Opinion
Case No. 17-BK-3283 (LTS) (Jointly Administered) Adv. Proc. No. 18-00028 (LTS)
2021-12-27
IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of The Commonwealth of Puerto Rico, et al., Debtors. Cooperativa de Ahorro y Crédito Abraham Rosa, et al., Plaintiffs, v. The Commonwealth of Puerto Rico, et al., Defendants.
HARRY ANDUZE MONTANO LAW OFFICES, By: Harry Anduze, Diego R. Corral, Harry Anduze Montano Law Offices, 1454 Fernandez Juncos Ave., San Juan, PR 00909, DESPACHO JURIDICO RAMOS LUINA LLC, By: Guillermo J. Ramos Luiña, P.O. Box 22763, UPR Station, San Juan, PR 00931, Counsel for Cooperativa de Ahorro y Credito Abraham Rosa, Cooperativa de Ahorro y Credito Vega Alta, Cooperativa de Ahorro y Credito Dr. Manuel Zeno Gandia, Cooperativa de Ahorro y Credito de Ciales, Cooperativa de Ahorro y Credito de Juana Diaz, Cooperativa de Ahorro y Credito de Rincon. O'NEILL & BORGES LLC, By: Hermann D. Bauer Alvarez, Carla García Benítez, 250 Muñoz Rivera Ave., Suite 800, San Juan, PR 00918-1813, PROSKAUER ROSE LLP, By: Martin J. Bienenstock, Timothy W. Mungovan, Stephen L. Ratner, Eleven Times Square, New York, NY 10036, Counsel for The Financial Oversight and Management Board for Puerto Rico, on its own behalf and as representative of the Debtors the Commonwealth of 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 Public Buildings Authority, and as attorneys for the Oversight Board's individual members, José B. Carrión III, Andrew G. Biggs, Carlos M. García, Arthur J. González, José R. González, Ana J. Matosantos, and David A. Skeel, Jr. MARINI PIETRANTONI MUNIZ LLC, By: Luis C. Marini Biaggi, Carolina Vielaz Rivero, 250 Ponce de León Ave., Suite 900, San Juan, PR 00918, Counsel for Government Development Bank and Puerto Rico Fiscal Agency and Financial Advisory Authority. O'MELVENY & MYERS LLP, By: Elizabeth L. Mckeen, 610 Newport Center Drive, 17th Floor, Newport Beach, CA 92600 and By: Suzzanne Uhland, Times Square Tower, 7 Times Square, New York, NY 10026, Counsel for Puerto Rico Fiscal Agency and Financial Advisory Authority. CANCIO COVAS & SANTIAGO, LLP, By: Charles E. Vilaró Valderrábano, Ileana M. Oliver Falero, MCS Plaza, Suite A-267, 255 Ave. Ponce de León, San Juan, Puerto Rico 00917, KING & SPALDING LLP, By: Arthur Steinberg, Floyd C. Newton, Scott I. Davidson, 1185 Avenue of the Americas, New York, NY 10036, Counsel for GDB Debt Recovery Authority and Its Trustees Matthew Karp, Jorge L. Padilla, and David Pauker. DELIZ LEGAL LLC, By: Juan Carlos Deliz, Plaza 650, Suite 502, 650 Munoz Rivera Ave., San Juan, PR 00918, CAPARRA HILLS2, By: Luz Celenia Molinelli Gonzalez, H 24 Calle Yagrumo, Guaynabo, PR 00968, Counsel for Corporacion Publica para la Supervision y Seguro de Cooperativas de Puerto Rico ("COSSEC"). CASILLAS, SANTIAGO & TORRES LLC, By: Juan J. Casillas Ayala, Esq., Israel Fernández Rodríguez, Esq., Juan C. Nieves González, Esq., Cristina B. Fernández Niggemann, Esq., PO Box 195075, San Juan, PR 00919-5075, PAUL HASTINGS LLP, By: Luc. A. Despins, Esq., G. Alexander Bongartz, Esq., 200 Park Avenue, New York, New York 10166 and By: Nicholas A. Bassett, Esq, 875 15th Street, N.W., Washington, D.C. 20005, Counsel for the Official Committee of Unsecured Creditors for all Title III Debtors (except for PBA and COFINA).
HARRY ANDUZE MONTANO LAW OFFICES, By: Harry Anduze, Diego R. Corral, Harry Anduze Montano Law Offices, 1454 Fernandez Juncos Ave., San Juan, PR 00909, DESPACHO JURIDICO RAMOS LUINA LLC, By: Guillermo J. Ramos Luiña, P.O. Box 22763, UPR Station, San Juan, PR 00931, Counsel for Cooperativa de Ahorro y Credito Abraham Rosa, Cooperativa de Ahorro y Credito Vega Alta, Cooperativa de Ahorro y Credito Dr. Manuel Zeno Gandia, Cooperativa de Ahorro y Credito de Ciales, Cooperativa de Ahorro y Credito de Juana Diaz, Cooperativa de Ahorro y Credito de Rincon.
O'NEILL & BORGES LLC, By: Hermann D. Bauer Alvarez, Carla García Benítez, 250 Muñoz Rivera Ave., Suite 800, San Juan, PR 00918-1813, PROSKAUER ROSE LLP, By: Martin J. Bienenstock, Timothy W. Mungovan, Stephen L. Ratner, Eleven Times Square, New York, NY 10036, Counsel for The Financial Oversight and Management Board for Puerto Rico, on its own behalf and as representative of the Debtors the Commonwealth of 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 Public Buildings Authority, and as attorneys for the Oversight Board's individual members, José B. Carrión III, Andrew G. Biggs, Carlos M. García, Arthur J. González, José R. González, Ana J. Matosantos, and David A. Skeel, Jr.
MARINI PIETRANTONI MUNIZ LLC, By: Luis C. Marini Biaggi, Carolina Vielaz Rivero, 250 Ponce de León Ave., Suite 900, San Juan, PR 00918, Counsel for Government Development Bank and Puerto Rico Fiscal Agency and Financial Advisory Authority.
O'MELVENY & MYERS LLP, By: Elizabeth L. Mckeen, 610 Newport Center Drive, 17th Floor, Newport Beach, CA 92600 and By: Suzzanne Uhland, Times Square Tower, 7 Times Square, New York, NY 10026, Counsel for Puerto Rico Fiscal Agency and Financial Advisory Authority.
CANCIO COVAS & SANTIAGO, LLP, By: Charles E. Vilaró Valderrábano, Ileana M. Oliver Falero, MCS Plaza, Suite A-267, 255 Ave. Ponce de León, San Juan, Puerto Rico 00917, KING & SPALDING LLP, By: Arthur Steinberg, Floyd C. Newton, Scott I. Davidson, 1185 Avenue of the Americas, New York, NY 10036, Counsel for GDB Debt Recovery Authority and Its Trustees Matthew Karp, Jorge L. Padilla, and David Pauker.
DELIZ LEGAL LLC, By: Juan Carlos Deliz, Plaza 650, Suite 502, 650 Munoz Rivera Ave., San Juan, PR 00918, CAPARRA HILLS2, By: Luz Celenia Molinelli Gonzalez, H 24 Calle Yagrumo, Guaynabo, PR 00968, Counsel for Corporacion Publica para la Supervision y Seguro de Cooperativas de Puerto Rico ("COSSEC").
CASILLAS, SANTIAGO & TORRES LLC, By: Juan J. Casillas Ayala, Esq., Israel Fernández Rodríguez, Esq., Juan C. Nieves González, Esq., Cristina B. Fernández Niggemann, Esq., PO Box 195075, San Juan, PR 00919-5075, PAUL HASTINGS LLP, By: Luc. A. Despins, Esq., G. Alexander Bongartz, Esq., 200 Park Avenue, New York, New York 10166 and By: Nicholas A. Bassett, Esq, 875 15th Street, N.W., Washington, D.C. 20005, Counsel for the Official Committee of Unsecured Creditors for all Title III Debtors (except for PBA and COFINA).
PROMESA
Title III
MEMORANDUM OPINION GRANTING DEFENDANTS’ MOTIONS TO DISMISS SECOND AMENDED COMPLAINT
LAURA TAYLOR SWAIN, United States District Judge Plaintiffs are six state-chartered credit unions that are part of a financial cooperative system (the "Cooperatives") that provides banking and financial services to communities in Puerto Rico. Plaintiffs hold certain debt instruments issued by the Commonwealth of Puerto Rico (the "Commonwealth"), other Commonwealth instrumentalities, and the Government Development Bank ("GDB") (together, the "Government Bonds"). Plaintiffs have brought this adversary complaint against the Commonwealth, GDB, the Financial Oversight and Management Board for Puerto Rico (the "FOMB") and its individual members, Corporación para la Supervisión y Seguro de Cooperativas de Puerto Rico ("COSSEC"), GDB Debt Recovery Authority ("GDB DRA") and its trustees, the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF"), the Puerto Rico Sales Tax Financing Corporation ("COFINA"), the Puerto Rico Highways and Transportation Authority ("HTA"), the Employees Retirement System of the Government of the Commonwealth of Puerto Rico ("ERS"), the Puerto Rico Electric Power Authority ("PREPA"), and the Public Buildings Authority ("PBA"). Plaintiffs allege that Defendants engaged in a fraudulent scheme from 2009 to 2015 to coerce the Cooperatives into buying Government Bonds while Defendants knew that the bonds were unsustainable and would diminish in value. Plaintiffs claim that this fraudulent scheme violated Puerto Rico contract and tort law, Puerto Rico's Act Against Organized Crime and Money Laundering, and provisions of the Commonwealth and United States constitutions, and, in the alternative, entitles Plaintiffs to a claim for unjust enrichment. Plaintiffs seek an order exempting their claims from discharge in certain Defendants’ debt adjustment proceedings under the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") as well as additional declaratory relief, injunctive relief, and compensatory damages.
PROMESA is codified at 48 U.S.C. § 2101 et seq. References to sections of "PROMESA" are to the uncodified version of the statute and are generally accompanied by parallel references to the codified provisions.
This matter is currently before the Court on Defendants’ Motions to Dismiss Plaintiffs’ Second Amended Complaint. In the interests of judicial economy, the Court withdraws its reference of the instant motions to Magistrate Judge Dein. (Docket Entry No. 142.) This Court has jurisdiction of this adversary proceeding pursuant to 48 U.S.C. § 2166(a). After careful consideration of all of the parties’ and intervenors’ submissions with respect to Defendants’ Motions to Dismiss and Plaintiffs’ Oppositions, Defendants’ Motions to Dismiss are granted pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) for the following reasons.
