Brigade Leveraged Capital Structures Fund Ltd. et al v. The Government Development Bank For Puerto Rico

Cross MOTION for Summary Judgment and Memorandum of Law in Opposition to Defendants Motion to Dismiss

D.P.R.August 5, 2016

IN THE UNITED STATES DISTRICT COURT DISTRICT OF PUERTO RICO Brigade Leveraged Capital Structures Fund Ltd., Brigade Distressed Value Master Fund Ltd., Tasman Fund LP, Claren Road Credit Master Fund, Ltd., Claren Road Credit Opportunities Master Fund, Ltd., Fir Tree Value Master Fund, L.P., Fir Tree Capital Opportunity Master Fund, L.P., Fir Tree Special Opportunities Fund IV, LP, Fir Tree Special Opportunities Fund V, LP, Fore Multi Strategy Master Fund, Ltd., Sola Ltd, Ultra Master Ltd, Solus Opportunities Fund 5 LP, Plaintiffs, - against - Alejandro J. García Padilla, in his official capacity as Governor of Puerto Rico; Juan C. Zaragoza Gómez, in his official capacity as Secretary of the Puerto Rico Department of the Treasury, and John Doe, in his/her official capacity as receiver for the Government Development Bank for Puerto Rico, Defendants. CIVIL NO. 16-01610 (FAB) PLAINTIFFS’ CROSS-MOTION FOR SUMMARY JUDGMENT AND MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 1 of 56 ii TABLE OF CONTENTS TABLE OF AUTHORITIES ......................................................................................................... iv PRELIMINARY STATEMENT .....................................................................................................1 STATEMENT OF FACTS ..............................................................................................................3 STANDARD OF REVIEW .............................................................................................................7 ARGUMENT ...................................................................................................................................8 I. Plaintiffs Have Standing to Challenge the Moratorium Act ................................................8 II. Plaintiffs’ Claims Are Ripe for Adjudication ....................................................................10 III. This Court Lacks Discretion to Abstain from Hearing Plaintiffs’ Claims .........................12 IV. Plaintiffs’ Claims Are Not Barred by the Master Trust Indenture .....................................14 V. The Moratorium Act Is Preempted by Federal Law ..........................................................17 A. The Challenged Provisions Are Expressly Preempted by Section 903(1) of the Bankruptcy Code and Section 303(1) of PROMESA .........18 1. The Challenged Provisions Prescribe a “Method of Composition of Indebtedness” That Binds Nonconsenting Creditors .......19 2. GDB Is a “Territorial Instrumentality” Covered by PROMESA and a “Municipality” Covered by Section 903(1) ...............................................24 B. The Challenged Provisions Conflict with and Are Preempted by the Bankruptcy Code and PROMESA .....................................25 C. The Moratorium Act Is Preempted Because Congress Has Occupied the Field of Debt Restructuring for the Commonwealth’s Agencies and Instrumentalities.................................................26 VI. The Amended Complaint States a Contract Clause Claim ................................................27 A. The Moratorium Act Has Substantially Impaired Plaintiffs’ Contract Rights ......28 1. The Receivership Provisions Substantially Impair Plaintiffs’ Rights ........29 2. The Stay Provisions Substantially Impair Plaintiffs’ Rights ......................32 Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 2 of 56 iii B. The Challenged Provisions of the Moratorium Act Were Neither Reasonable Nor Necessary to Serve an Important Public Purpose ........................34 VII. The Amended Complaint States a Takings Clause Claim .................................................37 A. Plaintiffs Possessed a Property Interest .................................................................38 B. The Moratorium Act Took Plaintiffs’ Contract Rights ..........................................38 C. Plaintiffs Have Been Deprived of Just Compensation ...........................................39 VIII. Plaintiffs’ Amended Complaint States a Dormant Commerce Clause Claim ...................40 IX. Plaintiffs’ Amended Complaint States a Claim for Denial of the Constitutional Right of Access to the Federal Courts ..................................42 CONCLUSION ..............................................................................................................................44 Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 3 of 56 iv TABLE OF AUTHORITIES Page CASES Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978) ................................................................................................................37 Ankenbrandt v. Richards, 504 U.S. 689 (1992) ................................................................................................................12 Antilles Cement Corp. v. Fortuño, 670 F.3d 310 (1st Cir. 2012) ...................................................................................................39 Arizona v. United States, 132 S. Ct. 2492 (2012) .............................................................................................................26 Asociación de Subscripción Conjunta del Seguro de Responsibilidad Obligatorio v. Flores Galarza, 484 F.3d 1 (1st Cir. 2007) ........................................................................................................37 Batterman v. Leahy, 544 F.3d 370 (1st Cir. 2008) ........................................................................................12, 13, 14 Cámara de Mercadeo, Industria, y Distribucion de Alimentos v. Vázquez, 2013 WL 5652076 (D.P.R. Oct. 16, 2013) ..............................................................................40 Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356 (2006) .................................................................................................................22 Chamber of Commerce v. Reich, 57 F.3d 1099 (D.C. Cir. 1995) .................................................................................................12 Chico Serv. Station, Inc. v. Sol P.R. Ltd., 633 F.3d 20 (1st Cir. 2011) .....................................................................................................12 In re City of Detroit, Mich., 504 B.R. 191 (Bankr. E.D. Mich. 2013) ..................................................................................31 Constr. Aggregates Corp. v. Rivera de Vicenty, 573 F.2d 86, 91 (1st Cir. 1978) ................................................................................................14 Cont’l Ill. Nat’l Bank & Tr. Co. of Chic. v. Wash., 696 F.2d 692 (9th Cir. 1983) .......................................................................................31, 32, 37 Cty. of Orange v. Merrill Lynch & Co. (In re Cty. of Orange), 191 B.R. 1005 (Bankr. C.D. Cal. 1996) ...................................................................................26 Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 4 of 56 v Page Cruden v. Bank of N.Y., 957 F.2d 961 (2d Cir. 1992).....................................................................................................15 Eagle SPE NV I, Inc. v. Kiley Ranch Communities, 5 F. Supp. 3d 1238 (D. Nev. 2014) ..........................................................................................30 Energy Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400 (1983) ................................................................................................................36 Fairey v. Tucker, 132 S. Ct. 2218 (2012) ............................................................................................................15 Faitoute Iron & Steel Co. v. Asbury Park, 316 U.S. 502 (1942) ...............................................................................................19, 20, 31, 33 Family Winemakers of Cal. v. Jenkins, 592 F.3d 1 (1st Cir. 2010) ........................................................................................................40 FDIC v. Elder Care Servs. Inc., 82 F.3d 524 (1st Cir. 1996) .....................................................................................................22 Fideicomiso de la Tierra del Caño Martin Peña v. Fortuño, 604 F.3d 7 (1st Cir. 2010) ........................................................................................................13 Fragoso v. Lopez, 991 F.2d 878 (1st Cir. 1993) ....................................................................................................14 Franklin Cal. Tax-Free Tr. v. Puerto Rico, 85 F. Supp. 3d 577 (D.P.R. 2015), aff’d, 805 F.3d 322 (1st Cir. 2015), aff’d, 136 S. Ct. 1938 (2016) .......................................................................................... passim Friedman v. Chesapeake & Ohio Ry. Co., 261 F. Supp. 728 (S.D.N.Y. 1966), aff’d, 395 F.2d 663 (2d Cir. 1968) ...........................................................................................17 Gen. Atomic Co. v. Felter, 434 U.S. 12 (1977) ...................................................................................................................42 Gonzalez v. United States, 284 F.3d 281 (1st Cir. 2002) ......................................................................................................8 Guillemard-Ginorio v. Contreras-Gómez, 585 F.3d 508 (1st Cir. 2009) ....................................................................................................14 Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 5 of 56 vi Page Gustafson v. Alloyd Co., 513 U.S. 561 (1995) ................................................................................................................21 HMW Indus., Inc. v. Wheatley, 368 F. Supp. 915 (D.V.I. 1973) ..............................................................................................26 Home Bdlg. & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934) .................................................................................................................36 Howe v. Bank of N.Y. Mellon, 783 F. Supp. 2d 466 (S.D.N.Y. 2011) .....................................................................................17 InterGen N.V. v. Grina, 344 F.3d 134 (1st Cir. 2003) ....................................................................................................15 Int’l Shoe Co. v. Pinkus, 278 U.S. 261 (1929) .................................................................................................................27 In re Jefferson Cty., Ala., 474 B.R. 228 (Bankr. N.D. Ala. 2012) ....................................................................................31 Katz v. Pershing LLC, 672 F.3d 64 (1st Cir. 2012) ......................................................................................................10 Kellogg Brown & Root Servs. Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015) .............................................................................................................21 Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470 (1987) .................................................................................................................12 Kontrick v. Ryan, 540 U.S. 443 (2004) .................................................................................................................42 In re Lason, Inc., 300 B.R. 227 (Bankr. D. Del. 2003) ........................................................................................22 La. Power & Light Co. v. City of Thibodaux, 360 U.S. 25 (1959) ...................................................................................................................14 Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935) .................................................................................................................21 LTV Steel Corp. v. Aetna Cas. & Surety Co. (In re Chateaugay Corp.), 1993 WL 563068 (Bankr. S.D.N.Y. Dec. 27, 1993) ................................................................41 Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 6 of 56 vii Page Lujan v. Defs. of Wildlife, 504 U.S. 555 (1992) ...................................................................................................................8 Lynch v. United States, 292 U.S. 571 (1934) .................................................................................................................38 Medina-Velázquez v. Hernández-Gregorat, 767 F.3d 103 (1st Cir. 2014) ....................................................................................................29 Metro. Wash. Airports Auth. v. Citizens for the Abatement of Aircraft Noise, Inc., 501 U.S. 252 (1991) ................................................................................................................12 Metro. W. Asset Mgmt., LLC v. Magnus Funding, Ltd., 2004 WL 1444868 (S.D.N.Y. June 25, 2004) .........................................................................17 Murray v. U.S. Bank Tr. Nat’l Ass’n, 365 F.3d 1284 (11th Cir. 2004) ...............................................................................................15 Neder v. United States, 527 U.S. 1 (1999) .....................................................................................................................21 Nulankeyutmonen Nkihtaqmikon v. Impson, 503 F.3d 18 (1st Cir. 2007) ........................................................................................................8 Ocasio-Hernández v. Fortuño-Burset, 640 F.3d 1 (1st Cir. 2011) ..............................................................................................7, 29, 30 Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm’n, 461 U.S. 190 (1983) .................................................................................................................11 Parella v. Ret. Bd. of R.I. Emps. Ret. Sys., 173 F.3d 46 (1st Cir. 1999) .....................................................................................................28 Parker v. Wakelin, 123 F.3d 1 (1st Cir. 1997) ........................................................................................................33 Pharm. Care Mgmt. Ass’n v. Rowe, 429 F.3d 294 (1st Cir. 2005) ....................................................................................................11 Pharm. Research & Mfrs. of Am. v. Concannon, 249 F.3d 66 (1st Cir. 2001) ......................................................................................................40 Quadrant Structured Prods. Co. v. Vertin, 16 N.E.3d 1165 (N.Y. 2014) ....................................................................................................15 Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 7 of 56 viii Page Riggs v. Johnson Cty., 73 U.S. 166 (1867) ...................................................................................................................42 Rivera-Puig v. García-Rosario, 983 F.2d 311 (1st Cir. 1992) ....................................................................................................12 Ropico, Inc. v. City of New York, 425 F. Supp. 970 (1976) ..........................................................................................................21 Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005) .................................................................................................27 Suitum v. Tahoe Reg’l Planning Agency, 520 U.S. 725 (1997) ................................................................................................................11 Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334 (2014) .............................................................................................................10 Telecomms. Regulatory Bd. v. CTIA—The Wireless Ass’n, 752 F.3d 60 (1st Cir. 2014) ......................................................................................................17 Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568 (1985) .................................................................................................................12 UAW of Am. Int’l Union v. Fortuño, 633 F.3d 37 (1st Cir. 2011) ......................................................................................................35 United States Trust Co. of N.Y. v. New Jersey, 431 U.S. 1 (1977) ............................................................................................................. passim Vázquez-Velázquez v. P.R. Highway & Transp. Auth., 2016 WL 183653 (D.P.R. Jan. 14, 2016) ..........................................................................13, 14 W.B. Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935) .......................................................................................................29, 32, 33 Watts v. Mo.-Kan.-Tex. R.R. Co., 383 F.2d 571 (5th Cir. 1967) ..................................................................................................15 Weaver’s Cove Energy, LLC v. R.I. Coastal Res. Mgmt. Council, 589 F.3d 458 (1st Cir. 2009) ......................................................................................................8 Whitfield v. Municipality of Fajardo, 2007 WL 6894780 (D.P.R. Nov. 8, 2007) ...............................................................................42 Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 8 of 56 ix Page Wisconsin v. Constantineau, 400 U.S. 433 (1971) .................................................................................................................13 Wright v. Universal Mar. Serv. Corp., 525 U.S. 70 (1998) ...................................................................................................................16 CONSTITUTIONAL PROVISIONS U.S. Const. art. I, § 7, cl. 2 .............................................................................................................16 U.S. Const. art. I, § 8, cl. 4 .............................................................................................................17 U.S. Const. art. I, § 10, cl. 1 .........................................................................................................27 U.S. Const. art. IV, § 3, cl. 2 ..........................................................................................................17 U.S. Const. art. V ...........................................................................................................................16 U.S. Const. art. VI, cl. 2 .................................................................................................................17 U.S. Const. amend. V.....................................................................................................................37 P.R. Const. art. II, § 7 ....................................................................................................................27 P.R. Const. art. II, § 9 ....................................................................................................................37 FEDERAL STATUTES 11 U.S.C. § 101 ..............................................................................................................................25 11 U.S.C. § 105 ..............................................................................................................................25 11 U.S.C. § 109 ..............................................................................................................................19 11 U.S.C. § 361 ..............................................................................................................................24 11 U.S.C. § 363 ..............................................................................................................................23 11 U.S.C. § 901 ..............................................................................................................................24 11 U.S.C. § 903 ...................................................................................................................... passim 11 U.S.C. § 1123 ............................................................................................................................42 11 U.S.C. § 1129 ......................................................................................................................25, 26 Puerto Rico Oversight, Management, and Economic Stability Act, Pub. L. 114-187, 130 Stat. 549 (2016) ............................................................................. passim Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 9 of 56 x Page Act of July 1, 1946, Pub. L. 79-481, 60 Stat. 409 (1946) .........................................................................................20 Act of August 16, 1937, Pub. L. 75-302, 50 Stat. 653 (1937) .........................................................................................20 PUERTO RICO STATUTES Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, Puerto Rico Law 21 of 2016 ............................................................................................ passim Puerto Rico Law 40 of 2016 ............................................................................................................1 Puerto Rico Law 74 of 2016 ......................................................................................................2, 22 7 L.P.R.A. § 551 et. seq. ............................................................................................................3, 25 7 L.P.R.A. § 552 ............................................................................................................................25 7 L.P.R.A. § 554 ..............................................................................................................................3 31 L.P.R.A. § 3374 ........................................................................................................................14 FEDERAL RULES Fed. R. Civ. P. 12 .........................................................................................................................7, 8 Fed. R. Civ. P. 56 .............................................................................................................................8 OTHER AUTHORITIES Bernier Proposes Receivership for Puerto Rico’s Government Development Bank, Reorg Research, July 8, 2016 ..................................................................................................10 Puerto Rico’s Bernier Favors Public Negotiations, Liquidating GDB in a Rapid Restructuring, Debtwire, July 28, 2016 .................................................................10 David A. Skeel Jr., States of Bankruptcy, 79 U. Chi. L. Rev. 677 (2012) .....................................31 Juan Zaragoza, ¿Y los chavos dónde están?, El Nuevo Día, June 19, 2016 ..........................2, 5, 33 Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 10 of 56 TO THE HONORABLE COURT: COME NOW Plaintiffs, by and through their undersigned counsel, and very respectfully state and pray as follows: PRELIMINARY STATEMENT Plaintiffs hold more than $750 million of the nearly $3.75 billion of outstanding bonds issued by the Government Development Bank of Puerto Rico (“GDB”), an instrumentality of the Commonwealth of Puerto Rico. In the midst of Puerto Rico’s current financial crisis, the Commonwealth’s political branches hastily enacted the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, Law 21 of 2016 (as amended by Law 40 of 2016, the “Moratorium Act” or the “Act”). The Act abrogated numerous contract rights protecting GDB bondholders, including promises that bondholders’ rights to principal and interest would not be reduced without their consent, they would recover on parity with all senior unsecured debts of GDB, and they would have a variety of remedies if GDB were to default. In this action, Plaintiffs challenge key provisions of the Moratorium Act as unconstitutional. Most fundamentally, the Act violates the Bankruptcy Clause of the United States Constitution and is preempted by federal bankruptcy law, including by the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), which Congress recently enacted for the purpose of restructuring the debt of the Commonwealth and its instrumentalities such as GDB. Section 303(1) of PROMESA expressly preempts any territorial law that, like the Act, prescribes a mechanism for altering the rights of creditors of territorial instrumentalities. As shown below, the Amended Complaint states a preemption claim and, moreover, Plaintiffs are entitled to summary judgment on this claim, which presents a pure question of law. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 11 of 56 2 The Moratorium Act also contravenes the constitutional prohibition against impairing the obligations of contracts. The Act unjustifiably relieved GDB and the Commonwealth of material contractual promises that existed for the protection of GDB bondholders. Defendants hyperbolically suggest that honoring these promises somehow would threaten “the life, health and general welfare” of the people of Puerto Rico, and that annulling bondholders’ contract rights was necessary to the resolution of the Commonwealth’s financial crisis. Not only are Defendants’ factual assertions directly contrary to the allegations of the Amended Complaint— and therefore unavailing to their motion to dismiss—but nothing could be further from the truth. By creating a mechanism for diverting GDB assets to politically favored creditors, the Act continues the fiscal manipulations that caused the current financial crisis, rather than solving the crisis. As Defendant Zaragoza Gόmez has candidly acknowledged, politicians for years maintained the “mirage” of financial solvency by treating GDB as an “Uncle Moneybags” who extended “credit and loans . . . without any source of repayment” for the benefit of the Commonwealth and its municipalities and to the detriment of GDB and its creditors.1 In further manipulation, the Commonwealth’s political branches recently enacted a law (Law 74 of 2016) that renounced $1.75 billion in debt owed by its instrumentalities to GDB—which, if it stands, would unilaterally reduce GDB’s assets to the detriment of GDB’s creditors. Defendants devote disproportionate energy to attempts to prevent this Court from reaching the merits of Plaintiffs’ constitutional challenges to the Moratorium Act. Defendants’ efforts include, for example, seeking the benefit of the “no action” clause in the Master Trust Indenture whose enforcement by Plaintiffs supposedly would threaten the well-being of the people of the Commonwealth, and asking this Court to stay its hand under an abstention doctrine 1 Juan Zaragoza, ¿Y los chavos dónde están?, El Nuevo Día, June 19, 2016. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 12 of 56 3 applicable only in diversity cases. Those misguided attempts merely show Defendants’ desperation to avoid this Court addressing the Act’s fundamental infirmities. In another attempt to avoid the merits, Defendants argue that this Court lacks subject matter jurisdiction because Plaintiffs have not yet been injured by the receivership provisions of the Moratorium Act (and thus implicitly concede that Plaintiffs have been injured by the other challenged provisions). Defendants are wrong because the Act injured Plaintiffs by abrogating their contract rights upon its enactment, and thus Plaintiffs’ claims seeking a declaration of the infirmities of the Act are ripe. Nor have Defendants established any basis for this Court to abdicate its “virtually unflagging obligation” to exercise the jurisdiction vested in it by Congress. Defendants’ request that this Court abstain under the Pullman doctrine is undermined by their failure to satisfy their burden of identifying any ambiguity in state law whose resolution could obviate the need to address Plaintiffs’ constitutional claims. No such ambiguity exists. For the reasons set forth below, Plaintiffs respectfully request that the Court grant them summary judgment on their preemption claim (Count IV), and deny Defendants’ motion to dismiss in its entirety. STATEMENT OF FACTS GDB is an instrumentality of the Commonwealth. 7 L.P.R.A. §§ 551 et seq. (the “GDB Act”). The Commonwealth and GDB made numerous statutory and contractual promises to bondholders in connection with GDB’s issuance of its currently outstanding bonds. (Am. Compl. ¶¶ 13-22.)2 The Commonwealth and GDB assured creditors that—among other promises that GDB would be operated in a manner that would preserve its ability to repay 2 “Am. Compl.” refers to the Amended Complaint, Dkt. No. 52. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 13 of 56 4 bondholders—GDB would maintain a minimum reserve of twenty percent of its demand deposit liabilities in short-term investments. (Am. Compl. ¶ 14); 7 L.P.R.A. § 554. GDB also made numerous promises relating to bondholders’ right to repayment, which could not be impaired without their consent: • GDB would pay principal and interest on specified dates. (Am. Compl. ¶ 18; Am. Compl., Ex. C (“Master Trust Indenture”) § 1001.) • GDB bonds would be payable on parity with all general, unsecured, and unsubordinated obligations of GDB. (Am. Compl. ¶ 20; Kaminetzky Decl., Ex. A (“Authorizing Resolution”) § 1(h).) 3 • Each bondholder would have the “absolute and unconditional” right to receive principal and interest when due and to institute suit to collect unpaid principal and interest, and these rights “shall not be impaired” without the consent of each affected bondholder. (Am. Compl. ¶ 18; Master Trust Indenture § 508.) • Other bondholder rights would not be altered without the consent of a majority of affected bondholders of the relevant series. (Am. Compl. ¶ 18; Master Trust Indenture § 902.) In addition, the Commonwealth and GDB promised bondholders protections in the event GDB ran into financial difficulties, including the right to declare an Event of Default if GDB failed to pay interest or principal, breached its covenants, defaulted on other debt, or entered into a receivership, “composition,” or similar insolvency proceeding. (Am. Compl. ¶ 18; Master Trust Indenture § 501.) Bondholders were entitled to various remedies upon an Event of Default, including the right to accelerate GDB’s outstanding debt. (Am. Compl. ¶ 18; Master Trust Indenture § 502.) The Commonwealth and GDB also promised bondholders that if GDB approached insolvency, its assets would not be dissipated through preferential transfers, and that any such transfers would be “null and ineffective.” (Am. Compl. ¶ 15.) Finally, the 3 “Kaminetzky Decl.” refers to the Declaration of Benjamin Kaminetzky in Support of Plaintiffs’ Cross- Motion for Summary Judgment. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 14 of 56 5 Commonwealth and GDB covenanted that no change to the laws governing GDB debt would “impair any obligation or commitment of [GDB].” (Am. Compl. ¶ 13.) GDB reiterated all of these promises in “Official Statements” marketing GDB bonds. (Am. Compl. ¶ 20.) Plaintiffs purchased GDB bonds in reliance on these promises. (Am. Compl. ¶ 23.) In dereliction of its duties to creditors, GDB rendered itself insolvent by making billions of dollars of questionable loans to Commonwealth entities over many years, and violated the GDB Act by engaging in preferential transfers. (Am. Compl. ¶¶ 12, 25.)4 The Moratorium Act retroactively nullified these promises protecting bondholders. First, the Act relieved GDB of obligations to preserve its ability to repay bondholders. Section 203(b)(i) of the Act nullified GDB’s statutory duty to maintain minimum reserves. (Am. Compl. ¶¶ 35, 44).5 Section 105 and 203(f) of the Act abrogated the promise that GDB would not make preferences while insolvent or “anticipat[ting]” insolvency by granting a broad retroactive and prospective immunity for preferential transfers. (Am. Compl. ¶¶ 35, 44). Second, the Moratorium Act’s Receivership Provisions—Sections 301, 302, and 401— abrogated bondholders’ fundamental right to repayment. In contravention of GDB’s promises that bondholders had an “absolute and unconditional” right to principal and interest when due, and that the amounts due would not be reduced without their consent, Section 301(H) provides for a reduction of bondholder principal and interest without bondholder consent. (“[T]he maximum liability to any person having a claim against [GDB] or against the receiver or receivership shall equal the amount such creditor would have received if [GDB] had been 4 See also, e.g., Certified transaction of Juan Zaragoza, ¿Y los chavos dónde están?, El Nuevo Día, June 19, 2016, Kaminetzky Decl., Ex. B. 5 This memorandum refers to the challenged provisions of Sections 201 and 203 of the Act as the “Moratorium Provisions,” and refers to Sections 301, 302, and 401 of the Act as the “Receivership Provisions.” Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 15 of 56 6 liquidated on the date of the appointment of the receiver.”); (Am. Compl. ¶¶ 34, 44.) Section 301 also grants a receiver broad powers to resolve GDB’s obligations. (Am. Compl. ¶¶ 34, 44). Third, Sections 301(H), 302, and 401 of the Moratorium Act eliminated GDB’s promise that all GDB bondholders will enjoy parity with all general, unsecured and unsubordinated liabilities of GDB. (Am. Compl. ¶¶ 34, 44.) Sections 301(H) and 302 direct a receiver to favor Puerto Rico banks over other GDB creditors, and to pay debts owed to those banks “for any reason” on par with bondholder and depositor debts. (Am. Compl. ¶¶ 34, 44.) Section 401 empowers a receiver to transfer selected assets of GDB to a bridge bank, and to cause the bridge bank to assume and pay selected liabilities of GDB, while leaving other assets and liabilities behind in GDB—without regard to statutory or contractual priorities. (Am. Compl. ¶¶ 34, 44.) Fourth, Sections 201(b) and 201(c) of the Moratorium Act stripped GDB bondholders of their contractually promised remedies. (Am. Compl. ¶¶ 35, 44.) Those provisions purport to stay any suit against GDB, and to suspend, during the pendency of the “state of emergency” for GDB declared by the Governor, the operation of the “ipso facto” clauses providing for the right to accelerate any GDB debt upon GDB’s insolvency or commencement of a GDB receivership proceeding. (Am. Compl. ¶¶ 35, 44.) And Section 201(c) purports to make any violation of Section 201(b) “void and punishable by contempt of court.” (Am. Compl. ¶¶ 35, 44.) Plaintiffs hold more than $750 million of GDB bonds. (Tobak Decl. ¶ 3.)6 On May 2, 2016, a group of GDB bondholders including Plaintiffs reached agreement with GDB on indicative terms of a proposed restructuring of their GDB bonds, subject to the negotiation of remaining terms. (Am. Compl. ¶ 27.) The agreed terms contemplate a two-step restructuring 6 “Tobak Decl.” refers to the Declaration of Marc J. Tobak in Support of Plaintiffs’ Cross-Motion for Summary Judgment. