various subsidiary proceedings").
"(1) Article III's constitutional requirements, (2) federal court prudential standing requirements, and (3) the 'party in interest' requirements under Bankruptcy Code 1109(b)." In re Old Carco LLC, 500 B.R. 683, 690 (Bankr. S.D.N.Y. 2013); see Sentinel Trust Co. v. Newcare Health Corp. (In re Newcare Health Corp.), 244 B.R. 167, 171 (B.A.P. 1st Cir. 2000) (noting that litigants must satisfy the requirements of section 1109(b) and other standing doctrines); see also Assured Guaranty Corp. v. Fin. Advisory Auth. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 872 F.3d 57, 64 n.7 (1st Cir. 2017); In re Glob. Indus. Techs., Inc., 645 F.3d 201, 210 (3d Cir. 2011). To demonstrate constitutional standing, a litigant must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision. Spokeo, Inc. v. Robins, 578 U.S. 330, 338, 136 S.Ct. 1540, 194 L.Ed.2d 635 (2016). An alleged injury only satisfies the injury-in-fact requirement if it is an "invasion of a legally protected interest which is (a) concrete and particularized; and (b) actual or imminent, not conjectural or hypothetical." R&D Master, 75 F.4th at 47. A generalized interest in having the government act in a lawful manner is not sufficient to confer standing. Indeed, "[i]t is apodictic that a mere interest in seeing the government turn square comers is not the kind of particularized interest that can satisfy the most basic constitutional prerequisite for standing." Osediacz v. City of Cranston, 414 F.3d 136, 142 (1st Cir. 2005); see Daggett v. Comm'n on Governmental Ethics & Election Pracs., 172 F.3d 104, 110 (1st Cir. 1999).
Section 1109(b) is made applicable to the Title III Cases by section 301(a) of PROMESA, 48 U.S.C. § 2161(a).
Section 1109(b) of the Bankruptcy Code provides that "[a] party in interest, including the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter." 11 U.S.C.A. § 1109(b) (Westlaw through P.L.118-23). Although the term "party in interest" is not defined in PROMESA or the Bankruptcy Code, courts interpret the provision to recognize that "anyone who has a legally protected interest that could be affected by a bankruptcy proceeding is entitled to assert that interest with respect to any issue to which it pertains." In re James Wilson Assocs., 965 F.2d 160, 169 (7th Cir. 1992) (noting that this interpretation "mak[es] explicit what is implicit in an in rem proceeding—that everyone with a claim to the res has a right to be heard before the res is disposed of since that disposition will extinguish all such claims"); In re Glob. Indus. Techs., Inc., 645 F.3d at 210 (applying the same definition). There is therefore substantial overlap between the requirements of constitutional standing and the "party in interest" standard, as each is generally satisfied "if the outcome of the proceeding may affect the ultimate disposition of the party's stake in the [bankruptcy] case, either as a direct result of the outcome of the proceeding... or as a result of the effect of the proceeding on the case as a whole." 7 COLLIER ON BANKRUPTCY ¶ 1109.04[4] (16th ed.); see also Assured Guaranty Corp., 872 F.3d at 64 n.7 (noting that "Article III standing is 'almost always satisfied with respect to any party in interest in a chapter 11 case'"). Movant contends that it has standing in the Commonwealth's Title III case because it is a creditor that has filed a proof of claim against the Commonwealth, and standing in PREPA's Title III case because Movant is "a client of PREPA." (Reply ¶ 3.) The Motion asserts that the Loan Sale Transaction has caused the EDB to become insolvent and caused "economic injury to the [EDB] ... and to hundreds of small business owners throughout Puerto Rico." (Mot. ¶¶ 26, 29.)
The Motion also asserts, in passing and with little explanation, that Movant is a "relator." (Mot. ¶¶ 26, 29.) To the extent Movant intends that descriptor to support its standing in this proceeding, such argument lacks merit. Although courts have recognized that relators can have Article III standing despite lacking personal injuries due to their status as "partial assignees of [the government's] claims against" defendants, United Seniors Ass'n, Inc. v. Philip Morris USA, 500 F.3d 19, 23-24 (1st Cir. 2007), Movant has cited no statute assigning any such right to it. To the contrary, PROMESA incorporates the standing requirements of section 1109(b) of the Bankruptcy Code. See 11 U.S.C. § 1109(b); 48 U.S.C. § 2161(a).