Defendants’ Motions to Dismiss include the following relevant pleadings: Defendants Financial Oversight and Management Board for Puerto Rico and Its Members, Commonwealth of Puerto Rico, Puerto Rico Sales Tax Financing Corporation, Puerto Rico Highways and Transportation Authority, Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Puerto Rico Electric Power Authority, and Public Buildings Authority's Motion to Dismiss Second Amended Complaint (Docket Entry No. 128, "FOMB Motion"); the Government Development Bank for Puerto Rico's Motion to Dismiss the Second Amended Complaint (Docket Entry No. 129); the Motion to Dismiss Second Amended Adversary Complaint by the GDB Debt Recovery Authority and Its Trustees Matthew Karp, Jorge L. Padilla, and David Pauker (Docket Entry No. 130); COSSEC's Joinder to Co-Defendants’ Motion to Dismiss Second Amended Complaint (Docket Entry No. 131); Limited Joinder of Intervenor Official Committee of Unsecured Creditors in Relief Sought by Defendants Financial Oversight and Management Board for Puerto Rico, Puerto Rico Sales Tax Financing Corporation, Puerto Rico Highways and Transportation Authority, Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and Puerto Rico Electric Power Authority in Motion to Dismiss Second Amended Complaint (Docket Entry No. 132); AAFAF's Joinder to Oversight Board and Debtor's Motion to Dismiss Plaintiffs’ Second Amended Complaint (Docket Entry No. 138); Supplemental Memorandum of Law in Support of Defendants Financial Oversight and Management Board for Puerto Rico and Its Members, Commonwealth of Puerto Rico, Puerto Rico Sales Tax Financing Corporation, Puerto Rico Highways and Transportation Authority, Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Puerto Rico Electric Power Authority, and Public Buildings Authority's Motion to Dismiss Second Amended Complaint (Docket Entry No. 143); Declaration of Julia D. Alonzo in Support of Defendants’ Motion to Dismiss Plaintiffs’ Second Amended Complaint (Docket Entry No. 144); Supplemental Brief in Support of Motion to Dismiss Second Amended Adversary Complaint by the GDB Debt Recovery Authority and Its Trustees Matthew Karp, Jorge L. Padilla, and David Pauker (Docket Entry No. 145); Government Development Bank for Puerto Rico's Supplemental Memorandum in Support of Motion to Dismiss Second Amended Complaint (Docket Entry No. 146); AAFAF's Joinder and Supplemental Memorandum to the Government Development Bank for Puerto Rico's and the Financial Oversight and Management Board for Puerto Rico's Supplemental Briefs in Support of Motion to Dismiss Second Amended Adversary Complaint (Docket Entry No. 147); COSSEC's Joinder to Co-Defendants’ Motions to Dismiss Second Amended Complaint and Supplemental Memorandum to Motion to Dismiss Second Amended Complaint (Docket Entry No. 148); Limited Joinder of Intervenor Official Committee of Unsecured Creditors in Supplemental Memorandum of Law of Defendants Financial Oversight and Management Board for Puerto Rico, Commonwealth of Puerto Rico, Puerto Rico Sales Tax Financing Corporation, Puerto Rico Highways and Transportation Authority, Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and Puerto Rico Electric Power Authority in Support of Motion to Dismiss Second Amended Complaint (Docket Entry No. 151); Reply Memorandum in Support of Defendants Financial Oversight and Management Board for Puerto Rico and Its Members, Commonwealth of Puerto Rico, Puerto Rico Sales Tax Financing Corporation, Puerto Rico Highways and Transportation Authority, Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Puerto Rico Electric Power Authority, and Public Building Authority's Motion to Dismiss Second Amended Complaint (Docket Entry No. 178, "FOMB Reply"); Reply Brief in Response to Plaintiffs’ Opposition and in Further Support of Motion to Dismiss Second Amended Adversary Complaint by the GDB Debt Recovery Authority and Its Trustees Matthew Karp, Jorge L. Padilla, and David Pauker (Docket Entry No. 179); Puerto Rico Fiscal Agency and Financial Advisory Authority and the Government Development Bank for Puerto Rico's Reply Brief in Response to Plaintiffs’ Opposition and in Further Support of Motion to Dismiss Second Amended Adversary Complaint (Docket Entry No. 180); and COSSEC's Reply Brief to Plaintiffs’ Opposition to COSSEC's Motion to Dismiss [Dkt. 170] and Joinder to Co-Defendants’ Replies in Support of Motions to Dismiss Second Amended Complaint [Dkt. No's 178 & 180] (Docket Entry No. 181.)
Plaintiffs’ Oppositions include the following: Plaintiffs’ Opposition to Government Development Bank's Motion to Dismiss and Memorandum in Support Thereof (Docket Entry No. 167, "Pls. Opp. to GDB"); Plaintiffs’ Opposition to Motion to Dismiss by the GDB-GDRA (Docket Entry No. 168); Opposition to Motion to Dismiss by the Puerto Rico Fiscal Agency and Financial Advisory Authority ("FAFAA") (Docket Entry No. 169); Opposition to COSSEC's Motions to Dismiss (Docket Entry No. 170); and Plaintiffs’ Opposition to the FOMB’ Motion to Dismiss and Memoranda in Support Thereof (Docket Entry No. 172, "Pls. Opp. to FOMB").
PROCEDURAL HISTORY
Plaintiffs filed their original adversary complaint on March 22, 2018. (See Docket Entry No. 1.) On May 24, 2018, the Court allowed the Official Committee of Unsecured Creditors (the "UCC") to intervene in this matter under Bankruptcy Code section 1109(b). (See Docket Entry No. 14.) In August 2018, Defendants filed motions to dismiss and motions for joinder in support of dismissal of Plaintiffs’ adversary complaint. (See Docket Entry Nos. 29, 31, 32, 34, 40, 59.) Plaintiffs did not respond to the motions to dismiss, and instead requested leave to file an amended complaint. (See Docket Entry No. 73.) After briefing on the motion for leave to amend was concluded, the Court allowed Plaintiffs’ motion and dismissed Defendants’ previously filed motions to dismiss as moot. (See Docket Entry No. 78.)
On April 16, 2019, Plaintiffs filed their Amended Complaint (Docket Entry No. 79, the "Amended Complaint"). Defendants again filed motions to dismiss and motions for joinder in support of dismissal of the Amended Complaint. (See Docket Entry Nos. 88, 91, 92, 93, 94, 97.) Plaintiffs again did not respond to Defendants’ motions and filed a motion for leave to file a second amended complaint. (See Docket Entry No. 116.) On April 14, 2020, this Court allowed Plaintiffs’ motion for leave to amend, ordered Defendants to refile their pending motions to dismiss, and allowed Defendants to file supplemental briefs addressing any new allegations. (See Docket Entry No. 125.) On April 16, 2020, Plaintiffs filed their Second Amended Complaint (Docket Entry No. 126, the "SAC"). In May 2020, Defendants filed their supplemental memoranda in support of their motions to dismiss the SAC. (See Docket Entry Nos. 143, 145, 146, 147, 148, 151.)
BACKGROUND
In the SAC, Plaintiffs assert seven claims against Defendants. Counts One and Two request that this Court enter an order pursuant to the Bankruptcy Code and PROMESA excepting Plaintiffs’ claims from discharge in any plan of adjustment related to certain Defendants that are Title III debtors. SAC ¶¶ 186-208. Count Three asserts that Defendants violated Puerto Rico's Act Against Organized Crime and Money Laundering ("PR-RICO"). Id. ¶¶ 209-35. In Count Four, Plaintiffs allege Defendants breached the terms and conditions of their agreements with Plaintiffs and maintain that such actions violated various Puerto Rico statutes related to fraud and negligence. Id. ¶¶ 236-56. Count Five alleges Defendants are liable for violations of Puerto Rico tort statutes. Id. ¶¶ 257-70. Count Six asserts Defendants’ conduct violated the Takings Clause of the Puerto Rico and United States constitutions. Id. ¶¶ 271-81. Count Seven alleges, in the alternative, that Plaintiffs are entitled to relief under the doctrine of unjust enrichment. Id. ¶¶ 282-86. Defendants have now filed the Motions to Dismiss currently before the Court seeking dismissal of Plaintiffs’ SAC pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).
On March 5, 2021, GDB DRA filed an informative motion (Docket Entry No. 186) submitting supplemental authority from the First Circuit in support of its motion to dismiss. Plaintiffs filed a response in opposition (Docket Entry No. 187) arguing that this Court should not consider this additional authority because it was improperly presented by GDB DRA. Because the Court does not rely on the First Circuit's discussion of equitable mootness to dismiss the claims against GDB DRA, it will not take up the issues raised in the informative motion and response.
The following factual summary is drawn from Plaintiffs’ SAC, the well-pleaded allegations of which are taken as true for purposes of this motion practice, documents attached to or incorporated in the SAC, and matters of which the Court can take judicial notice.
In considering a motion to dismiss under either Rules 12(b)(1) or 12(b)(6) the court will accept well-pleaded factual claims as true and construe such facts and inferences in the plaintiffs’ favor. See Ocasio-Hernandez v. Fortuño-Burset, 640 F.3d 1, 7 (1st Cir. 2011) ; Gonzalez v. Otero, 172 F. Supp. 3d 477, 495 (D.P.R. 2016). The court may also consider documents attached to or incorporated into the complaint, and relevant public records. Foley v. Wells Fargo Bank, N.A., 772 F.3d 63, 68 (1st Cir. 2014) ; see also Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993) (concluding court may consider "documents the authenticity of which are not disputed by the parties, ... official public records, ... documents central to plaintiffs’ claim, or ... documents sufficiently referred to in the complaint").
Plaintiffs’ Investment in Government Bonds
While the SAC is unclear as to which Government Bonds each Plaintiff purchased and when, Plaintiffs allege that approximately 65% of the Cooperatives’ investment portfolio consists of Government Bonds. SAC ¶ 49, Ex. C at 11 (discussing investment of Cooperatives generally). These investments include the direct sale of bonds issued by specific Commonwealth entities as well as the purchase of general obligation bonds and bonds issued by GDB. Id. ¶¶ 49, 106. Plaintiffs purchased the Government Bonds with cash at par value or near par value. Id. ¶ 48. At the time the SAC was filed, the Government Bonds, taken as a whole, were trading at a discounted rate of approximately 49% below par value. Id. ¶ 49. Plaintiffs allege that their high concentration of investments in Government Bonds was the result of a "fraudulent scheme" by Defendants to sell Government Bonds to Plaintiffs while Defendants knew that the Commonwealth would not be able to repay the bonds. See id. ¶¶ 94, 98.