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 16 of 56 7 that reduces the face amount of Plaintiffs’ GDB bonds by up to 53%. (Am. Compl. ¶ 27.) The challenged provisions of the Act are frustrating consummation of this agreement, in part because the Act’s unconstitutional favoring of certain creditors has emboldened them to hold out for a recovery higher than that received by other creditors of equal rank. (Am. Compl. ¶ 29.) On June 30, 2016, President Obama signed PROMESA into law. See Pub. L. 114-187, 130 Stat. 549 (2016). Modeled on the Bankruptcy Code, PROMESA created a comprehensive federal restructuring scheme for Puerto Rico and its instrumentalities, including GDB. PROMESA preempts any territory law that alters the rights of nonconsenting creditors of a territory or its instrumentalities, as well as any territory law inconsistent with its provisions. See Pub. L. 114-187, §§ 4, 303(1), 130 Stat. at 551, 579. Plaintiffs filed their Amended Complaint against Defendants García Padilla and Zaragoza Gόmez (in their official capacities) on May 20, 2016. On July 7, 2016, Defendants filed a motion to dismiss the complaint. Plaintiffs move for partial summary judgment concurrently with their opposition to Defendants’ motion to dismiss. STANDARD OF REVIEW On a Rule 12(b)(6) motion, the Court construes the “well-pleaded facts . . . in the light most favorable to the plaintiffs.” Franklin Cal. Tax-Free Tr. v. Puerto Rico, 85 F. Supp. 3d 577, 595 (D.P.R. 2015) (“Franklin I”), aff’d, 805 F.3d 322 (1st Cir. 2015) (“Franklin II”), aff’d, 136 S. Ct. 1938 (2016) (“Franklin III”). The motion should be denied if, as here, the complaint “provide[s] fair notice to the defendants and state[s] a facially plausible legal claim.” See Ocasio-Hernández v. Fortuño-Burset, 640 F.3d 1, 12 (1st Cir. 2011). Similarly, a motion to dismiss under Rule 12(b)(1) should be denied where, as here, the plaintiff “clearly alleg[es] definite facts to demonstrate that jurisdiction is proper.” See Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 17 of 56 8 Nulankeyutmonen Nkihtaqmikon v. Impson, 503 F.3d 18, 25 (1st Cir. 2007). The Court will “then construe such facts and the reasonable inferences drawn therefrom in favor of the plaintiff.” Id. “While the court generally may not consider materials outside the pleadings on a Rule 12(b)(6) motion, it may consider such materials on a Rule 12(b)(1) motion.” Gonzalez v. United States, 284 F.3d 281, 288 (1st Cir. 2002). The Court should grant summary judgment “if plaintiffs show ‘that there is no genuine dispute as to any material fact’ and that they are ‘entitled to judgment as a matter of law.’” Franklin I, 85 F. Supp. 3d at 595 (quoting Fed. R. Civ. P. 56(a)). Because the issues presented by Plaintiffs’ preemption claim are purely legal, “the Court need not consider any fact to determine whether the [Moratorium] Act, on its face, is preempted by federal law.” See id. at 589. ARGUMENT I. Plaintiffs Have Standing to Challenge the Moratorium Act Plaintiffs have alleged facts showing (1) “a concrete and particularized injury in fact”— namely, the illegal impairment of their contract rights and taking of their property; (2) “a causal connection that permits tracing the claimed injury” to the enactment of the Moratorium Act; and (3) these injuries will be redressed by the Court’s order declaring the unlawful provisions of the Moratorium Act unconstitutional and enjoining their enforcement. See Weaver’s Cove Energy, LLC v. R.I. Coastal Res. Mgmt. Council, 589 F.3d 458, 467 (1st Cir. 2009); see also Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992). Thus, Plaintiffs satisfy all three requirements for standing to challenge the Moratorium Act provisions at issue. Defendants do not dispute that Plaintiffs have standing to challenge the Act’s Moratorium Provisions. Nor do Defendants dispute that Plaintiffs have shown that their injuries are caused by the Commonwealth’s enactment of the Receivership Provisions or that the relief sought Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 18 of 56 9 would redress those injuries. Instead, Defendants argue only that Plaintiffs have not established that the Receivership Provisions have caused any “injury in fact” to Plaintiffs because GDB has not yet been placed into receivership. (Mot. at 8-11.) 7 But the “injury in fact” to Plaintiffs does not depend on the appointment of a receiver. Plaintiffs allege that the enactment of the Receivership Provisions of the Act inflicted ongoing harm to Plaintiffs because those provisions eliminate or impair contract rights and obligations. Before the enactment of the Act, Plaintiffs and all other holders of GDB bonds benefited from GDB’ binding promises that holders would recover on an equal rank with all other unsecured creditors of GDB and that their entitlement to principal and interest would not be reduced without consent of each affected bondholder. (Am. Compl. ¶¶ 18, 20.) The Act injured Plaintiffs because it nullified those promises: GDB is no longer bound by its promise that holders will recover equally pro rata with all other unsecured creditors, and holders’ entitlements to principal and interest can be reduced without their consent. (Am. Compl. ¶¶ 34, 44.) Even if no receiver is appointed, Plaintiffs have lost the protections conferred by those promises. This Court’s reasoning in Franklin I is equally applicable here: The Commonwealth’s nullification of this series of statutory and contractual security rights and remedial provisions, through its enactment of the [Moratorium] Act, is a “direct and immediate” injury to the plaintiff bondholders. Plaintiffs should not be forced to live with such substantially impaired contractual rights—rights that they bargained for when they purchased the [GDB] bonds that they hold collectively. . . . Here, not having the guarantee of remedial provisions that they were promised affects plaintiffs’ day-to-day business as [GDB] bondholders, particularly when negotiating with [GDB] over remedies and potential restructuring. Indeed, the threat of [the Commonwealth’s] invocation of the [Moratorium Act’s Receivership Provisions] hangs over plaintiffs and diminishes their bargaining power as bondholders. 7 “Mot.” refers to Defendants’ Motion to Dismiss, Dkt. No. 74. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 19 of 56 10 85 F. Supp. 3d at 591-92 (citations omitted); see also Franklin II, 805 F.3d at 333 n.16. Defendants contend that Franklin I is distinguishable because it involved “the total elimination of the right to request a receiver.” (Mot. at 9.) But Franklin I did not hold that the plaintiffs’ claims were ripe only because the right eliminated was the right to appoint a receiver. Rather, this Court described five different alleged impairments (only one of which was the elimination of a receivership right), see id. at 590-91, and held that the nullification of that “series of statutory and contractual security rights and remedial provisions” constituted a direct injury, id. at 591, 594 & n.11 (emphasis added). Plaintiffs here allege abrogation of a similar series of rights, including the “absolute and unconditional right” that their entitlement to principal and interest would not be changed without their consent and the promise that the Commonwealth would not pass a law that would impair any of GDB’s obligations. (Am. Compl. ¶¶ 13-22, 34-35, 44); see infra Part VI.A. As in Franklin I, the Court’s ruling that the Receivership Provisions are unconstitutional will restore to Plaintiffs these rights that were impaired by the enactment of the Receivership Provisions.8 II. Plaintiffs’ Claims Are Ripe for Adjudication Defendants question the ripeness only of Plaintiffs’ challenges to the Receivership Provisions, thus implicitly conceding all other challenges are ripe. Defendants’ argument that 8 The threat of future harm from Defendants’ enforcement of the Receivership Provisions is independently sufficient to establish standing. Standing is demonstrated by an allegation of future injury if it is “certainly impending, or there is a substantial risk that the harm will occur.” Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334, 2341 (2014) (quotation omitted). Plaintiffs have alleged the imminence of a receivership (Am. Compl. ¶ 28), as confirmed by recent developments. On the same day that Defendants filed their motion to dismiss—arguing that the Receivership Provisions “may or may not become operative” (Mot. at 10)—GDB Bank President Melba Acosta announced her resignation, and the next day Popular Democratic party president and gubernatorial candidate David Bernier proposed naming a receiver for GDB. See Bernier Proposes Receivership for Puerto Rico’s Government Development Bank, Reorg Research, July 8, 2016 (Kaminetzky Decl., Ex. C.). On July 28, David Bernier again called for GDB to be placed into receivership as a result of Ms. Acosta’s resignation. See Puerto Rico’s Bernier Favors Public Negotiations, Liquidating GDB in a Rapid Restructuring, Debtwire, July 28, 2016 (Kaminetzky Decl., Ex. D.). Harm from the Commonwealth’s enforcement of the Receivership Provisions is therefore “sufficiently threating” to confer standing. See Katz v. Pershing LLC, 672 F.3d 64, 71 (1st Cir. 2012). Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 20 of 56 11 the challenges to the Receivership Provisions are not ripe is fatally flawed, including because Defendants ignore that Plaintiffs seek declaratory relief, among other relief. A request for declaratory relief is ripe if: (1) the issues are fit for judicial decision and (2) hardship to the plaintiffs looms as a result of withholding court consideration. See, e.g., Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm’n, 461 U.S. 190, 201 (1983). A controversy is fit for adjudication if it will be resolved by “specific relief through a decree of conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.” Franklin I, 85 F. Supp. 3d at 588 (quotation omitted). Hardship is assessed by evaluation of the extent of and immediacy of the harms the plaintiff has suffered or is likely to suffer. Id. Plaintiffs’ claims are ripe for adjudication because Plaintiffs assert that the Receivership Provisions are unconstitutional on their face, and that their enactment impaired Plaintiffs’ rights. Contrary to Defendants’ characterization, Plaintiffs claims do not depend on how the provisions may be applied to hypothetical future facts. Indeed, courts routinely conclude that facial challenges to statutes are ripe as soon as the statute is enacted. See, e.g., Suitum v. Tahoe Reg’l Planning Agency, 520 U.S. 725, 736 n.10 (1997) (“[F]acial challenges to a regulation are generally ripe the moment the challenged regulation or ordinance is passed.” (quotation omitted)); Pharm. Care Mgmt. Ass’n v. Rowe, 429 F.3d 294, 307 (1st Cir. 2005). Because the impairment of Plaintiffs’ rights is ongoing, Plaintiffs will continue to suffer hardship unless and until the constitutional claims are adjudicated. Plaintiffs—like the bondholders in Franklin I—have lost their bargained-for rights. See 85 F. Supp. 3d at 591. Enactment of the Moratorium Act has undermined Plaintiffs’ efforts to achieve an amicable restructuring deal by skewing the playing field between the negotiating Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 21 of 56 12 parties, and has emboldened favored GDB creditors to hold out for recoveries higher than they would