Peaje Investments LLC v. The Financial Oversight and Mgmt Board for Puerto Rico

Case Type:
Case Status:
Affirmed in part and Reversed in part
17-2165, 17-2166, 17-2167 (1st Circuit, Aug 08,2018) Published
A declaration by a governmental instrumentality (i.e., not the legislature) of the existence of a lien is insufficient to create a statutory lien unless the instrumentality's declaration is required by statute or statute stipulates that the instrumentality's declaration, in and of itself, is sufficient to create a lien. Except in those circumstances, a governmental instrumentality's declaration of a lien creates a security interest for purposes of 11 U.S.C. § 552.
Procedural context:
The plaintiff-appellant (Peaje Investments LLC) filed a direct appeal with the Court of Appeals following a trial on the plaintiff-appellant's declaratory relief/injunction adversary proceedings against the Commonwealth of Puerto Rico and the Puerto Rico Highways and Transportation Authority. The district court had ruled that: (1) Peaje was not entitled to a preliminary injunction regarding certain toll revenues, adequate protection regarding the use of the toll revenues, or relief from stay with respect to the toll revenues; and (2) Peaje had waived its right to argue that it had a non-statutory lien on the toll revenues. Peaje appealed both orders.
Peaje Invesments LLC (Peaje) is the beneficial owner of $65MM of uninsured bonds issued by the Puerto Rico Highways and Transportation Authority (the Authority). Peaje contended that the Authority's bond debt was secured by a statutory lien on certain toll revenues. Peaje commenced adversary proceedings in the Authority's and in the Commonwealth of Puerto Rico's respective bankruptcy cases to assert its rights to the toll revenues. The Authority, which was created as a public corporation and instrumentality of the Commonwealth, adopted a resolution that stated it would pay its bond debt from toll revenues. The resolution also created the "Sinking Fund," which in turn contained three accounts. The funds in these accounts were to be held in trust by a "Fiscal Agent" and "subject to a lien and charge in favor of the holders of the bonds... until paid out or transferred." As a result of Puerto Rico's financial crisis, Puerto Rico's governor issued executive orders that suspended the Authority's obligation to deposit toll revenues with the Fiscal Agent. In the underlying litigation, Peaje argued that it held statutory liens, not security interests, and denied that 11 U.S.C. §§ 552(a) and 928 applied to its liens. Further, Peaje did not discuss the effects of 11 U.S.C. § 928(b) on its rights, which it would have had Peaje asserted an alternative right as the holder and beneficiary of a security interest.
Howard, Kayatte, and Torreson (D. Maine, sitting by designation)

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