Defendants’ Alleged Fraudulent Scheme
Plaintiffs have named a number of governmental entities and individual defendants in this action, alleging that each played a role in the fraudulent scheme or assumed control of and liability for the alleged actions of the entities at issue. Plaintiffs allege that the Commonwealth, with GDB, controlled the issuance of the Government Bonds purchased by Plaintiffs. Id. ¶¶ 15, 17. Plaintiffs point to COSSEC, which regulates, supervises, and insures the Cooperatives, as the entity that issued misleading directives and exerted pressure on the Cooperatives to increase their investment in Government Bonds. Id. ¶¶ 16, 84. Plaintiffs allege that COFINA, HTA, ERS, PREPA, and PBA received funds from the sale of the Government Bonds to Plaintiffs. Id. ¶ 21. Plaintiffs further allege that AAFAF, which was created under Act 21 of April 6, 2016, is directly involved in the Commonwealth's restructuring efforts and "continues to exert significant influence" over COSSEC policy. Id. ¶ 20. Plaintiffs also bring claims against the FOMB, which was created upon the enactment of PROMESA in June 2016, and its individual Board members in their official capacities, alleging that the FOMB, as the Commonwealth's representative in the Title III proceedings, is "subject to the legal obligations and parameters that stem from the actions and omissions of Debtors." Id. ¶ 202. GDB DRA, which was created by GDB's Restructuring Act in August 2017, and its individual trustees in their official capacities are also named in the SAC as "nominal defendants to ensure the effectiveness of any judgment against the GDB." Id. ¶ 18.
Specifically, Plaintiffs name José B. Carrión III, Andrew G. Biggs, Carlos M. García, Arthur J. González, José R. González, Ana J. Matosantos, David A. Skeel, Jr., and Eli Díaz Atienza as the relevant individual members of the FOMB.
Plaintiffs identify Jorge L. Padilla, Mathew Karp, and David Pauker, as designated members of GDB DRA's Board of Trustees, as Defendants in this matter.
Plaintiffs also name various entities and groups as Defendants that are or were not yet in existence or are unidentified in the SAC. This includes GDB Public Entity Trust ("GDB PET"), which Plaintiffs allege is a public trust that will be created pursuant to Act 109, and several unidentified securities firms, law firms, counsel, accounting firms, and insurance companies. SAC ¶¶ 19, 31-34.
Meetings and Presentations Concerning Government Bonds
Plaintiffs allege that Defendants’ fraudulent actions and omissions were carried out between 2009 and 2015 through (i) "meetings and conversations between officials of the GDB, the governor's office and COSSEC (in the latter's case, through COSSEC chairman Melvin Carrión and the Executive President José González Torres)"; (ii) "meetings and conversations held by COSSEC officials in preparation of meetings of the Board of Directors of COSSEC"; and (iii) "meetings of COSSEC's Board of Directors." Id. ¶ 79. Plaintiffs also allege that, after COSSEC issued a 2009 circular letter, which is discussed in more detail infra, COSSEC sponsored a presentation by the GDB for the Cooperatives about the "purported virtues" of the Government Bonds. Id. ¶ 224. Plaintiffs allege "[t]hat COSSEC sponsored presentation was an integral part of the Commonwealth's scheme to obtain funding from the Cooperatives for the government's unsustainable spending while knowing that the Commonwealth did not have the financial means and capability of honoring the bonds in case of default." Id.
According to the SAC, "COSSEC's Board of Directors is comprised of four (4) governmental officials (the Commissioner of Cooperative Development, the Commissioner of Financial Institutions, the Secretary of the Treasury [or his/her representative] and the President of the Government Development Bank [or his/her representative]), four (4) representatives elected by [C]ooperatives and one representative of the Public Interest." Id. ¶ 52. The Board is chaired by the Commissioner of Cooperative Development. Id. COSSEC is also managed by an Executive President, who is appointed by COSSEC's Board of Directors. Id. Plaintiffs allege that "[a]ctual control of COSSEC and its operations has been exerted by its Chairmen and Executive Presidents, and more recently by [AAFAF]" and that the "[r]epresentatives of the Cooperatives do not have direct access to government information; therefore, they could only rely on the information provided by the governmental officials in COSSEC, particularly, regarding the financial situation of the government." Id. ¶¶ 52, 53.
Plaintiffs also allege that, in 2009, during discussions with COSSEC's Board of Directors, Defendants failed to disclose the Commonwealth's financial situation and its impact on the Government Bonds. See id. ¶¶ 86-92, 117. Plaintiffs allege that these omissions violated Defendants’ duties to the Cooperatives. Id. ¶ 117. Plaintiffs state Defendants had a statutory and fiduciary duty to disclose "the risks and adverse conditions resulting from the government's dire financial shortcomings" and to abstain "from fostering the placement of [Government Bonds] in the investment portfolios of the credit unions." Id. ¶ 86.
Plaintiffs further maintain that they were pressured to increase their investments in Government Bonds by "abusive regulatory practices designed to intimidate [the] credit unions...." Id. ¶ 84. Plaintiffs specifically allege that "in 2009 COSSEC's then Executive President, Mr. Jos[é] A González-Torres, was pressured and coerced into illegally using the agency's regulatory power to go after credit unions that were not favoring the transactions being implemented or advanced by the Commonwealth through Mr. Melvin Carrión, then Commissioner of Cooperative Development and chairman of COSSEC's board of directors." Id. Plaintiffs contend that "[g]overnmental members of COSSEC's Board of Directors and COSSEC's Executive President called upon the Cooperatives to ‘cooperate’ with the government's financial and development needs and ‘warned’ that in the absence of said ‘cooperation’ it would be necessary to reevaluate the tax-exempt status of Cooperatives, which has been in effect since the 1940s." Id. ¶ 104. Plaintiffs allege those "threats" caused the Cooperatives to increase their investments in the Government Bonds. Id.
COSSEC Circular Letters
Plaintiffs also allege that two regulatory circular letters issued by COSSEC in 2009 and 2012 (the "Circular Letters") contained false and misleading statements and placed pressure on Plaintiffs to increase their purchases of Government Bonds. See id. ¶¶ 83, 97-103. According to Plaintiffs, COSSEC routinely implemented policy through circular letters that notified the Cooperatives of its stance towards various regulatory matters. Id. ¶ 80. Failure to comply with COSSEC's circular letters could subject a Cooperative to an adverse finding that it is not in compliance with current regulations. Id. ¶ 82. On June 22, 2009, COSSEC issued Circular Letter 09-03 (the "2009 Circular Letter") in which it "authorize[d] the purchase of these [Government Bonds]." Id. Ex. E at 1. The 2009 Circular Letter further states that Plaintiffs "may benefit" from certain advantages of the Government Bonds, including that (1) the bonds are "backed by the Government, which guarantees 100% of interest and principal payments, as provided in the bonds"; (2) Plaintiffs could sell the bonds "at market value at any time due to their capital appreciation"; and (3), that these bonds were "excellent guarantees" that could be used as collateral. Id. Ex. E at 2. COSSEC's 2009 Circular Letter advised that, "[b]ased on the benefits that these bonds offer, the [C]ooperatives may purchase them, as long as they ensure that at the time of their purchase, the classification of these investments are between AAA to BBB-(minus) or from Aaa to Baa-(minus), as issued by Standard & Poor (S&P), Fitch, and Moody's respectively." Id. Ex. E at 2. COSSEC further stated in the 2009 Circular Letter that "[i]f after the date of acquisition or purchase of the investment, the investment shows a classification lower than the foregoing ones indicated, COSSEC will not consider these a violation" of the regulation regarding the grade requirements of the Cooperatives’ investments and "[t]herefore the [C]ooperatives will not have to make adjustments to the classification of the investments for this reason and each [C]ooperative will perform an analysis to determine the course of action to take in the best interest of the institution and in compliance with the Generally Accepted Accounting Principles." Id. Ex. E at 3 (emphasis in original).
On March 20, 2012, COSSEC issued another circular letter (the "2012 Circular Letter") in which it "authorize[d]" the Cooperatives to increase their investments in negotiable instruments, like the Government Bonds, to up to 30% of their total assets, an increase of 5% from the prior 25% regulatory cap. Id. ¶ 103, Ex. G at 1-2.
Plaintiffs assert that the Circular Letters were false and misleading in the following respects:
• "In the circular letter 2009-03 it was informed to the Cooperatives that the [Government Bonds] were backed by the government, which guarantees 100% of interest and principal payments. That is a completely incorrect and misleading statement. Many bonds, such as those issued by the GDB, did not carry the express guarantee of the Commonwealth ... [and] the information then known by the governmental members of COSSEC's Board of Directors indicated that the government was not able to honor repayment of the amounts being taken from the Cooperatives." Id. ¶ 98.
• "[T]he bonds were described as ‘liquid assets’ and were described as having ample opportunity of being sold at market value at any time due to their alleged capital appreciation." Id. ¶ 99. Plaintiffs allege this is an incorrect and misleading statement because "[f]or a bond to be considered liquid, the maturity has to be less than a year and the bonds marketed to [C]ooperatives had a median remaining term to maturity of approximately seven and a half years." Id.
• "The letter also described the bonds as assets that could be used as ‘excellent collateral.’ But, the only way these bonds would be excellent collateral would be if their credit rating were exceptionally high and these bonds barely qualified as investment grade." Id. ¶ 100.
• The 2012 Circular Letter "raise[d] the regulatory limit applicable to the [Government Bonds]. This allowed the government to take an increased amount of Cooperative moneys in exchange for instruments of substantially diminished value that had the consequence of a higher concentration of risk in unsound [Government Bonds], which was a harmful investment strategy for Cooperatives." Id. ¶ 103.
Plaintiffs maintain that the Secretary of the Treasury and GDB, who are members of COSSEC's Board of Directors, knew that these statements were false when made because "they were and continue to be in charge of the financial and economic policy of the Commonwealth." Id. ¶ 101. Plaintiffs also point to the statement included in the 2009 Circular Letter that "should the credit rating of the bonds fall below acceptable limits after purchase, COSSEC ‘will not consider’ these a violation of the regulation requiring investment grade securities" as evidence of Defendants’ knowledge that the Government Bonds were a bad investment. Id. ¶ 227 (emphasis in original).
Effort to Achieve Legislative Solution
When it became known that the Commonwealth would likely be unable to repay the Government Bonds, Plaintiffs first worked with the government to protect the Cooperatives from the losses attributable to the Government Bonds. See id. ¶ 131, Ex. C at 15. Plaintiffs signed confidentiality agreements with GDB on July 17, 2015, to discuss "an agreement to restructure their holdings of [Government Bonds]." Id. ¶ 131. Plaintiffs participated in additional discussions with the Commonwealth government to address the financial risks associated with their holdings in Government Bonds and drafted proposed legislation, which was later adopted as Act 220 on December 15, 2015. Id. ¶¶ 125, 126, Ex. C at 15. Act 220 allows the Cooperatives to use different accounting principles for their investments in Government Bonds to protect the financial stability of the Cooperatives. Id. ¶ 173, Ex. C at 15. However, Plaintiffs allege that the Commonwealth, GDB, and COSSEC have failed to adopt other policy measures to adequately protect the Cooperatives. Id. ¶ 127.