have been entitled to before enactment of the Moratorium Act. (Am. Compl. ¶ 29); see Franklin I, 85 F. Supp. 3d at 591-92; see also Metro. Wash. Airports Auth. v. Citizens for the Abatement of Aircraft Noise, Inc., 501 U.S. 252, 265 n.13 (1991) (constitutional challenge to statute was ripe because the challenged statute “hangs over [plaintiff] like the sword over Damocles”); Chamber of Commerce v. Reich, 57 F.3d 1099, 1100-01 (D.C. Cir. 1995) (per curiam). Under these circumstances, a judicial decision would “be of practical assistance in setting the underlying controversy to rest because it would completely restore plaintiffs’ contractual rights.” Franklin I, 85 F. Supp. 3d at 592 (quotation omitted); see Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 582 (1985).9 III. This Court Lacks Discretion to Abstain from Hearing Plaintiffs’ Claims Contrary to Defendants’ contention, this is not one of those extraordinary cases in which this Court should forego its “virtually unflagging obligation” to exercise jurisdiction vested in it by Congress. See Chico Serv. Station, Inc. v. Sol P.R. Ltd., 633 F.3d 20, 29 (1st Cir. 2011) (quoting Ankenbrandt v. Richards, 504 U.S. 689, 705 (1992)). Defendants have failed to satisfy their burden of showing that the Court has discretion to abstain in this case. Pullman abstention is permissible only when there is (1) substantial uncertainty over the meaning of the state law at issue; and (2) the state court’s clarification of that law could obviate the need for a federal constitutional ruling. See Batterman v. Leahy, 544 F.3d 370, 373 (1st Cir. 2008) (declining to abstain); Rivera-Puig v. García-Rosario, 983 F.2d 311, 322 (1st Cir. 1992) 9As a fallback, Defendants argue that the challenge to the Receivership Provisions under the Takings Clause is not ripe. Defendants are wrong. The Amended Complaint alleges that “the mere enactment of [the Receivership Provisions] constitutes a taking,” Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 494 (1987), and thus its Takings Clause claim was “ripe the moment the [Moratorium] Act was passed,” Franklin I, 85 F. Supp. 3d at 611. For the same reason, the enactment of the Receivership Provisions was the “final decision” that took Plaintiffs’ contract rights. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 22 of 56 13 (same).10 Abstention is not permissible when state law is unambiguous and requires no further clarification. Batterman, 544 F.3d at 374 (citing Wisconsin v. Constantineau, 400 U.S. 433, 439 (1971)). In addition, defendants seeking abstention must show, on a claim-by-claim basis, “how clarification of a state law would avoid the need to address such challenges.” Batterman, 544 F.3d at 374; Vázquez-Velázquez v. P.R. Highway & Transp. Auth., 2016 WL 183653, at *3 (D.P.R. Jan. 14, 2016) (holding abstention unwarranted where “defendants merely allege, by conclusory statement, that [the law at issue] is unclear without explaining in what respects”). Defendants have failed to show that this Court has discretion to abstain under Pullman. Defendants’ arguments address challenges only to the Receivership Provisions, and Defendants fail to address those challenges on a claim-by-claim basis. Defendants do not show that any of the Receivership Provisions is ambiguous, much less that resolving any ambiguity would obviate the need for a ruling on any constitutional issue.11 Instead, Defendants argue that Section 302 is unambiguous in their favor, and merely suggest—without any showing—that the “scope” of other provisions is ambiguous. (Mot. at 16.) Those nebulous contentions fall far short of justifying abstention as to any of Plaintiffs’ constitutional challenges. Nor does any relevant ambiguity in state law exist. Plaintiffs’ preemption claim turns principally on whether the Moratorium Act provides for a “method of composition” of GDB’s indebtedness preempted by 11 U.S.C. § 903(1) and PROMESA § 303(1). See infra Part V.A.1. 10 Pullman abstention is discretionary, not mandatory. See, e.g., Fideicomiso de la Tierra del Caño Martin Peña v. Fortuño, 604 F.3d 7, 16 (1st Cir. 2010). 11 In any event, Section 202(a) of the Act, as Defendants observe, “provides for ‘adequate protection’ to be accorded to creditors ‘to the extent required by applicable constitutional law.’” (Mot. at 43.) Thus, even if there were an ambiguity in a provision of the Moratorium Act on which its constitutionality depended, the resolution of that ambiguity would turn on federal constitutional law. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 23 of 56 14 The meaning of “method of composition” as used in PROMESA and the Bankruptcy Code is a question of federal law, and Defendants do not identify any ambiguity in the Act that would alter whether it provides for a “method of composition.” Pullman abstention is not appropriate as to Plaintiffs’ other claims, as to which Defendants neither identify a specific ambiguity which requires the Commonwealth courts’ resolution nor show how such a resolution would eliminate the constitutional infirmities of the Challenged Provisions. Batterman, 544 F.3d at 374; Vázquez-Velázquez, 2016 WL 183653 at *3.12 IV. Plaintiffs’ Claims Are Not Barred by the Master Trust Indenture Defendants’ argument that the “no action” clause of the Master Trust Indenture bars Plaintiffs’ claims is wrong for three reasons. First, Defendants lack standing to invoke that clause because they are not parties to the contract containing it. Under Puerto Rico law, “[c]ontracts shall only be valid between the parties who execute them,” with an exception for third party beneficiaries only where the contract contains a “stipulation in favor of [that] third person.” 31 L.P.R.A. § 3374. Defendants have not even attempted to make a showing that the 12 Thibodaux and Burford abstention are entirely inapplicable. Thibodaux is limited to abstention from the exercise of diversity jurisdiction. See La. Power & Light Co. v. City of Thibodaux, 360 U.S. 25, 26 (1959). Because this is not a diversity case, Defendants’ argument that Thibodaux applies is meritless. See, e.g., Constr. Aggregates Corp. v. Rivera de Vicenty, 573 F.2d 86, 91 (1st Cir. 1978) (describing Thibodaux as among a “line of cases [that] involves the appropriateness of abstention in diversity suits where only state claims are asserted”). Burford abstention applies only in “the narrow class of cases seeking individualized review of agency- specific regulatory determinations, where federal intervention would threaten uniformity, and thereby, the state’s effort to establish a coherent regulatory policy.” Guillemard-Ginorio v. Contreras-Gómez, 585 F.3d 508, 525 n.19 (1st Cir. 2009). In Fragoso v. Lopez, 991 F.2d 878 (1st Cir. 1993), the First Circuit refused to abstain in favor of a claim resolution proceeding pursuant to the Puerto Rico Rehabilitation and Liquidation Model Act, which created a “comprehensive framework for the liquidation of insolvent insurance companies” and empowered the Puerto Rico Commissioner of Insurance to act as a receiver for insolvent insurance companies. Id. at 883 & n.7. The First Circuit held that abstaining under Burford would be inappropriate because the law created a “judicial structure” akin to bankruptcy rather than an “administrative agency,” and because the federal court was not being asked to review any decisions or proceedings under the law. Id. at 883. Likewise, Plaintiffs here are not seeking review of the determination of any state agency, bypassing any state administrative scheme, or seeking to resolve any issue of state law. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 24 of 56 15 “no action” clause was intended to operate “in favor” of them. To the contrary, “no action” clauses are intended to benefit all bondholders by protecting the issuer against multiplicitous litigation brought by individual bondholders that would diminish corporate assets. See, e.g., Murray v. U.S. Bank Tr. Nat’l Ass’n, 365 F.3d 1284, 1289 n.9 (11th Cir. 2004); Watts v. Mo.- Kan.-Tex. R.R. Co., 383 F.2d 571, 574 (5th Cir. 1967); Quadrant Structured Prods. Co. v. Vertin, 16 N.E.3d 1165, 1175-76 (N.Y. 2014); see also Master Trust Indenture at 3 (stating that the agreed terms and conditions of the Indenture are “for the equal and proportionate benefit of all securityholders”). “No action” clauses are not meant to protect government officials against constitutional challenges to laws that abrogate bondholders’ contract rights and facilitate looting of the issuer. Second, Defendants are equitably estopped from invoking the benefit of the “no action” clause. “[T]he doctrine of equitable estoppel precludes a party from enjoying rights and benefits under a contract while at the same time avoiding its burdens and obligations.” InterGen N.V. v. Grina, 344 F.3d 134, 145 (1st Cir. 2003). Here, Defendants were involved in enacting and implementing legislation that substantially impairs rights under the Master Trust Indenture and associated agreements. It would be inequitable in the extreme to allow Defendants to exploit the “no action” clause while abrogating GDB’s obligations under the Master Trust Indenture. Third, the “no action” clause does not by its terms bar Plaintiffs from asserting their constitutional claims. The broad reading of the “no action” clause advanced by Defendants violates two fundamental interpretive principles: (1) “a court must indulge every reasonable presumption against waiver of fundamental constitutional rights[,]” Fairey v. Tucker, 132 S. Ct. 2218, 2220 (2012) (quotation omitted), and (2) “no action” clauses are “strictly construed,” see Cruden v. Bank of N.Y., 957 F.2d 961, 968 (2d Cir. 1992). Tellingly, Defendants fail to cite any Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 25 of 56 16 case in which a “no action” clause has been interpreted to bar the assertion of constitution claims, and Plaintiffs know of none. Contrary to Defendants’ argument, the “no action” clause does not bar bondholders from asserting rights that arise under the United States Constitution. By its express terms, the clause sets forth the conditions under which a bondholder “shall have any right to institute any proceeding . . . with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder [i.e., under the Indenture].” (Master Trust Indenture § 507 (emphasis added).) That the clause explicitly speaks to the very existence of the bondholders’ rights that it governs is a sure sign that it has no bearing on rights granted to bondholders independently of the Master Trust Indenture. Thus, the clause’s scope necessarily is limited to rights whose existence or non-existence depends on the parties’ agreement, which excludes rights arising under the United States Constitution or federal statute. See U.S. Const. art. I, § 7, cl. 2; U.S. Const. art. V. Nor can the “no action” clause be interpreted somehow to waive Plaintiffs’ rights to assert their constitutional claims. See, e.g., Wright v. Universal Mar. Serv. Corp., 525 U.S. 70, 80 (1998) (“[W]e will not infer from a general contractual provision that the parties intended to waive a statutorily protected right unless the undertaking is explicitly stated. More succinctly, the waiver must be clear and unmistakable.” (quotation omitted)). Further examination of the “no action” clause demonstrates an additional limit: the clause governs only rights to sue “in respect of” an Event of Default. Under its plain language, the “no action” clause sets forth the preconditions to a bondholder’s right to institute certain proceedings, including: the bondholder must notify the Trustee “of a continuing Event of Default”; the