At its core, the relevant standing inquiry is whether Movant has a "legally protected interest[] that could be affected by the" proceeding currently before the Court. In re Glob. Indus. Techs., Inc., 645 F.3d at 212. Thus, standing is assessed on a proceeding-by-proceeding and "issue-by-issue basis," In re Quigley Co., Inc., 391 B.R. 695, 705 (Bankr. S.D.N.Y. 2008) (holding that party was only permitted to object to aspects of proposed plan "that directly implicate its own rights and interests"); see Sentinel Tr. Co. v. Newcare Health Corp. (In re Newcare Health Corp.), 244 B.R. 167, 172 (B.A.P. 1st Cir. 2000) ("In bankruptcy, a party may have standing for some matters and not for others."); cf. Katz v. Pershing, LLC, 672 F.3d 64, 71 (1st Cir. 2012) ("The standing inquiry is claim-specific: a plaintiff must have standing to bring each and every claim that she asserts.").
The fact that Movant has filed a proof of claim against the Commonwealth in the amount of $6,162.99 merely demonstrates that it has an interest in the Commonwealth's overall bankruptcy case, not that it has any particular interest in the disallowance and disgorgement of O&B's fees or in the O&B's attorney-client relationship with the Oversight Board in the Title III cases. The right to payment underlying Movant's proof of claim is not being addressed in the instant contested matter, and Movant has not alleged any way in which the outcome of this matter will "affect[] the ultimate distribution that [Movant] may receive." 7 COLLIER ON BANKRUPTCY ¶ 1109,04[4] (providing examples of ways in which parties may satisfy Article III standing requirements in a bankruptcy proceeding).
Nor does Movant's status as a debtor pursuant to its loan from the EDB provide a basis for standing to challenge O&B's retention and its fees. As the First Circuit noted in connection with Movant's previous attempt to compel the Oversight Board to review the Sale Agreement pursuant to the Contract Review Policy, Movant has neither alleged nor developed any argument that any "procedural right" created by the Contract Review Policy "exists to protect [Movant's] 'concrete interests.'" R&D Master, 75 F.4th at 48 (quoting Lujan v. Defs. of Wildlife, 504 U.S. 555, 573 n.7-8, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)). Moreover, to the extent that Movant asserts "a traditional 'pocketbook injury'" arising out of one of the Purchaser's collection efforts against Movant, Movant has "not allege[d] that the [Oversight Board] directly caused any collection to take place," nor that there is more than a
"bare hypothesis" that "the [Oversight Board's] inaction bears any relationship to [one of the Purchaser's] collection efforts." R&D Master, 75 F.4th at 48 (holding that R&D Master and other appellants "lack standing even assuming (without deciding) that their alleged injury is legally cognizable"). Furthermore, as in R&D Master, Movant here has not alleged facts that would demonstrate that the Oversight Board's review of the Sale Agreement would result in a determination that the Sale Agreement should be rescinded, nor that the Oversight Board would then act to rescind the Sale Agreement. R&D Master, 75 F.4th at 48-49 ("The FOMB's scope of review, per the Policy, is compliance with the fiscal plan, but Appellants allege nothing to that effect, rather only malfeasance with the underlying transaction between the [EDB] and [one of the Purchasers]. Second, even if the FOMB rejects a contract, PROMESA grants it full discretion to take any action it decides to .... Here, Appellants make no allegations, beyond mere conjecture, that the FOMB would likely rescind the contract.").
As compared to the theory of standing rejected by the First Circuit in R&D Master, the absence of redressability to support Movant's standing here is even more apparent. In R&D Master, Movant directly sought to compel the Oversight Board to review the Sale Agreement. Here, Movant challenges O&B's representation of the Oversight Board and O&B's compensation. Implicit in Movant's request for relief is the unsupported hypothesis that disallowance of O&B's fees and severance of its relationship with the Oversight Board would somehow cause the Oversight Board to take a different position with respect to its decision to defer review of the Sale Agreement. Thus, compared to the relief sought in R&D Master, Movant's request here for disallowance and disgorgement of O&B's fees and the disqualification of O&B is an additional step removed from remedying any injury arising out of the Sale Agreement.
The Motion also asserts that O&B is subject to conflicts of interest because it allegedly has represented certain entities that are counterparties to contracts with PREPA. Movant's only apparent relationship with PREPA is as a ratepayer, not as a creditor. (See Reply ¶ 3.) Movant has asserted only in the most general and conclusory manner that its interests are affected by O&B's representation of the Oversight Board in PREPA's Title III Case. (See, e.g., id. (stating that Movant is "a client of PREPA suffering the consequences of ill-conceived contracts"); R&D Pet. ¶ 2 (asserting that PREPA's Title III Case has "operate[d] to the legal and economic detriment of PREPA's bondholders, PREPA's creditors, and more than 1.5 million energy consumers in Puerto Rico").) Movant has not identified any specific injury to itself arising from O&B's representation of the Oversight Board, nor alleged any way in which the disqualification of O&B and the denial of O&B's compensation would remedy that injury.
Accordingly, Movant lacks both constitutional and statutory standing to prosecute the Motion with respect to the Motion's request for disqualification of O&B and disallowance and disgorgement of O&B's fees.