Relief Sought
Plaintiffs seek the following relief:
1. "the entry of an Order and/or Judgment declaring that Plaintiffs’ claims (including the claims for Monetary Damages) against all defendants under Title III of PROMESA are exempted from the discharge that the confirmation of a plan of adjustment of debts might entail pursuant to 11 U.S.C. § 944";
2. "the entry of judgment declaring that the restructuring of the GDB and that the qualifying modification of the GDB are null and void for failing to comply with Title VI of PROMESA" ;
In 2018, this Court approved the restructuring of GDB's debts under a qualifying modification pursuant to Title VI of PROMESA. (See Order Approving the Qualifying Modification for the Government Development Bank for Puerto Rico Pursuant to Section 601(m)(1)(D) of the Puerto Rico Oversight, Management, and Economic Stability Act (Docket Entry No. 270 in Case No. 18-1561)). Plaintiffs allege that they are not bound by the resolution of that proceeding because they did not sign on to the Restructuring Support Agreement, which proposed the terms for the qualifying modification, they did not participate in the Title VI proceeding, and they voted against the transaction through the solicitation process. SAC ¶¶ 153-55. Thus, Plaintiffs conclude, they have never waived nor released their claims against GDB. Id. ¶ 157. As explained infra at note 13, this argument is not persuasive.
3. "the entry of a specific provision in each of the orders confirming plans for each of the defendants under Title III of PROMESA declaring that Plaintiffs’ claims (including the claims for Monetary Damages) against Defendants as described herein are exempted from discharge";
4. "the entry of an Order for Defendants to pay triple compensation to Plaintiffs for the damages suffered, and the expenses incurred in this suit, including a reasonable sum for attorney's fees as provided un[der] the Acts Against Organized Crime. Civil remedies, 25 L.P.R.A. § 971h(d)";
5. "the entry of an Order for Defendants to return to Plaintiffs all sums taken and appropriated by the fraudulent sale of the materially diminished and value impaired Puerto Rico Debt Securities acquired by the Cooperatives";
6. "the entry of an Order for Defendants to compensate Plaintiffs for the losses and damages caused as a result of Defendants’ fraudulent actions in order to make Plaintiffs enter into a sales and purchase agreement of government papers";
7. "the entry of an Order for Defendants to compensate Plaintiffs for all damages caused by the fraudulent, negligent and unconstitutional acts of Defendants";
8. "the entry of an Order for Defendants to justly compensate the Plaintiffs for the taking of their property";
9. "the entry of an Order for compensation for all lost opportunities incurred by Plaintiffs as a result of Defendants’ acts and/or omissions";
10. "the entry of an Order for the rescission of any or all transactions as sought";
11. "the entry of an Order imposing punitive damages in an amount that the Court shall deem appropriate";
12. "the entry of an Order imposing pre-award and pre-judgment interest on all sums appropriated from the date deposited until the date of the judgment and until such sums are paid, all at the highest rate allowed by law";
13. "the entry of an Order for any and all other relief available to Plaintiffs, in law or equity or otherwise, which may be granted by this Honorable Court";
14. "the entry of an Order for the compensation of all costs of these proceedings and for recovery of damages incurred, including legal fees, including while on appeal, if any, and for collection."
Id. Prayer & Request for Relief. Defendants argue, inter alia, that Plaintiffs’ claims should be dismissed on various grounds, including that the Court lacks subject matter jurisdiction to hear unripe claims, some claims fail as a matter of law, Plaintiffs have failed to allege sufficient facts to satisfy the Federal Rules, and some claims are time-barred.
ANALYSIS
Motion to Dismiss Standard
Under Federal Rule of Civil Procedure 12(b)(1), defendants "may seek dismissal of claims by asserting that the Court lacks subject matter jurisdiction." Franklin Cal. Tax-Free Tr. v. Commonwealth of Puerto Rico, 85 F. Supp. 3d 577, 587 (D.P.R. 2015). Federal Rule of Civil Procedure 12(b)(6) similarly allows defendants to challenge "complaints if they fail to state a plausible legal claim upon which relief can be granted." Id. at 595. In ruling on a motion to dismiss under either Rule 12(b)(1) or 12(b)(6), the court must " ‘isolate and ignore statements in the complaint that simply offer legal labels and conclusions or merely rehash cause-of-action elements.’ " Lyman v. Baker, 954 F.3d 351, 359-60 (1st Cir. 2020) (quoting Schatz v. Republican State Leadership Comm., 669 F.3d 50, 55 (1st Cir. 2012) ). In addition, the court must " ‘take the complaint's well-plead (i.e., non-conclusory, non-speculative) facts as true, drawing all reasonable inferences in the pleader's favor, and see if they plausibly narrate a claim for relief.’ " Id. at 360 (quoting Schatz, 669 F.3d at 55 ). " ‘Plausible, of course, means something more than merely possible, and gauging a pleaded situation's plausibility is a ‘context-specific’ job that compels [the court] ‘to draw on’ ... ‘judicial experience and common sense.’ ’ " Id. (quoting Schatz, 669 F.3d at 55 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) )). The court may also " ‘consider (a) ‘implications from documents’ attached to or fairly ‘incorporated into the complaint,’ (b) ‘facts’ susceptible to ‘judicial notice,’ and (c) ‘concessions’ in [the] plaintiff's ‘response to the motion to dismiss.’ ’ " Id. (quoting Schatz, 669 F.3d at 55-56 (footnote omitted)).
PROMESA Section 105: Claims Against the FOMB
As an initial matter, PROMESA requires that Defendants’ Motions to Dismiss be granted on all counts insofar as the SAC asserts claims against the FOMB and its individual members. Under PROMESA section 105, "[t]he Oversight Board, its members, and its employees shall not be liable for any obligation of or claim against the Oversight Board or its members or employees or the territorial government resulting from actions taken to carry out this chapter." 48 U.S.C.A § 2125 (Westlaw through Pub. L. No. 117-57 ); see also Opinion and Order Granting in Part and Denying in Part the Motions to Dismiss Plaintiff's Amended Adversary Complaint Pursuant to Fed. R. Civ. P. 12(b)(1) and (b)(6) (Docket Entry No. 62 in Adv. Proc. No. 17-00229) at 29 (dismissing claims against FOMB and its executive director pursuant to PROMESA section 105). Plaintiffs argue that "the FOMB and its members cannot disavow themselves from nor ignore the legal consequences of the actions and omissions of the entities they represent before this Court in these Title III proceedings." SAC Initial Statement, xi. Plaintiffs acknowledge, however, that the FOMB's "representative authority of Defendants" is pursuant to PROMESA. Id. ¶ 22. The SAC also makes clear that the individual FOMB defendants are sued in their "official capacity" as members of the FOMB. Id. ¶¶ 23-30. Thus, the FOMB and its individual members are being sued here for their "actions taken to carry out [PROMESA]."
Plaintiffs’ claims against the FOMB and its individual members José B. Carrión III, Andrew G. Biggs, Carlos M. García, Arthur J. González, José R. González, Ana J. Matosantos, David A. Skeel, Jr., and Eli Díaz Atienza are therefore dismissed pursuant to PROMESA section 105. The following analysis of Plaintiffs’ claims assumes the dismissal of the claims asserted against the FOMB and its members and does not further assess Plaintiffs’ claims with respect to the FOMB.
Federal Rule of Civil Procedure 9(b) : Particularized Pleading of Fraud Claims
The theme running throughout the SAC and underlying many of Plaintiffs’ claims is that Defendants, through various actions and omissions, engaged in a fraudulent scheme to encourage Plaintiffs to increase their investment in Government Bonds while Defendants knew that the Commonwealth's finances made the Government Bonds unsound investments. "[W]here fraud lies at the core of the action, Rule 9(b) applies." Hayduk v. Lanna, 775 F.2d 441, 443 (1st Cir. 1985). Rule 9(b) thus applies to many of Plaintiffs’ claims. Counts One and Two assert that Defendants’ alleged fraudulent actions show that they are dishonest debtors that are not entitled to the discharge of their debts. SAC ¶¶ 197, 208. Count Three contends that the purported fraudulent scheme constitutes a violation of Puerto Rico's Act Against Organized Crime and Money Laundering. Id. ¶ 215. Finally, Counts Four and Five both assert that Plaintiffs are entitled to relief under fraud-related Puerto Rico statutes. Id. ¶¶ 238, 259.
To state a claim for fraud under Puerto Rico law, a plaintiff must allege " ‘(1) that a false representation was made; (2) that the plaintiff reasonably and foreseeably relied thereon; (3) that the plaintiff was injured by his reliance; and (4) that the defendant intended to defraud the plaintiff.’ " Microsoft Corp. v. Comput. Warehouse, 83 F. Supp. 2d 256, 262 (D.P.R. 2000) (quoting Wadsworth, Inc. v. Schwarz-Nin, 951 F. Supp. 314, 323 (D.P. R 1996) ). Federal Rule of Civil Procedure 9(b) requires a party alleging fraud or mistake to "state with particularity the circumstances constituting fraud or mistake." The plaintiff must "specify the who, what, where, and when of the allegedly false or fraudulent representation." Alt. Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 29 (1st Cir. 2004). " ‘The courts have uniformly held inadequate a complaint's general averment of the defendant's ‘knowledge’ of material falsity, unless the complaint also sets forth specific facts that make it reasonable to believe that defendant knew that a statement was materially false or misleading.’ " N. Am. Catholic Educ. Programming Found., Inc. v. Cardinale, 567 F.3d 8, 13 (1st Cir. 2009) (quoting Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992), superseded by statute on other grounds) (emphasis in original).
Plaintiffs argue that they have met the heightened pleading standard of Rule 9(b) "by indicating the who, what, where, and when of Defendants[’] fraudulent actions and omissions." (Pls. Opp. to FOMB at 11.) However, Plaintiffs’ allegations concerning fraud are conclusory and, critically, Plaintiffs fail to provide sufficient factual allegations to support an inference that any purported misrepresentations were knowingly false when made. Plaintiffs have therefore failed to satisfy Rule 9(b) with respect to the aspects of their claims that allege fraud.
COFINA, HTA, ERS, PREPA, PBA, and AAFAF
Not every Defendant is alleged to have participated actively in the purported fraudulent scheme. Most of Plaintiffs’ allegations concerning actions or omissions taken by Defendants are specific to the Commonwealth (through the Treasury Department), GDB, and COSSEC. Plaintiffs do not allege that COFINA, HTA, ERS, PREPA, or PBA engaged in any actions or withheld any information that injured Plaintiffs. Plaintiffs only allege that these entities "took funds from Plaintiffs under the fraudulent and deceitful actions and omissions of the Commonwealth, the GDB and COSSEC, thus benefiting from said actions and omissions." SAC ¶ 190; see also id. ¶¶ 21, 198. The SAC also fails to allege how AAFAF, which was created in 2016, engaged in any fraud against Plaintiffs during the relevant period of 2009 to 2015. See id. ¶ 20. The SAC alleges only that, "[s]ince its creation," AAFAF has been involved in the restructuring of Puerto Rico's debt and has exerted "significant influence in COSSEC's decision making processes." Id.
As explained above, the Court does not here address Plaintiffs’ allegations concerning the FOMB and its members because all claims against them are being dismissed pursuant to section 105 of PROMESA.
"[W]here there are multiple defendants, the specific role of each must be alleged." Rick v. Profit Mgmt. Assocs., Inc., 241 F. Supp. 3d 215, 224 (D. Mass. 2017). Here, Plaintiffs have provided no facts alleging that COFINA, HTA, ERS, PREPA, PBA, or AAFAF engaged in any fraudulent conduct or withheld any information from Plaintiffs. Plaintiffs have not alleged any specific role of these Defendants in the purported fraud and therefore have failed to meet the requirements of Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, with respect to these Defendants in connection with Counts One, Two, Three, Four, and Five. These Counts are dismissed as against COFINA, HTA, ERS, PREPA, PBA, and AAFAF.
Plaintiffs also included as Defendants GDB DRA and its trustees "as nominal defendants to ensure the effectiveness of any judgment against the GDB" because "the GDB [DRA] and its Trustees, as well as the GDB Public Entity Trust and its Trustees, are or may become successors to the GDB and its assets and, as such, are liable for the actions and omissions of the GDB." SAC ¶¶ 18, 19. Plaintiffs do not include any allegations concerning actions or omissions by or on behalf of GDB DRA or GDB Public Entity Trust that constitute fraud, and thus the allegations concerning these Defendants stand or fall with the allegations concerning GDB. For the reasons discussed infra, as a result of Plaintiffs’ failure to state a claim against GDB, Plaintiffs have also failed to satisfy Rules 9(b) and 12(b)(6) with respect to GDB DRA, GDB Public Entity Trust, and their trustees.
The Commonwealth, GDB, and COSSEC
Plaintiffs’ allegations detailing the purported fraudulent scheme single out the Commonwealth, GDB, and COSSEC. Plaintiffs allege that "[t]he improper actions and omissions of the Commonwealth, the PR Treasury, the GDB and COSSEC constitute fraudulent dishonest and unconstitutional actions in reckless disregard to the government's duties over the credit union system, including Plaintiffs." SAC ¶ 92. These actions and omissions, Plaintiffs allege, were carried out through meetings between the Commonwealth, GDB, and members of the COSSEC Board of Directors from 2009 to 2015 and at a COSSEC-sponsored presentation after the issuance of the 2009 Circular Letter. Id. ¶¶ 79, 224. Plaintiffs further allege that COSSEC's Circular Letters included numerous misstatements that the Commonwealth, GDB, and COSSEC knew were false or misleading. Id. ¶¶ 97-103. Plaintiffs allege that the cited Circular Letters were issued "to expressly authorize, induce and compel the purchase" of Government Bonds. Id. ¶ 97.
Plaintiffs’ allegations with respect to the COSSEC Board of Directors meetings from 2009 to 2015 and the presentation by GDB fail to meet the standards of Federal Rule of Civil Procedure 9(b) because Plaintiffs do not provide sufficient factual details to plausibly suggest fraud occurred during these events. Plaintiffs do not identify the speakers or even the representatives of GDB or the Commonwealth who were present at these meetings, referring only to "officials of the GDB" or "officials of the ... governor's office." Id. ¶ 79. Plaintiffs’ allegations concerning COSSEC are more specific, alleging that Mr. Carrión Rivera and Mr. González Torres attended these meetings. Id. However, Plaintiffs fail to specify when these meetings occurred, who was in attendance at any given meeting, or precisely what was said or omitted at these meetings that constituted fraud by the Commonwealth, GDB, and COSSEC. Nor do Plaintiffs include any allegations concerning their own institutional attendance at these meetings or presentations; they speak only of the Cooperatives generally, failing to allege any reliance on the fraud that was allegedly perpetrated at these events. See, e.g., id. ¶ 224 ("Shortly thereafter, COSSEC summoned the [C]ooperatives to its headquarters wherein COSSEC sponsored a presentation by the GDB to the [C]ooperatives about the purported virtues of the Puerto Rico Bonds.") (emphasis added). Plaintiffs’ allegations here amount to conclusory assertions that fraud occurred at unspecified meetings attended by unspecified individuals over a four-year period. See Bio-Vita, Ltd. v. Rausch, 759 F. Supp. 33, 37-38 (D. Mass. 1991) (concluding that allegations did not meet Rule 9(b) when plaintiffs provided only general "temporal references" and failed to identify the specific individuals to whom the allegedly fraudulent statements were made).
Plaintiffs do identify specific allegedly false statements in COSSEC's Circular Letters. See, e.g., SAC ¶¶ 98-100. Assuming, arguendo, that these statements were false, Plaintiffs’ claims nevertheless fail because Plaintiffs do not plausibly allege facts sufficient to support an inference that Defendants knew that these statements were inaccurate at the time the Circular Letters were issued in 2009 and 2012. Plaintiffs generally seek to support their conclusion that these statements were knowingly false by stating that, as the keeper of the Commonwealth's financial records, the Commonwealth, through the Secretary of Treasury, and GDB must have known that the statements in COSSEC's Circular Letters were false and misleading. See, e.g., id. ¶ 101 ("The fact that those statements were blatantly incorrect was known by the Secretary of Treasury and the GDB, because they were and continue to be in charge of the financial and economic policy of the Commonwealth."). Plaintiffs likewise rely on conclusory allegations concerning COSSEC's knowledge of the Commonwealth's inability to repay the Government Bonds. See, e.g., id. ¶ 89 (alleging that the Commonwealth's, GDB's, and COSSEC's actions and omissions were done "with full knowledge of the government's lack of financial capacity to pay"). Such blanket statements are insufficient to support a non-speculative inference that Defendants were aware that these statements were misleading at the times the statements were made, which were years before the full extent of the Commonwealth's financial situation became public.
Plaintiffs also refer to the 2009 Circular Letter's statement that the Cooperatives would not be penalized if the Government Bonds later fell below the acceptable credit rating limits as evidence of Defendants’ knowledge of falsity of their statements concerning the attributes of the Government Bonds. See id. ¶ 227 ("That unusual statement proves that they knew the bonds were going to fall below acceptable limits...."). This vague reference, in which it is unclear whether the relevant allegation refers to the Commonwealth's, GDB's, or COSSEC's knowledge of a future drop in ratings, does not support an inference that the statements in the 2009 Circular Letter that the bonds were currently backed by the government, were liquid assets, and were excellent collateral, were known to be untrue when the statements were made. "[M]ere allegations of fraud, corruption or conspiracy, averments to conditions of mind, or referrals to plans and schemes are too conclusional to satisfy the particularity requirement, no matter how many times such accusations are repeated." Hayduk, 775 F.2d at 444. Thus, Plaintiffs’ allegations of fraud that are based on the content of the Circular Letters do not meet the requirements of Rule 9(b).
The Court accordingly finds that Plaintiffs have failed to satisfy the pleading requirements of Rule 9(b) with respect to the Commonwealth, GDB, and COSSEC as well as the other Defendants. Therefore, Counts One, Two, Three, Four, and Five are dismissed as against all Defendants insofar as they assert causes of action based on fraud. Below, the Court further analyzes the specific allegations of each Count.
Counts One and Two: Exception to Discharge
In Counts One and Two, Plaintiffs request that this Court, pursuant to Bankruptcy Code sections 105 and 944, and PROMESA section 304(h), exempt Plaintiffs’ claims from discharge through a plan of adjustment. See SAC ¶¶ 187, 206. Plaintiffs argue that Defendants are not honest debtors entitled to discharge of their debts because Defendants fraudulently appropriated funds from Plaintiffs by leading or coercing them to make and increase their investments in unsound Government Bonds. See id. ¶¶ 189, 197. Plaintiffs request an order exempting their claims with respect to "all defendants under Title III of PROMESA." Id. Prayer & Request for Relief 1. As explained above, Plaintiffs have not sufficiently pleaded that Defendants engaged in any fraudulent conduct that could support finding that the Title III Defendants are dishonest debtors. Thus, even if such a finding were a proper basis for denial of discharge under PROMESA, Plaintiffs’ SAC falls short of pleading the necessary predicate. The Court further concludes that Plaintiffs are not entitled to exception from discharge under the cited provisions of the Bankruptcy Code or PROMESA.
The Commonwealth, ERS, PBA, HTA, PREPA, and COFINA are the Title III debtors that are also Defendants in this matter. GDB's debts were restructured through a PROMESA Title VI proceeding that concluded in 2018. COFINA and GDB have already modified their debts and thus Plaintiffs’ request for exemption from discharge of any debts owed from COFINA and GDB is moot. Defendants argue that the exemption from discharge claims are not ripe as to the other named Title III defendants because, at the time Plaintiffs filed the SAC, there was no proposed plan of adjustment for the Title III debtors. (See, e.g., FOMB Mot. at 38-43.) With respect to HTA and PREPA, there still is no proposed plan of adjustment currently before the Court purporting to discharge Plaintiffs’ claims. Thus, Plaintiffs’ claims concerning discharge are not ripe with respect to HTA and PREPA and Counts One and Two are further dismissed as to these Defendants for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). See Atlantic Med. Ctr., Inc. v. Commonwealth of Puerto Rico (In re Fin. Oversight & Mgmt. Bd. for P.R.), 624 B.R. 310, 320 (D.P.R. 2018) ("Plaintiffs’ claim regarding dischargeability is not fit, and should await a proposed plan of adjustment that purports to discharge amounts due on the Removed Claims.").