The Court's Jurisdiction to Address Whether the Sale Agreement Should Be Invalidated
The Court also lacks jurisdiction of Movant's request for a declaration nullifying the Sale Agreement. Section 306(a)(2) of PROMESA confers on district courts "original but not exclusive jurisdiction of all civil proceedings arising under [Title III of PROMESA], or arising in or related to cases under [Title III of PROMESA]."
48 U.S.C.A. § 2166(a)(2) (Westlaw through P.L.118-23). The jurisdictional language of section 306(a)(2) is analogous to that of the bankruptcy jurisdiction statute, 28 U.S.C.A. § 1334(b), and the Court has previously looked to case law applying the bankruptcy jurisdiction statute for general guidance in interpreting and applying section 306(a)(2). See Fin. Oversight & Mgmt. Bd. for P.R. v. Hernández-Montañez (In re Fin. Oversight & Mgmt. Bd. for P.R.), 77 F.4th 49, 60-61 (1st Cir. 2023) ("Hernández-Montañez") (noting that "general principles from our title 11 case law are instructive," but cautioning that courts should not "rigidly import the jurisdictional tests from that context to this case"); Asociación de Salud Primaria de P.R., Inc. v. Puerto Rico (In re Fin. Oversight & Mgmt. Bd. for P.R.), 330 F. Supp. 3d 667, 680 (D.P.R. 2018) ("[T]he First Circuit's interpretation of 28 U.S.C. § 1334 is instructive."); see also Roosevelt Campobello Int'l Park Comm'n v. EPA, 711 F.2d 431, 437 (1st Cir. 1983) (holding that two statutes' common purpose and matching language supported conclusion that Congress intended the construction of one to follow the other).
Proceedings that "arise under" Title III are those in which the cause of action is created by Title III. See In re Middlesex Power Equip. & Marine, Inc., 292 F.3d 61, 68 (1st Cir. 2002). Proceedings that "arise in" a Title III case are those which have "no existence outside of the bankruptcy." Gupta v. Quincy Med. Ctr., 858 F.3d 657, 664-65 (1st Cir. 2017) (quoting In re Wood, 825 F.2d 90, 97 (5th Cir. 1987)). "Arising in" jurisdiction is not determined by reference to a "but for" test but, rather, "the fundamental question is whether the proceeding by its nature, not its particular factual circumstance, could arise only in the context of a bankruptcy case." Gupta, 858 F.3d at 664-65 (citing In re Middlesex Power Equip. & Marine, Inc., 292 F.3d 61, 68 (1st Cir. 2002)). Generally, proceedings that are "related to" a Title III case are those which "potentially have some effect on the bankruptcy estate, such as altering debtor's rights, liabilities, options, or freedom of action, or otherwise have an impact upon the handling and administration of the bankrupt estate." In re Middlesex Power Equip. & Marine, Inc., 292 F.3d at 68 (quoting Smith v. Commercial Banking Corp. (In re Smith), 866 F.2d 576, 580 (3d Cir. 1989)). The determination of whether a matter is "related to" a Title III case "must be determined case-by-case" considering, among other things, whether the rights asserted in the proceeding are part and parcel of PROMESA's "comprehensive approach to fiscal, management, and structural problems and adjustments." Hernández-Montañez, 77 F.4th at 61 (quoting 48 U.S.C. § 2194(m)(4)); see also In re Santa Clara Cnty. Child Care Consortium, 223 B.R. 40, 45 (B.A.P. 1st Cir. 1998) ("The jurisdiction of the bankruptcy courts to hear related matters is broad but not unlimited. There must be some nexus between the 'related proceeding' and the title 11 case for the bankruptcy court to have subject matter jurisdiction.").
Although Movant filed the Motion on the jointly administered docket for the Title III Cases, Movant's request for a declaration determining that the Sale Agreement is null and void does not seek to vindicate any right created by Title III of PROMESA or the provisions of the Bankruptcy Code that are incorporated into Title III. To the contrary, Movant cites the Contract Review Policy (promulgated pursuant to section 204(b)(2) of PROMESA, which is part of Title II rather than Title III of PROMESA) and "due process" as the bases for its requested declaratory relief. (Mot. ¶ 111(c).) Thus,
the request does not "arise under" Title III. Movant's request and the rights that Movant seeks to vindicate through that request are also not ones that "by [their] nature ... could arise only in the context of a bankruptcy case," Gupta, 858 F.3d at 664-65, and the declaratory relief requested therefore does not "arise in" any of the Title III cases. Cf. R&D Master, 75 F.4th at 49 n.6 ("To the extent Appellants might have some defense to a collection action, say fraud or statute of limitations, they can raise it in a direct proceeding between themselves and [the relevant Purchaser].").