In the SAC, Plaintiffs challenge GDB's qualifying modification under Title VI of PROMESA. See SAC ¶¶ 164-65. Plaintiffs argue that they are not bound by this Court's Order Approving the Qualifying Modification for the Government Development Bank for Puerto Rico Pursuant to Section 601(m)(1)(D) of the Puerto Rico Oversight, Management, and Economic Stability Act (Docket Entry No. 270 in Case No. 18-1561) because they were not parties to the Restructuring Support Agreement and did not approve the qualifying modification. (Pls. Opp. to GDB at 15-16.) However, Plaintiffs’ allegations show that they were aware of GDB's Title VI proceeding at the time the modification was approved by this Court, and they failed to raise an objection through that judicial proceeding. See SAC ¶¶ 160-61, 166. The effect of a restructuring under Title VI of PROMESA is not limited to parties that consent to the qualifying modification. See 48 U.S.C.A § 2231(m) (Westlaw through Pub. L. No. 117-57 ) ("A Qualifying Modification will be conclusive and binding on all holders of Bonds whether or not they have given such consent ...."). The Court declines to revisit GDB's Title VI qualifying modification now because Plaintiffs knew about the proceeding and could have raised their objection at the appropriate time and in the appropriate forum in 2018.
However, with respect to the Commonwealth, ERS, and PBA, because the FOMB has now submitted for confirmation its Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al. (Docket Entry No. 19568 in Case No. 17-3283, the "Plan"), the Court will consider the merits of Plaintiffs’ claims requesting exception to discharge in connection with these Title III debtors. On the merits, the Court concludes that Plaintiffs have failed to state a claim for exemption of their claims from discharge under any of the statutory provisions cited in the SAC.
Plaintiffs’ allegations in Count One track the language of Bankruptcy Code section 523, which provides that discharges of an individual debtor under specified provisions of the Code do not discharge the individual from claims for money obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's ... financial condition." 11 U.S.C.A. § 523(a)(2) (Westlaw through Pub. L. No. 117-57 ); see SAC ¶ 190. None of the debtors is an individual, so section 523 is inapplicable for that reason alone. However, Plaintiffs disclaim reliance on section 523 of the Bankruptcy Code to support their request for an exception to discharge, acknowledging that section 523 was not incorporated into PROMESA because it does not apply to entity debtors. (Pls. Opp. to FOMB at 34.) Plaintiffs instead argue that their reference to section 523 was "made to evince" the equitable bankruptcy principle that "only honest debtors are entitled to receive a fresh start." (Id. ) Thus, Plaintiffs argue that, pursuant to Bankruptcy Code section 105(a), which allows this Court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title" 11 U.S.C.A § 105(a) (Westlaw through Pub. L. No. 117-57 ), the Court should issue an order based on this equitable principle precluding Defendants from discharging the debts owed to Plaintiffs. (See Pls. Opp. to FOMB at 34-35.)
Section 105(a), however, is not an unlimited grant to the Court of roving power to take actions that it deems equitable. "[W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code." Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988) ; see HSBC Bank USA v. Branch (In re Bank of New England Corp.), 364 F.3d 355, 362 (1st Cir. 2004). While, as Plaintiffs argue, "[t]here is no provision in the Code or in PROMESA prohibiting or denying a claimant's right to object to discharge on grounds of dishonesty or fraud [from] a Title III debtor" (Pls. Opp. to FOMB at 45), there is also nothing in the Bankruptcy Code or PROMESA providing for an exception to discharge for dishonest debtors in proceedings involving entity debtors. Plaintiffs fail to cite any case discussing this purported equitable principle of the Bankruptcy Code in the context of entity debtors. Moreover, as set forth above, Plaintiffs have failed to allege sufficiently in the first place that Defendants engaged in a fraudulent scheme. The Court therefore concludes that Plaintiffs have failed to plead a plausible factual, or a proper legal, ground for their request for exemption from discharge pursuant to section 105 of the Code, as incorporated into PROMESA.
Plaintiffs also argue that they are entitled to an exemption from discharge under section 944 of the Bankruptcy Code. SAC ¶ 200. Bankruptcy Code section 944 governs the effect of confirmation of a proposed plan of adjustment on a debtor's debts and provides that "[t]he debtor is not discharged ... from any debt excepted from discharge by the plan or order confirming the plan." 11 U.S.C.A § 944(a), (c)(1) (Westlaw through Pub. L. No. 117-57 ). Plaintiffs maintain that, under section 944, the Court may except claims from discharge in the confirmation order. Plaintiffs have not offered any legal basis for the inclusion of such an exemption provision in the Plan or any order concerning the Plan. "[S]ection 944(c)(1) should not be construed as an invitation to the court or to creditors to incorporate any of the provisions of section 523 of the Code for any other general or equitable exception to discharge." See 6 Collier on Bankruptcy ¶ 944.04 (16th ed. 2021) (emphasis added). The exceptions to discharge for individual debtors do not apply equally to other sections of the Bankruptcy Code. Id. Plaintiffs’ reliance on the "honest debtor" principle, as drawn from section 523, therefore cannot support a claim for discharge under section 944(c).
Finally, Plaintiffs cite PROMESA section 304(h), which provides that "[t]his chapter may not be construed to permit the discharge of obligations arising under Federal police or regulatory laws, including laws relating to the environment, public health or safety, or territorial laws implementing such Federal legal provisions. This includes compliance obligations, requirements under consent decrees or judicial orders, and obligations to pay associated administrative, civil, or other penalties." 48 U.S.C.A § 2164(h) (Westlaw through Pub. L. No. 117-57 ). Plaintiffs argue that this section prohibits the discharge of their claims against Defendants. SAC ¶ 206. Plaintiffs’ argument is not persuasive. First, section 304(h) applies to "obligations arising under Federal police or regulatory laws" and thus does not apply to the Puerto Rico law-based fraud, tort, and contract claims asserted by Plaintiffs. Second, section 304(h) does not provide Plaintiffs with an avenue to request an exemption from discharge because it does not provide a cause of action for challenging dischargeability. See Asociación de Salud Primaria de Puerto Rico, Inc. v. Commonwealth of Puerto Rico (In re Fin. Oversight & Mgmt. Bd. for P.R.), 330 F. Supp. 3d 667, 674 (D.P.R. 2018) (interpreting similar language in PROMESA section 7 as guiding the construction of PROMESA and not as creating "new rights" or "any cause of action").
For these reasons, the Court dismisses Counts One and Two under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) as well as for failure to satisfy the pleading requirements of Rule 9(b). In sum, the Court finds that Plaintiffs’ request for exceptions to discharge with respect to COFINA and GDB is moot and the request concerning HTA and PREPA is not ripe; thus, Counts One and Two are dismissed with respect to these defendants pursuant to Federal Rule of Civil Procedure 12(b)(1). Further, Plaintiffs have failed to state a claim upon which relief can be granted for an exemption from discharge with respect to the Commonwealth, ERS, and PBA. Accordingly, the Court will dismiss Counts One and Two with respect to the Commonwealth, ERS, and PBA under Federal Rule of Civil Procedure 12(b)(6).
Count Three: Act Against Organized Crime and Money Laundering
In Count Three, Plaintiffs allege that the Commonwealth, through GDB and COSSEC, "engaged in a pattern of organized criminal activity of illegal appropriation of millions of dollars from the Cooperatives through fraud" in violation of Puerto Rico's Act Against Organized Crime and Money Laundering ("PR-RICO"). SAC ¶ 215.
Plaintiffs’ PR-RICO claim is predicated on the allegedly fraudulent scheme that was discussed above. Plaintiffs allege that "Defendants purposely and knowingly made misleading, incorrect, and outright false representations to induce Plaintiffs and upon which Plaintiffs relied to enter into sales and purchase agreements of [Government Bonds]." Id. ¶ 216. Plaintiffs again point to the allegedly false statements in the COSSEC Circular Letters and allege that Defendants "deceitfully instigated Plaintiffs into buying the [Government Bonds] when they knew that the Commonwealth ... did not have the intent of honoring the guarantee and thus illegally appropriated ... funds of the [C]ooperatives and the Plaintiffs through deceit and false pretenses." Id. ¶ 228; see id. ¶¶ 217-29.
"It is well-settled in this circuit that when a [PR-RICO] plaintiff relies on predicate acts containing fraud, they are subject to Rule 9(b) ’s heightened pleading requirement." DeMauro v. DeMauro, No. 99-1589, 2000 WL 231255, at *2 (1st Cir. Feb. 16, 2000) (citing New England Data Servs., Inc. v. Becher, 829 F.2d 286, 288 (1st Cir. 1987) ). Plaintiffs do not dispute that their PR-RICO claim is rooted in fraud and subject to a heightened pleading standard, but they maintain that the SAC meets the requirements of Rule 9(b). (Pls. Opp. to FOMB at 22.) Because this Court has concluded that Plaintiffs have failed to sufficiently allege the fraudulent conduct underlying their PR-RICO claim, Count Three is dismissed with respect to all Defendants for failure to satisfy Rule 9(b).
The Puerto Rico Supreme Court has held that courts may look to interpretations of the federal RICO statute to interpret the PR-RICO. See People v. Meliá León, 143 D.P.R. 708, 743 (1997) (translation available at Exhibit H to the FOMB Motion).
Counts Four and Five: Puerto Rico Statutory Violations
"[I]t is well settled in this circuit that a motion to dismiss may be granted on the basis of an affirmative defense, such as the statute of limitations, as long as ‘the facts establishing the defense [are] clear ‘on the face of the plaintiff's pleadings.’ ’ " Álvarez-Maurás v. Banco Popular of P.R., 919 F.3d 617, 628 (1st Cir. 2019). In addition to finding that Plaintiffs have failed to satisfy Rule 9(b) with respect to the fraud alleged in Counts Four and Five, the Court finds that, based on the face of Plaintiffs’ SAC, Counts Four and Five are time-barred as to all Defendants.
In Count Four, Plaintiffs allege that GDB, COSSEC, and the Commonwealth, breached the terms and conditions of their agreement with Plaintiffs. SAC ¶ 237. While Count Four is titled as a breach of contract claim, Plaintiffs cite certain Commonwealth statutes concerning fraud and allege that "Defendants made deceitful representations to Plaintiffs, upon which Plaintiffs relied in order to enter into a sales and purchase agreement[ ] of government papers." Id. ¶ 240. Count Four is essentially a request that the Court find that Defendants mislead Plaintiffs in violation of Puerto Rico's fraud statutes, 31 L.P.R.A. §§ 3018, 3019, 3408, or, in the alternative, that Defendants were reckless and grossly negligent in not being aware of the risks associated with the Government Bonds, in violation of 31 L.P.R.A. §§ 3020, 3021. Id. ¶¶ 238-56. Count Five puts forth a claim that Defendants’ acts and omissions constitute a violation of Puerto Rico's fault and negligence statute, 31 L.P.R.A. § 5141, and asserts a constitutional due process claim. Id. ¶¶ 258, 269.
In Defendants’ Motions to Dismiss, Defendants characterize Plaintiffs’ claims under Counts Four and Five as subject to Puerto Rico's one-year statute of limitations for fault and negligence claims and assert that, because they involve the purchase and sale of securities, the fraud claims are subject to the two-year statute of repose under the Puerto Rico Uniform Securities Act ("PRUSA"). (See FOMB Mot. at 26-28.) Plaintiffs do not dispute Defendants’ characterization of their claims or the applicable statutes of limitations. (See Pls. Opp. to FOMB at 16-20.) Instead, Plaintiffs appear to argue that Defendants have engaged in continuing violations and that the statutes of limitations should be equitably tolled.
"Puerto Rico's Civil Code provides that actions for obligations arising from fault or negligence prescribe one year from the moment the aggrieved person has knowledge of the injury; that is to say, the statute of limitations provides a one-year term for a tort action." Bado-Santana v. Ford Motor Co., 283 F. Supp. 2d 520, 526 (D.P.R. 2003). PRUSA "forbids suits brought ‘more than two (2) years after the sale contract has been executed’ " for a purchase of securities. Ambert v. Caribe Equity Grp., Inc., Civil No. 11-1254 (JAF), 2011 WL 4626012, at *7 (D.P.R. Sept. 30, 2011). "[T]he PRUSA's two-year statute of limitations extinguishes any claims for fraud under Puerto Rico law, regardless of whether ... [plaintiffs] properly state a claim for fraud under Commonwealth law." Id. (dismissing potential Puerto Rico law fraud claim related to sale of security as time-barred under PRUSA). "[A] plaintiff will be deemed to have knowledge of the injury, for purposes of the statute of limitations, when she [ ] has notice of the injury, plus notice of the person who caused it." Bado-Santana, 283 F. Supp. 2d at 527 (internal quotation marks omitted). The statute of limitations starts running " ‘from the moment the damage is known.’ " Id. (quoting Barretto Peat, Inc. v. Luis Ayala Sucrs., Inc., 896 F.2d 656, 658 (1st Cir. 1990) ).
Plaintiffs’ constitutional claim in Count Five is similarly covered by Puerto Rico's one-year statute of limitations. See Thomas v. Town of Salisbury, 134 F. Supp. 3d 568, 574 (D. Mass. 2015) (finding forum state's tort statute of limitations governed constitutional claims).
Here, it is clear from the face of the SAC that Plaintiffs were aware of their potential claim for damages attributable to their high level of investment in Government Bonds by, at the latest, December 2015 when Plaintiffs engaged in discussions with some Defendants that resulted in the passage of Act 220 on December 15, 2015, to stabilize the impact of the investments on the Cooperatives’ system. SAC ¶ 126. Plaintiffs also acknowledge that, "[s]ince 2015, Plaintiffs have acted diligently and in good faith to present to the Commonwealth and its pertinent agencies and officials their claims, proposals, comments and recommendations. The same has been done with the FOMB since November 2016." Id. ¶ 178. Plaintiffs’ filing of this adversary proceeding in March 2018 was therefore beyond the one-year statutory period for fault and negligence claims that would have ended, at the latest, in December 2016, and the two-year statute of limitations for fraud related to a security under PRUSA, which would have expired, at the latest, in December 2017. Plaintiffs’ choice to pursue a legislative solution for the damages purportedly caused by their investment in the Government Bonds does not excuse Plaintiffs from timely pursuing litigation with respect to claims related to their known injury.
Plaintiffs have also failed to allege the existence of continuing violations that would prevent the running of the statute of limitations period on their claims. "A continuing violation occurs when there is a series of continual unlawful acts, not when there are merely continual harmful effects from an original unlawful act." Muñiz-Rivera v. United States, 204 F. Supp. 2d 305, 315 (D.P.R. 2002) (emphasis in original). Here, Plaintiffs have alleged that, after 2015, Defendants were aware of Plaintiffs’ injury and failed to take steps to address the risk to Plaintiffs’ portfolios. SAC ¶¶ 178-85. In addition, Plaintiffs allege that
[a]fter taking the property of the credit unions through the misuse of the regulatory authority, from 2015 onwards the Commonwealth, acting through the governmental representatives in COSSEC's Board of Directors (especially the GDB and the PR Treasury), continued misusing its regulatory power by ignoring the risks and harms caused by the improper and unconstitutional actions and omission undertaken during the relevant period between 2009-2015 in order to cover up and disown the Commonwealth's responsibilities in the threat to the cooperative financial system caused by the government.
Id. ¶ 91. These allegations do not describe continued fraudulent acts or conduct vis-à-vis Plaintiffs but, rather refer to failure to take steps to remedy the effects of the alleged unlawful fraud that caused Plaintiffs to heavily invest in Government Bonds from 2009 to 2015. Plaintiffs fail to allege any specific additional unlawful conduct by Defendants after 2015 beyond conclusory statements such as "[t]he actions, omissions and extremely reckless conduct of defendants Commonwealth, GDB, COSSEC, [AAFAF], and FOMB have caused and continue to cause damages, losses and risks." Id. ¶ 183. Such conclusions are insufficient to delay commencement of the statute of limitations period.
Plaintiffs have also failed to allege facts sufficient to support an inference that equitable tolling may be available to preserve their claims. "The doctrine of equitable tolling provides that, in exceptional circumstances, a statute of limitations ‘may be extended for equitable reasons not acknowledged in the statute creating the limitations period.’ " Rivera v. LifeLink Found., Inc., 208 F. Supp. 3d 425, 430 (D.P.R. 2016) (quoting David v. Hall, 318 F.3d 343, 345-46 (1st Cir. 2003) ). Equitable tolling is " ‘not available to rescue a litigant from his own lack of due diligence,’ and is ‘appropriate only when circumstances beyond the petitioner's control have prevented him from filing on time.’ " Rivera, 208 F. Supp. 3d at 430. Plaintiffs argue that they are entitled to equitable tolling because they have "diligently pursued their rights and extraordinary circumstances have stood in their way." (Pls. Opp. to FOMB at 18-19.) Plaintiffs contend that "there was a good amount of information that led to the filing of this adversary proceeding that at the time (between 2015 and 2018) was simply unknown to the Plaintiffs due to the fact that the Defendants had exclusive control of it." (Pls. Opp. to FOMB at 19.) Plaintiffs also point to Puerto Rico's national emergency that followed Hurricane Maria in September 2017 as a reason for their delay. (Id. ) In addition, Plaintiffs argue that discovery will show that "all statutes of limitations were duly and timely tolled through multiple written communications, meetings and actions by Plaintiffs." (Pls. Opp. to GDB at 10.)
These proffers do not support equitable tolling. Plaintiffs’ argument that Defendants had exclusive control of information that was unknown to Plaintiffs is unavailing. Plaintiffs were aware, at the latest by December 2015, of their injury and who purportedly caused it and therefore they had the information they needed to diligently pursue their claims. Hurricane Maria's passage through Puerto Rico is also insufficient to support equitable tolling. The hurricane occurred almost two years after Plaintiffs were aware of their injury, and Plaintiffs did not file their adversary proceeding complaint until March 2018, approximately six months after the hurricane. Further, Plaintiffs’ argument that discovery will show that Plaintiffs’ attempts to communicate with Defendants tolled the statute of limitations is not supported by the SAC. Plaintiffs allege that, after the purported fraud, Defendants "failed to comply with their duties and ignored the mounting risks resulting from the placement of PR debt in the investment portfolios of the credit unions." SAC ¶ 88. When faced with the lack of response from Defendants, Plaintiffs should have timely proceeded with filing their suit. See Rivera, 208 F. Supp. 3d at 430-31 (declining to equitably toll claims when "there was nothing to prevent [plaintiff] from filing this suit shortly after [defendant] allegedly stonewalled them by refusing to return their calls").
Counts Four and Five are therefore dismissed as time-barred with respect to all Defendants.
Count Six: Takings Clause
In Count Six, Plaintiffs allege that the Commonwealth's illegal appropriation of Plaintiffs’ moneys violated Article II § 9 of the Constitution of Puerto Rico and the Fifth Amendment of the United States Constitution, both of which prohibit the taking of private property for public use without just compensation. SAC ¶ 272. Plaintiffs allege that Defendants engaged in a "taking" by compelling Plaintiffs to purchase Government Bonds "with materially diminished" value, which "did not constitute just compensation." Id. ¶ 275. Plaintiffs allege that "Defendants illegally appropriated the moneys of the Cooperatives to finance the government operation" and that this was a "direct appropriation of property and a physical taking." Id. Plaintiffs further allege that Defendants’ actions "constitute[d] a categorical regulatory taking" because, by forcing Plaintiffs to purchase bonds that would materially diminish in value, "the Commonwealth deprived the Cooperatives’ property of any significant economic value." Id. ¶ 276. Plaintiffs also allege that "any confirmation of a Reorganization Plan that does not pay in full Plaintiffs[’] claims for taking their private property, would constitute a public taking of private property and denial of just compensation for that taking." Id. ¶ 278 (emphasis added). It is unclear what Plaintiffs refer to when they describe "that taking."
To the extent Plaintiffs are alleging that approval of a plan of adjustment for the debtor Defendants would effectuate a "taking," such a claim is not ripe with respect to the Commonwealth, ERS, PBA, PREPA, and HTA and are dismissed for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). See Aurelius Cap. Master, Ltd. v. Commonwealth of Puerto Rico (In re Fin. Oversight & Mgmt. Bd. for P.R.), 919 F.3d 638, 647 (1st Cir. 2019) ("Under PROMESA, no claims will be discharged, and no determinations will be made about the treatment of claims, until the plan of adjustment is confirmed, for which the [plaintiffs] have not received a final decision from the Commonwealth on the status of their alleged property.") (internal citation omitted). While a plan of adjustment for the Commonwealth, ERS, and PBA has been filed with the Title III court for confirmation, the Court has not yet reached a final decision on the treatment of Plaintiffs’ claims. Plaintiffs have filed an objection to the Plan disputing their treatment and alleging the same Takings Clause arguments. (See Credit Union's Joint Objection to Seventh Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico et al., Docket Entry No. 18594 in Case No. 17-3283.) A decision on that objection will be properly made in the context of confirmation.
Plaintiffs do not include any specific allegations that the approval of COFINA's plan of adjustment or GDB's qualifying modification was a "taking." Plaintiffs’ SAC was filed on April 16, 2020, after COFINA and GDB's debts were restructured in 2019 and 2018, respectfully. The Court will interpret the absence of such allegations and the SAC's assertion that "confirmation of a Reorganization Plan that does not pay in full Plaintiffs[’] claims for taking their private property would constitute" a taking (SAC ¶ 278 (emphasis added)) to suggest that Plaintiffs are not asserting this takings theory against GDB and COFINA, but rather that Plaintiffs are only arguing that future approvals of plans of adjustment impairing their claims would violate the Takings Clause. Accordingly, the Court will only consider this theory as asserted against the remaining debtor Defendants: the Commonwealth, ERS, PBA, HTA, and PREPA.