The only remaining question is whether the declaratory relief aspect of the Motion is "related to" the Title III Cases. Although Movant relies on section 204(b)(2) of PROMESA for its claim, its allegations concern a contract (the Sale Agreement) executed only by non-debtors. Cf. Hernández-Montañez, 77 F.4th at 63 n.5 (declining to "opine on the circumstances in which disputes centering on [non-debtor] instrumentalities may or may not 'relate to' the Commonwealth's Title III case," but determining that the parties' dispute concerning "the fiscal plan for the Commonwealth itself (rather than one of its instrumentalities)" was related to the Commonwealth's Title III case); Nuveen Mun. Tr. ex rel. Nuveen High Yield Mun. Bond Fund v. WithumSmith Brown, P.C., 692 F.3d 283, 297 (3d Cir. 2012) ("If a creditor's recovery from a non-debtor definitely will not affect the amount of its payment from a bankruptcy estate, the third-party action is not 'related to' the bankruptcy proceeding."); In re VideOcart, Inc., 165 B.R. 740, 744 (Bankr. D. Mass. 1994) ("The present action is by a non-debtor against non-debtors. A recovery by the plaintiff against the defendants will not directly affect the Debtor's bankruptcy estate."). A judicial declaration concerning the validity or invalidity of the Sale Agreement would, at most, affect Movant's rights vis-à-vis the EDB and the Purchasers, none of whom are debtors in the Title III Cases. It would have no apparent consequences for the "rights, liabilities, options, or freedom of action" of the Commonwealth or on the Title III Cases. To the extent that invalidation of the Sale Agreement would have economic consequences for the EDB, the EDB has "its own legal personality and existence apart from the Commonwealth of Puerto Rico and any of its agencies, instrumentalities or public corporations," 7 L.P.R.A. § 611a(b), and its debts and obligations are "its sole responsibility and not the responsibility of the Commonwealth of Puerto Rico, its agencies, instrumentalities and public corporations." 7 L.P.R.A. § 611a(c). It is perhaps due to this legal separation between the Commonwealth and the EDB that the Motion and Reply are devoid of facts that would demonstrate that the Loan Sale Transaction has financially harmed the Commonwealth, or that the nullification of the Sale Agreement would financially benefit the Commonwealth. Instead, the Motion relies upon conclusory assertions that the Sale Agreement has harmed non-debtors: the EDB, Movant, and unspecified "small business owners." (Mot. ¶ 26.) Although Movant asserts that the Commonwealth has been injured, those statements lack any factual explanation concerning the source or nature of that alleged injury. (See Mot. ¶ 83 ("Professionals employed by the Oversight Board cannot be allowed to take advantage of their privileged association with the Oversight Board in order to financially benefit private clients, injure the Commonwealth of Puerto Rico, and deprive the creditors of the Commonwealth of Puerto Rico and of the Puerto Rico Electric Power Authority of attainable remedies in the Title III Case."); see also Reply ¶ 46 ("The Commonwealth of Puerto Rico and hundreds of small Puerto Rican business owners like the Movant are being collaterally injured by the Oversight Board's willful misconduct and negligence in relation to the controversial Loan Sale Agreement.").)
In a footnote, Movant's Reply notes that the EDB's enabling statute provides that, "[s]hould [EDB] not have enough reserves to cover its bond obligations, the Puerto Rico General Fund is obligated by law to set aside said money in favor of the [EDB] in its annual budget." (Reply ¶ 19 n.8 (citing 7 L.P.R.A. § 611g(f)).) The provision cited by Movant states that certain bonds issued by the EDB "shall enjoy the additional security of a special reserve fund in which the monies assigned to the Bank shall be deposited and put at its disposal by the Commonwealth of Puerto Rico for the purpose of said special reserve fund." 7 L.P.R.A. § 611g(f). Movant has not, however, alleged that any such bonds exist, nor alleged that the EDB has had to tap into the special reserve fund for payment of bond obligations. The Motion also does not allege that a declaratory judgment nullifying the Sale Agreement would lessen the Commonwealth's obligations under the enabling statute. Accordingly, Movant has presented no basis in fact or in law to conclude that nullification of the Sale Agreement would have any impact on the Commonwealth's liabilities, much less an impact that would be material to the Commonwealth's Title III Case following confirmation of the Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al. (Docket Entry No. 19784) on January 18, 2022.
Accordingly, Movant has not demonstrated that invalidation of the Sale Agreement could conceivably affect the Commonwealth's Title III Case, or that there is any other basis to exercise jurisdiction of this aspect of the instant contested matter pursuant to Title III of PROMESA. The Court therefore lacks subject matter jurisdiction of the instant contested matter to the extent that it requests invalidation of the Sale Agreement.
CONCLUSION
For the foregoing reasons, the Motion is denied in all respects for lack of subject matter jurisdiction. This Memorandum Order resolves Docket Entry Nos. 23285 and 25134 in Case No. 17-3283.
SO ORDERED.