On the other hand, to the extent Plaintiffs are alleging a Takings Clause violation based on the transactions that led to Plaintiffs’ purchase of the Government Bonds, "that taking" has already occurred and is ripe for consideration. See Knick v. Twp. of Scott, Penn., ––– U.S. ––––, 139 S. Ct. 2162, 2177, 204 L.Ed.2d 558 (2019). The Court considers this second theory below and concludes that Plaintiffs have failed entirely to allege facts showing that they were required to purchase the Government Bonds in a way that would constitute a taking.
A direct taking occurs "[w]hen the government physically acquires private property for a public use." Cedar Point Nursery v. Hassid, ––– U.S. ––––, 141 S. Ct. 2063, 2071, 210 L.Ed.2d 369 (2021). Direct takings can be carried out through a regulation that "results in a physical appropriation of property." Id. at 2072. In such cases, the Court assesses the claims under a per se rule that the "government must pay for what it takes." Id. at 2071. A regulatory taking, in contrast, occurs when the government "instead imposes regulations that restrict an owner's ability to use his own property." Id. In that scenario, to determine whether a taking has occurred, the court will consider "factors such as the economic impact of the regulation, its interference with reasonable investment-backed expectations, and the character of the government action." Id. at 2072 (citing Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124, 98 S.Ct. 2646, 57 L.Ed.2d 631 (1978) ). Under either theory, plaintiffs must first allege that the government engaged in an unconstitutional taking by forcibly depriving plaintiffs of their property. See Yee v. City of Escondido, Cal., 503 U.S. 519, 539, 112 S.Ct. 1522, 118 L.Ed.2d 153 (1992) (holding no per se taking occurred when regulation did not require occupation of plaintiff's property); Franklin Mem'l Hosp. v. Harvey, 575 F.3d 121, 129 (1st Cir. 2009) ("[W]here a property owner voluntarily participates in a regulated program, there can be no unconstitutional taking.").
Plaintiffs allege that they were "compell[ed]" to give their money to Defendants through the purchase of the Government Bonds by Defendants’ exercise of their regulatory powers. See SAC ¶¶ 105, 275-76. Plaintiffs allege that the "government's regulatory powers were employed through binding Circular Letters issued by the Cooperatives’ regulator (COSSEC), itself a state agent." Id. ¶ 277. In addition, Plaintiffs allege, Defendants used COSSEC's regulatory powers to intimidate the Cooperatives and warned them that failure to purchase the Government Bonds could lead to the reevaluation of the Cooperatives’ tax-exempt status. Id. ¶¶ 104-06.
Plaintiffs cite Broad v. Sealaska Corp., 85 F.3d 422 (9th Cir. 1996) and A&D Auto Sales, Inc. v. United States, 748 F.3d 1142 (Fed. Cir. 2014) for the proposition that government regulations or actions that compel or coerce owners to give up economically viable use of their property can trigger takings claims. (Pls. Opp. to FOMB at 28.) However, in Broad, the court concluded that no taking occurred because the plaintiff "was not in any way compelled by the federal government" to move its assets into a trust in a transaction that the plaintiff alleged constituted a taking. 85 F.3d at 431. The plaintiff had merely exercised its "option" under the statute to transfer such assets. Id. In A&D Auto Sales, the court acknowledged that coercion, described as "irresistible pressure," may result in a taking, but noted that "persuasion ... does not create takings liability." 748 F.3d at 1154-56, 1158 (declining to decide whether government's offer of financial assistance was coercive and instead determining that plaintiffs’ takings claim failed because plaintiffs did not allege economic loss).
Plaintiffs here have not alleged facts showing that COSSEC's regulatory actions coerced or forced a taking of Plaintiffs’ property. Generalized allegations of threats and pressure towards the Cooperatives are insufficient to establish that the credit unions at issue here were subject to the type of "irresistible pressure" necessary to find that a taking occurred through coercion. See A&D Auto Sales, 748 F.3d at 1155 (quoting Turney v. United States, 115 F. Supp. 457, 463 (Ct. Cl. 1953) ). Moreover, while Plaintiffs have alleged that the COSSEC Circular Letters impose mandatory requirements (SAC ¶¶ 81-82), the Circular Letters proffered by Plaintiffs did not command the Cooperatives to purchase Government Bonds. The 2009 Circular Letter uses permissive, not mandatory language, that "authorizes the purchase of these instruments." Id. Ex. E at 1; see id. ("so that the associations can participate in the purchase of bonds"); id. at 2 ("the cooperatives may purchase them"). The same type of permissive language is used in the 2012 Circular Letter. See id. Ex. G at 2 ("COSSEC authorizes the savings and loan cooperatives to increase the maximum limit of investments to 30% of the total assets"); id. ("5% will remain as the maximum that a cooperative in adequate condition may invest in additional instruments"). The 2009 Circular Letter also provides that the purchase of the Government Bonds is subject to the Cooperatives ensuring that at the time of purchase the Government Bonds have certain credit ratings. Id. Ex. E at 2. Thus, even the authorized opportunity was conditioned on certain rating criteria. Id. The Circular Letters make it plain that the ultimate decision whether to invest in these bonds was left to Plaintiffs; thus, Plaintiffs have not provided sufficient allegations under either of the per se or regulatory takings theories.
For these reasons, Plaintiffs’ allegations that the transactions through which they purchased the Government Bonds were a "taking" fail to state a claim upon which relief may be granted. Accordingly, Defendants’ Motions to Dismiss are granted with respect to this interpretation of Count Six as to all Defendants under Federal Rule of Civil Procedure 12(b)(6). To the extent Plaintiffs are alleging that the future approval of a plan of adjustment itself "would constitute a public taking of private property," such claim is not ripe with respect to the relevant Defendants, the Commonwealth, ERS, PBA, HTA, and PREPA, and is dismissed under Federal Rule of Civil Procedure 12(b)(1). Such theory will be addressed, if appropriate, in the context of an objection to the confirmation of a plan of adjustment.
Count Seven: Unjust Enrichment
In Count Seven, Plaintiffs bring a claim for unjust enrichment. Plaintiffs argue that such a claim lies when "there is an unjust enrichment of a party in detriment of another and the applicable laws do not provide for a just outcome." Id. ¶ 284. Plaintiffs allege that "Defendants by fraud and deceit, appropriated millions of dollars that belonged to the Plaintiffs, causing them extreme economic damages. No valid public policy could sanction such action. Especially when the economic damage was done to the [C]ooperatives, which are institutions that the Defendants are precisely required by law to protect." Id. ¶ 285. Plaintiffs assert that, if "this Court could not fashion a remedy under the aforementioned causes of action, the historic doctrine of unjust enrichment demands a remedy in equity for the Plaintiffs." Id. ¶ 286.
Under Puerto Rico law, the unjust enrichment doctrine requires "1) existence of enrichment; 2) a correlative loss; 3) nexus between loss and enrichment; 4) lack of cause for enrichment; and 5) absence of a legal precept excluding application of enrichment without cause." P.R. Tel. Co., Inc. v. SprintCom, Inc., 662 F.3d 74, 97 (1st Cir. 2011) (quoting Hatton v. Mun. of Ponce, 134 D.P.R. 1001, 1010 (1994) ). The Puerto Rico Civil Code states that, "[w]hen there is no statute applicable to the case at issue, the court shall decide in accordance with equity...." 31 L.P.R.A. § 7. Unjust enrichment lies only "when the laws have not foreseen a situation where a patrimonial shift occurs, which ... cannot be rationally explained by the prevalent body of laws." Ortiz Andújar v. E.L.A., 22 P.R. Offic. Trans. 774, 780, 122 D.P.R. 817 (1988). Thus, claims "for unjust enrichment are subsidiary to other remedies provided by law and is unavailable if the plaintiff may seek other forms of relief." Rivera-Muñiz v. Horizon Lines Inc., 737 F. Supp. 2d 57, 65 (D.P.R. 2010). When plaintiffs allege conduct that is covered by an applicable statute, even if plaintiffs have failed to sufficiently allege that claim or if the claim is time-barred, it is inappropriate to allow a claim for unjust enrichment. See Ocaso, S.A., Compañia de Seguros y Reaseguros v. P.R. Mar. Shipping Auth., 915 F. Supp. 1244, 1263 n.15 (D.P.R. 1996) (dismissing claim for unjust enrichment when facts would allow for a claim sounding in tort, despite tort claim being time-barred). Because Plaintiffs support their unjust enrichment claim by pointing to fraudulent conduct by Defendants, which is governed by applicable Puerto Rico statutes, as evidenced by Plaintiffs’ claims under Counts Four and Five, Plaintiffs may not also state a claim for unjust enrichment. Count Seven is therefore dismissed as to all Defendants under Federal Rule of Civil Procedure 12(b)(6). CONCLUSION
For all the reasons detailed herein, Defendants’ Motions to Dismiss are granted. All claims against the FOMB are dismissed pursuant to PROMESA section 105. Counts One, Two, Three, Four, and Five are dismissed with respect to COFINA, HTA, ERS, PREPA, PBA, and AAFAF under Federal Rule of Civil Procedure 12(b)(6), as Plaintiffs have failed to include any allegations concerning conduct by these Defendants with respect to these claims. Counts One, Two, Three, Four, and Five are further dismissed with respect to all Defendants for failure to satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b). Counts One and Two are also dismissed pursuant to Federal Rule of Civil Procedure 12(b)(1) with respect to GDB and COFINA as moot, and as against HTA and PREPA as unripe. Counts One and Two are further dismissed with respect to the Commonwealth, ERS, and PBA under Federal Rule of Civil Procedure 12(b)(6). Counts Four and Five are additionally dismissed as time-barred as to all Defendants. Count Six is dismissed under Federal Rule of Civil Procedure 12(b)(6) with respect to all Defendants to the extent it alleges Defendants violated the Takings Clause by forcing Plaintiffs to purchase Government Bonds. To the extent Count Six asserts that an approval of a plan of adjustment for the debtor Defendants that have not yet restructured their debts would constitute a violation of the Takings Clause, Count Six is dismissed as unripe under Federal Rule of Civil Procedure 12(b)(1). Finally, Count Seven is dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) as to all Defendants. This Order resolves Docket Entry Nos. 128, 129, 130, 131, 132, and 138. Because Plaintiffs have already modified their claims several times in response to challenges concerning the sufficiency of their allegations and have failed to cure such deficiencies, no further leave to amend will be granted and judgment will be entered.
SO ORDERED.