bondholder must have “made written request to the Trustee to institute proceedings in respect of such Event of Default”; and the Trustee must have “failed to institute any such Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 26 of 56 17 proceeding.” (Master Trust Indenture § 507(1), (2) & (4).) Courts have interpreted substantively similar provisions as applying “to claims relating only to an Event of Default,” and not “prevent[ing] noteholders from bringing extra-contractual tort claims.” Howe v. Bank of N.Y. Mellon, 783 F. Supp. 2d 466, 473 (S.D.N.Y. 2011) (quoting Metro. W. Asset Mgmt., LLC v. Magnus Funding, Ltd., 2004 WL 1444868, at *5 (S.D.N.Y. June 25, 2004)).13 Here, Plaintiffs’ constitutional claims rest on Puerto Rico’s enactment and implementation of the Moratorium Act, not on any Event of Default by GDB. Defendants appear to concede as much. (See Mot. at 10 (“Plaintiffs entered forbearance and thus do not fall within the category of bondholders whose bonds were defaulted.” (citation omitted)).) V. The Moratorium Act Is Preempted by Federal Law Under the Supremacy Clause, a territorial law is invalid on its face if it is expressly preempted by, impliedly conflicts with, or regulates conduct in a field occupied by federal law. U.S. Const. art. VI, cl. 2; see Telecomms. Regulatory Bd. v. CTIA—The Wireless Ass’n, 752 F.3d 60, 63-64 (1st Cir. 2014); Franklin I, 85 F. Supp. 3d at 595. As demonstrated below, the challenged provisions of the Moratorium Act are preempted by the Bankruptcy Clause14 and Territorial Clause15 of the U.S. Constitution, and by legislation enacted by Congress pursuant to those clauses. In particular, Chapter 9 of the Bankruptcy Code provides a federal scheme for municipal debt restructuring and displaces any state or territorial 13 Friedman v. Chesapeake & Ohio Ry. Co., 261 F. Supp. 728 (S.D.N.Y. 1966), aff’d, 395 F.2d 663 (2d Cir. 1968), on which Defendants rely (Mot. at 20), is not to the contrary. In Friedman, the plaintiffs’ claims against the issuer of bonds invoked “provisions of the trust indenture in order to accelerate the maturity of the bonds by the alleged occurrence of events of default.” 261 F. Supp. at 730. Those claims were barred by the express terms of a “no action” clause governing “action[s] growing out of any provision of” the indenture. Id. 14 The Bankruptcy Clause authorizes Congress “[t]o establish . . . uniform Laws on the subject of bankruptcies throughout the United States.” U.S. Const. art. I, § 8, cl. 4. 15 The Territorial Clause of the United States Constitution empowers Congress to “make all needful rules and regulations respecting” territories, including Puerto Rico. U.S. Const. art. IV, § 3, cl. 2. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 27 of 56 18 municipal restructuring law, and PROMESA adds a “comprehensive” federal restructuring scheme for Puerto Rico and its instrumentalities, including GDB, to fill any gap in the bankruptcy laws applicable to Puerto Rico. See Pub. L. 114-187, § 405(m)(4), 130 Stat. at 591. The challenged provisions of the Moratorium Act are expressly preempted by and conflict with the Bankruptcy Code and PROMESA, and regulate conduct in the field of restructuring of a territory and its instrumentalities, which is occupied by PROMESA. Preemption is a purely legal issue that relies solely on the relevant statutory text, and the showing below that the challenged provisions of the Moratorium Act are preempted by federal law is sufficient both to defeat Defendants’ Motion to Dismiss and to entitle Plaintiffs to summary judgment on their preemption claim. See Franklin I, 85 F. Supp. 3d at 589. A. The Challenged Provisions Are Expressly Preempted by Section 903(1) of the Bankruptcy Code and Section 303(1) of PROMESA Section 903(1) of the Bankruptcy Code provides that “a State law prescribing a method of composition of indebtedness of [a] municipality may not bind any creditor that does not consent to such composition.”16 11 U.S.C. § 903(1). Puerto Rico is a “State” for purposes of Section 903(1). Franklin I, 85 F. Supp. 3d at 596. Thus, Section 903(1)—like its predecessor Section 83(i) of the Bankruptcy Act17— “expressly prohibit[s] state municipal bankruptcy laws adjusting creditors’ debts without their consent,” including Puerto Rico laws. Franklin II, 805 F.3d at 335. 16 Defendants’ argument that Section 903(1) does not apply to a State’s ability to restructure its own debt— as opposed to the debt of its instrumentalities—is irrelevant. Plaintiffs take no position on the invalid provisions of the Moratorium Act as applied to the Commonwealth’s own debt. (Mot. at 41-42.) 17 See Act of July 1, 1946, Pub. L. 79-481, § 83(i), 60 Stat. 409, 415 (1946). The First Circuit has held that Section 903(1) is merely a “re-codification” of Section 83(i). Franklin II, 805 F.3d at 336. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 28 of 56 19 Congress extended Section 903(1)’s preemption of municipal restructuring laws in Section 303(1) of PROMESA, Pub. L. 114-187, § 303(1), 130 Stat. at 579. Section 303(1) incorporates verbatim Section 903(1)’s prohibition on laws “prescribing a method of composition of indebtedness,” and expressly applies it to territories and their instrumentalities.18 As shown below, these provisions preempt the challenged provisions of the Moratorium Act. 1. The Challenged Provisions Prescribe a “Method of Composition of Indebtedness” That Binds Nonconsenting Creditors Defendants argue that Section 903(1) does not preempt the challenged provisions of the Moratorium Act because none of those provisions “establishes a method of composition of debt.” (Mot. at 42.) Defendants concede that a “method of composition” includes a reduction in the amount of principal that a debtor owes to its creditors. (Id.) Defendants assert, however, that only laws that reduce principal and grant a discharge are prohibited “compositions.” (Id. at 42- 43.) That narrow interpretation cannot be squared with Congress’s intent in enacting the original prohibition on laws “prescribing a method of composition of indebtedness” as described by the Supreme Court, the First Circuit, and this Court in Franklin. In Franklin III, the Supreme Court explained that Congress added Section 83(i) to the Bankruptcy Act in 1946 to “override” Faitoute Iron & Steel Co. v. Asbury Park, 316 U.S. 502, 507-09 (1942), by “bar[ring] the States from enacting their own municipal bankruptcy schemes.” 136 S. Ct. at 1944-45. Faitoute involved a New Jersey statute that permitted municipalities to use a “plan of adjustment or composition” to modify outstanding debts and to impose the modification on nonconsenting creditors, but prohibited any such plan from providing for “any reduction of the principal amount of any outstanding obligation.” See 316 U.S. at 504. The 18 Section 303(1) also adds language extending the prohibition to “a moratorium law, but solely to the extent that it prohibits the payment of principal or interest by an entity not described in section 109(b)(2) of title 11, United States Code.” Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 29 of 56 20 Supreme Court upheld the statute and a plan by which a municipality extended the maturities and reduced the interest rate of its outstanding bonds. Id. at 507-08, 516. In response, Congress added Section 83(i) to the Bankruptcy Act to “restore what had been believed to be the pre- Faitoute status quo.” Franklin II, 805 F.3d at 335. This undermines Defendants’ argument that laws prescribing “a method of composition” for indebtedness include only laws providing “for a discharge of debt, under which creditors receive less than their full claims in full satisfaction of their claims.” (Mot. at 42 (quotation omitted)). If Defendants were right, then Section 83(i)’s prohibition on “State law[s] prescribing a method of composition of indebtedness” would not have overturned Faitoute, which had held that a state law providing for modification of municipal debts yet prohibiting any reduction in principal was not preempted by federal bankruptcy law. Franklin III, 136 S. Ct. at 1944-45. As the Supreme Court and the First Circuit explained in Franklin, however, Section 83(i) overturned Faitoute. In fact, when Section 83(i) was enacted, the Bankruptcy Act used the term “composition” broadly to reach any adjustment of the terms of a municipality’s debt. In particular, a municipality that sought to restructure its debts could petition to implement a plan of “composition,” which encompassed “modifying or altering the rights of creditors generally, or of any class of them, . . . either through issuance of new securities of any character, or otherwise.” Act of August 16, 1937, Pub. L. 75-302, § 83(a), 50 Stat. 653, 655 (1937); see Act of July 1, 1946, Pub. L. 79-481, § 83(a), 60 Stat. 409, 411 (1946). In adding Section 83(i) to the Bankruptcy Act, Congress intended the same broad meaning of “composition” as used in the pre-existing municipal bankruptcy provisions of the Bankruptcy Act (which Congress amended and restated when adding Section 83(i)). See, e.g., Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 30 of 56 21 Gustafson v. Alloyd Co., 513 U.S. 561, 570 (1995) (“[I]dentical words used in different parts of the same [a]ct are intended to have the same meaning[.]”). That broad meaning incorporated the usage of “composition” at common law. See Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 585 (1935) (relying on the meaning of composition at common law as “a method of adjusting among creditors[’] rights in property in which all are interested”); see also Neder v. United States, 527 U.S. 1, 21 (1999) (citing the “well-established rule of construction” that Congress is presumed to incorporate the established meaning of statutory terms). Further, in reenacting the substance of Section 83(i) in Section 903(1) and in Section 303(1), Congress incorporated that same broad meaning of “composition” into those provisions. See Franklin II, 805 F.3d at 335-56 (holding that there is “no evidence of express modification by Congress” of Section 83(i) when Congress “re-codifi[ed]” it as Section 903(1)); see also Kellogg Brown & Root Servs., Inc. v. United States ex rel. Carter, 135 S. Ct. 1970, 1977 (2015) (holding that Congress’s use of prior statutory language in a new statute indicates that “no fundamental alteration was intended” in the language’s meaning). And, in Franklin, both this Court and the First Circuit interpreted “composition” broadly in holding that Section 903(1) preempted provisions of the Recovery Act that authorized public corporations to adjust their obligations to creditors. See Franklin II, 805 F.3d at 335-36; Franklin I, 85 F. Supp. 3d at 597.19 Even under Defendants’ grudging reading of “method of composition,” the challenged provisions qualify because they allow GDB to reduce its debts without creditor consent. Section 301(H) provides, in relevant part, that “the maximum liability to any person having a claim 19 Defendants rely on a single case to address the preemptive scope of Section 903(1) or its predecessor. (Mot. at 43 (citing Ropico, Inc. v. City of New York, 425 F. Supp. 970, 978 (1976)).) But Ropico does not hold that Section 903(1) prohibits only laws that reduce outstanding principal. Instead, it held that a municipal moratorium law that provided for a three-year extension, ongoing payments at the contract rate of interest, and a six percent rate of interest after the maturity date did “not amount to a composition as presently enacted.” Id. at 983. That narrow holding has no bearing on the Moratorium Act. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 31 of 56 22 against [GDB] or against the receiver or receivership shall equal the amount such creditor would have received if [GDB] had been liquidated on the date of the appointment of the receiver.” Moratorium Act § 301(H) (emphasis added). By fixing GDB’s “maximum liability” to a creditor at liquidation value rather than at face value, Section 301(H) prescribes a method for reducing GDB’s obligations to bondholders without their consent.20 Further, the Commonwealth recently enacted legislation that unilaterally reduced its instrumentalities’ obligations to GDB—i.e, assets on GDB’s books—by $1.75 billion, thus further depressing the liquidation value of GDB’s assets. P.R. Law 74 of 2016. Because it is undisputed that a reduction in the amount of a debt constitutes a “composition,” Section 301(H) provides for a “method of composition.” That Section 301(H) provides for a “method of composition” is further confirmed by its operation as a discharge. Because Section 301(H) caps GDB’s “maximum liability” with respect to a debt at the hypothetical liquidation recovery of that debt, creditors have no entitlement to the remaining unpaid value of their claim and GDB is relieved of any further liability to repay the creditor above the hypothetical liquidation amount.21 This permanent reduction in the value of a claim amounts to a discharge. See Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 364 (2006) (explaining that a “discharge . . . gives the debtor a ‘fresh start’ by releasing him, her, or it from further liability for old debts”). Section 401 of the Moratorium Act prescribes another method for imposing a “composition” on nonconsenting creditors, both by reducing GDB’s debts and adjusting 20 It is well established in law and finance that liquidation values are generally lower than fair market values. See FDIC v. Elder Care Servs., Inc., 82 F.3d 524, 528 (1st Cir. 1996) (noting the “lower price” that a “forced liquidation would ordinarily be expected to bring”); In re Lason, Inc., 300 B.R. 227, 233 (Bankr. D. Del. 2003) (“A liquidation ‘contemplates valuation according to the depressed prices that one typically receives in distress sales.’” (citation omitted)). 21 By way of example, if the face value of a bond is $100, but the most that the bondholder would have received under a hypothetical liquidation on the date the receivership is commenced is $80, then, under Section 301(H), GDB is no longer obligated to pay the bondholder the remaining $20. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 32 of 56 23 priorities among creditors without consent. Under Section 401, a receiver may create a “bridge bank” to which the receiver—in the receiver’s sole discretion—may transfer selected assets and assume whichever of GDB’s liabilities the receiver deems “appropriate.” See Moratorium Act § 401(A), (B), (D), (E), (J). That provision operates in tandem with Section 301(H) to adjust creditor priorities, reduce creditor claims, and grant GDB a discharge. While 301(H) caps claims against GDB at a hypothetical liquidation value, it does not set a maximum recovery for claims against the bridge bank, thereby creating a means for diverting money to favored creditors from disfavored creditors.22 Thus, creditor claims and priorities are adjusted because creditors of the same rank— even holders of bonds of the same series—can receive different treatment because the receiver is free to pick some creditors to be left behind in GDB (with their claims subject to the Section 301(H) cap) while other, preferred creditors’ bonds could be assumed by the bridge bank. Because the assets assumed by the bridge bank are not assets of GDB, GDB effectively receives a discharge as the left-behind creditors lose the entitlement to recover from any of the assets moved to the bridge bank. The ability to limit a creditor’s right of recovery and to transfer assets from GDB without satisfying GDB creditors beyond the minimum liquidation amount is a further “method of composition.” Defendants’ reliance on the statement in Section 204(a) of the Moratorium Act that “nothing in the Act authorizes any government entity to compromise any obligation over the objection of a creditor” cannot save the Act from prescribing a method of composition. Sections 301, 302, and 401 of the Act expressly permit GDB to reduce or otherwise impair creditor 22 This transfer of assets is akin to a sale under Section 363 of the Bankruptcy Code, 11 U.S.C. § 363, but without any of the procedural safeguards normally afforded to creditors under the Bankruptcy Code. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 33 of 56 24 obligations without consent, as shown above. Tellingly, Defendants have not taken the position that Section 204(a) invalidates Section 301(H)’s reduction of creditor entitlements and discharge, or the receiver’s power to use the bridge bank provisions of Section 401 to permanently reduce the entitlements of certain disfavored GDB creditors.23 Indeed, the Act goes far beyond reducing the value of and altering the priority of debt: it also provides other restructuring powers that constitute “methods of composition,” including the power to transfer or sell any GDB assets, reject contracts, and invalidate certain contractual provisions. See generally Moratorium Act §§ 301, 302, 401. 2. GDB Is a “Territorial Instrumentality” Covered by PROMESA and a “Municipality” Covered by Section 903(1) GDB is a “territorial instrumentality” of Puerto Rico covered by Section 303(1) of PROMESA. See Pub. L. 114-187, § 5(19)(A), 130 Stat. at 552 (defining a “territorial instrumentality” as “any political subdivision, public agency, instrumentality—including any instrumentality that is also a bank—or public corporation of a territory, and this term should be broadly construed to effectuate the purposes of this Act.”). Defendants previously have represented to the Court that GDB is a “territorial instrumentality.” (Dkt. No. 81 at 2.) Bankruptcy Code Section 903(1) also preempts the challenged provisions of the Act because GDB is a “municipality” for purposes of Section 903(1). Section 101(40) of the Bankruptcy Code defines a “municipality” as a “political subdivision or public agency or 23 The Act’s provision for the accrual of interest during a moratorium and provision of “adequate protection” for some creditors if the Constitution so requires are also irrelevant. The accrual of interest simply adds value that Section 301(H) will reduce upon a receivership. And “adequate protection” is not relevant to the question of “composition”: Chapter 9 and PROMESA debtors must provide adequate protection to secured creditors yet Chapter 9 and PROMESA obviously provide for a “method of composition.” See 11 U.S.C. §§ 361, 901(a); Pub. L. 114-187, § 301(a), 130 Stat. at 577 (providing that 11 U.S.C. § 361 applies in a PROMESA case). Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 34 of 56 25 instrumentality of a State.” See 11 U.S.C. § 101(40). It is undisputed that Puerto Rico is a “State” for the purposes of this provision. 11 U.S.C. § 105(52); Franklin III, 136 S. Ct. at 1942. Defendants’ contention that GDB is not a “municipality” is undermined by the GDB’s organic statute, which expressly provides that the GDB is a “governmental instrumentality of the Commonwealth Government” and a public agency. 7 L.P.R.A. § 551; see also id. § 552(A) (empowering GDB to “[t]o act as fiscal agent and as paying agent and as a financial advisory and reporting agency of the Commonwealth Government”). Because GDB is an “instrumentality” and “agency” of a “State,” it is a “municipality” within the meaning of Section 903(1). None of the cases cited by Defendants are to the contrary; indeed, GDB qualifies as a “municipality” under the tests set forth in each of Defendants’ cases. (Mot. at 44.) B. The Challenged Provisions Conflict with and Are Preempted by the Bankruptcy Code and PROMESA The challenged provisions of the Moratorium Act cannot stand for the additional reason that they conflict with the provisions of the Bankruptcy Code and PROMESA. Section 4 of PROMESA provides that PROMESA “shall prevail over any general or specific provisions of territory law . . . inconsistent with this Act.” Pub. L. 114-187, § 4, 130 Stat. at 551. The challenged provisions are preempted because they permit a restructuring of GDB expressly contrary to PROMESA and the Bankruptcy Code. For example, PROMESA applies Sections 1129(b)(1), (b)(2)(A), and (b)(2)(B) of the Bankruptcy Code to a PROMESA restructuring. Pub. L. 114-187, § 301(a), 130 Stat. at 577 (applying 11 U.S.C. § 1129(b)(1), (b)(2)(A), (b)(2)(B), among other provisions of title 11, to cases under PROMESA). Under these provisions, a plan of reorganization cannot be imposed on dissenting creditors unless it satisfies the “fair and equitable” standard and the absolute priority rule, meaning that the plan cannot discriminate unfairly among creditors of the same rank or Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 35 of 56 26 provide for distributions to junior creditors ahead of senior creditors. See 11 U.S.C. § 1129(b)(1), (b)(2)(A), (b)(2)(B). By contrast, Sections 301, 302, and 401 of the Moratorium Act impose no such limitations on the receiver, and, indeed, direct the receiver to discriminate among creditors of similar rank and permit the receiver to allow distributions to junior creditors on a par with senior creditors. See supra Part V.A.1 (addressing bridge bank provisions), infra Part VIII (addressing discrimination in favor of Puerto Rico instrumentalities). Those provisions of the Moratorium Act thus conflict with, and are preempted by, the Bankruptcy Code and PROMESA. See Cty. of Orange v. Merrill Lynch & Co. (In re Cty. of Orange), 191 B.R. 1005, 1016-17 (Bankr. C.D. Cal. 1996) (holding a California law conflicted with the Bankruptcy Code by altering priorities of recovery and creating a “special class of creditors”). The challenged provisions thus “stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” and are thus preempted. Franklin II, 805 F.3d at 343-44. C. The Moratorium Act Is Preempted Because Congress Has Occupied the Field of Debt Restructuring for the Commonwealth’s Agencies and Instrumentalities PROMESA exclusively occupies the field of debt restructuring laws for the Commonwealth and its instrumentalities. Field preemption occurs when states “regulat[e] conduct in a field that Congress, acting within its proper authority, has determined must be regulated by its exclusive governance.” Arizona v. United States, 132 S. Ct. 2492, 2501 (2012). Congressional intent to preempt state law regulating conduct in an entire field can be inferred, “where there is a federal interest . . . so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.” Id. (quotation omitted).24 Taken 24 Indeed, territorial law may more readily be preempted because the territory’s legislative power derives from an act of Congress, so “no problem of ‘dual sovereignties’ is presented.” HMW Indus., Inc. v. Wheatley, 368 F. Supp. 915, 917 (D.V.I. 1973). Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 36 of 56 27 together, the general preemptive force of bankruptcy laws and Congress’ exercise of expansive authority under the Territorial Clause indicate that by enacting PROMESA, Congress has occupied the field of debt restructuring for Puerto Rico instrumentalities. Congress intended PROMESA to be a “comprehensive” solution to Puerto Rico’s debt crisis. See PROMESA § 405(m)(4), 130 Stat. at 591. This broad preemptive force of the federal bankruptcy laws is long-established: in 1929, the Supreme Court held that the Bankruptcy Act superseded preexisting state laws governing “the distribution of property of insolvents . . . or that otherwise relate to the subject of bankruptcies” because those laws fell “within the field entered by Congress when it passed the Bankruptcy Act.” Int’l Shoe Co. v. Pinkus, 278 U.S. 261, 265-66 (1929); see, e.g., Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1201-02 (9th Cir. 2005) (invalidating a California law regarding preferential transfers on ground that Congress had occupied the field of insolvency law). Defendants argue that the Act’s challenged provisions “fill that gap” created by Puerto Rico’s ineligibility for Chapter 9 of the Bankruptcy Code. (Mot. at 40.) But there is now no longer any gap to fill because PROMESA provides a comprehensive restructuring regime for GDB. The challenged provisions of the Moratorium Act are thus preempted as they legislate in a field that Congress has wholly occupied. VI. The Amended Complaint States a Contract Clause Claim The U.S. Constitution and the Puerto Rico Constitution prohibit the Commonwealth from enacting any law “impairing the Obligation of Contracts.” U.S. Const. art. I, § 10, cl. 1; P.R. Const. art. II, § 7; see Franklin I, 85 F. Supp. 3d at 603 (the Puerto Rico clause “provides at least the same level of protection” as the federal clause). A law violates these prohibitions if it results “in the substantial impairment of a contractual relationship” and the impairment of a plaintiff’s Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 37 of 56 28 rights is not “reasonable and necessary to serve an important public purpose.” Parella v. Ret. Bd. of R.I. Emps. Ret. Sys., 173 F.3d 46, 59 (1st Cir. 1999) (quotations omitted).25 A. The Moratorium Act Has Substantially Impaired Plaintiffs’ Contract Rights Impairment of contract rights is “substantial” when the rights “were the seller’s central undertaking in the contract” or “substantially induced the buyer to enter into the contract[,]” Franklin I, 85 F. Supp. 3d at 607 (quotation omitted), and when important contract rights are “totally eliminated” rather than being “merely modified or replaced by an arguably comparable” provision. See United States Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 19 (1977); see also Franklin I, 85 F. Supp. 3d at 607. The Moratorium Act has nullified fundamental promises that formed GDB’s central undertaking to its bondholders, and that substantially induced Plaintiffs to purchase GDB bonds. These promises relate to Plaintiffs’ right to receive principal and interest when due and to sue to enforce that right; Plaintiffs’ rights to consent to alteration of payment terms; the priority of Plaintiffs’ bonds; operation of GDB in a manner that preserves its ability to repay bondholders; the right to declare a default; the right to accelerate GDB’s obligations upon default; prohibitions on preferential transfers of GDB’s assets; and a bar on any Commonwealth law impairing GDB’s obligations. See supra pp. 3-5 (citing Am. Compl. ¶¶ 13-22). As shown below, the Act’s impairment of these rights is substantial. In arguing that the Moratorium Act does not substantially impair Plaintiffs’ rights, Defendants rely (i) on characterizations of the rights admittedly impaired by the Act as insubstantial; (ii) assertions regarding how individual provisions of the Act operate in isolation; 25 Defendants do “not concede that the federal Contract Clause applies to Puerto Rico.” (Mot. at 20 n.8.) But Defendants do not offer any reason that Puerto Rico, as a territory, would be free to impair the obligation of contracts unfettered by the U.S. Constitution, let alone cite any authority supporting that startling proposition. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 38 of 56 29 and (iii) speculation that the challenged provisions of the Act might not reduce bondholder recoveries. But Defendants’ characterizations and speculation are irrelevant on a motion to dismiss, which requires that Plaintiffs’ factual allegations be taken as true, and that inferences be drawn in Plaintiffs’ favor. See Ocasio-Hernández, 640 F.3d at 7, 12-13; see also Medina- Velázquez v. Hernández-Gregorat, 767 F.3d 103, 108 (1st Cir. 2014). Further, Defendants’ consideration of statutory provisions in isolation directly contravenes the Supreme Court’s direction that, for these purposes, allegedly impaired rights must be “viewed in combination, with the cumulative significance that each imparts to all.” W.B. Worthen Co. v. Kavanaugh, 295 U.S. 56, 62 (1935). Taken together, it is clear that the alleged impairment is substantial. 1. The Receivership Provisions Substantially Impair Plaintiffs’ Rights The Receivership Provisions impair GDB’s central undertakings regarding bondholders’ right to repayment, and their right to equal and ratable recovery from GDB’s assets. Section 301(H) of the Moratorium Act, for example, limits Plaintiffs’ maximum recovery in receivership to the hypothetical amount that they would have received if GDB were liquidated at the time a receiver was appointed. See supra pp. 22. By eliminating GDB’s obligation to pay Plaintiffs anything above the hypothetical liquidation amount, Section 301(H) impairs Plaintiffs’ right to repayment, and abrogates GDB’s promise that Plaintiffs’ contractual entitlement to repayment would not be altered without their consent. In addition, Section 301(H) negates GDB’s promise of an equal and ratable recovery from its available assets. The issue is not, as Defendants suggest, what amount Plaintiffs might have recovered in a hypothetical liquidation, but what amount GDB is obligated to pay Plaintiffs. As shown above, the Moratorium Act allows GDB unilaterally to reduce its obligations to Plaintiffs. See supra Part V.A.1. Sections 301 and 302 further impair Plaintiffs’ contract right to equal recovery by mandating unfair discrimination among creditors of equal rank—among Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 39 of 56 30 holders of the same series of bonds—based in part on whether the creditor is based in Puerto Rico. (Am. Compl. ¶¶ 34, 44); see infra Part VIII. In addition, Section 401 permits creation of a bridge bank that would facilitate transferring the surplus stripped from Plaintiffs to other, favored creditors. (Am. Compl. ¶¶ 34, 44.) Thus, the Receivership Provisions substantially impair Plaintiffs’ contract rights. See, e.g., United States Trust Co., 431 U.S. at 19 (finding that repeal of an “important security provision” constituted substantial impairment); Eagle SPE NV I, Inc. v. Kiley Ranch Communities, 5 F. Supp. 3d 1238, 1246 (D. Nev. 2014) (“reducing the amount an assignee can recover on debt he already purchased” constituted substantial impairment). Defendants characterize the Receivership Provisions as entailing a “modification,” rather the “elimination,” of the receivership remedy under the GDB Act, and speculate that Plaintiffs might not recover less than they would have recovered if the provisions had not been enacted. (Mot. at 25-26.) But Defendants’ reliance on labels disregards the real and substantial impact that the Receivership Provisions have on Plaintiffs’ contract rights, including by providing a mechanism to reduce GDB’s obligation to Plaintiffs and divert funds to favored creditors. No such impact was possible in a receivership under the GDB Act, which provided for a court- supervised receivership and did not permit—much less direct—the receiver unilaterally to reduce creditor entitlements or to prefer some creditors over others of equal rank or authorize the creation of a bridge bank to facilitate such preferences. (Am. Compl. ¶¶ 16, 34, 44.) None of Defendants’ arguments that the Receivership Provisions are “creditor friendly” address, much less rebut, the detrimental impact of the Moratorium Act’s Receivership Provisions. Defendants’ speculation about Plaintiffs’ future recoveries is improper on a motion to dismiss. Ocasio-Hernández, 640 F.3d at 12-13. In any event, it is irrelevant. Courts, including the Supreme Court, have rejected arguments that legislation impairing contractual promises Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 40 of 56 31 might not alter the bonds’ value. The Ninth Circuit, for example, has Circuit rejected the argument that conditioning future bond issuances on the vote of the electorate worked no impairment unless and until voters rejected a proposed bond issuance. See Cont’l Ill. Nat’l Bank & Tr. Co. of Chic. v. Wash., 696 F.2d 692, 700 (9th Cir. 1983). Instead, the Ninth Circuit held, imposing the voting requirement when none existed before was sufficient to substantially impair the bonds. See id. Similarly, in United States Trust Co., the Supreme Court held that repeal of a covenant limiting deficits was a substantial impairment without regard to whether the impairment substantially reduced the bond’s trading price. See 431 U.S. at 19-20. Nor is Faitoute availing to Defendants. In Faitoute, the Supreme Court emphasized that the decision was inextricably bound to its particular facts, which involved bondholders’ “paper rights” with no practical value absent the “resuscitating scheme” that allegedly impaired those rights. 316 U.S. at 516; see id. (“We do not go beyond the case before us.”). The Supreme Court subsequently has emphasized that Faitoute is an outlier, see United States Trust Co., 431 U.S. at 27 (describing Faitoute as the “only time in this century that alteration of a municipal bond contract has been sustained by this Court”), and other courts have limited Faitoute to its facts. See, e.g., In re City of Detroit, Mich., 504 B.R. 191, 238-39 (Bankr. E.D. Mich. 2013); In re Jefferson Cty., Ala., 474 B.R. 228, 279 n.21 (Bankr. N.D. Ala. 2012) (describing Faitoute as of “dubious” precedential value); see also, e.g., David A. Skeel Jr., States of Bankruptcy, 79 U. Chi. L. Rev. 677, 714 (2012) (observing that it is “uncertain” whether “Faitoute remains good law”). Unlike the law that resuscitated “paper rights” in Faitoute, the Moratorium Act eviscerated fundamental undertakings, essential bondholder remedies and key security provisions. Thus, Faitoute has no application here. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 41 of 56 32 2. The Stay Provisions Substantially Impair Plaintiffs’ Rights The Stay Provisions of the Moratorium Act eliminated bargained-for remedies and foundational promises that safeguarded GDB’s ability to repay bondholders. In Franklin I, this Court concluded that the Recovery Act’s elimination of the rights to declare an event of default (including for breach of an ipso facto clause upon entry into a receivership or insolvency proceeding), to accelerate payments, and to sue to enforce these rights alleged a substantial impairment of the Franklin I plaintiffs’ rights. 85 F. Supp. 3d at 607-08. Because here the Stay Provisions eliminate the same remedies, the provisions likewise substantially impair Plaintiffs’ contract rights against GDB. See id.; W.B. Worthen Co., 295 U.S. at 62 (holding that bondholders’ rights were substantially impaired by a law postponing exercise of remedies that had provided “attractiveness and value to collateral security”). In addition, the Stay Provisions nullified GDB’s promises to operate with a minimum reserve and, if approaching insolvency, not to make preferential transfers. Those impairments eliminate important bondholder protections and thus substantially impair Plaintiffs’ contract rights, just as New Jersey’s elimination of the covenant not to incur deficits above a certain amount substantially impaired bondholder rights in United States Trust Co.. See 431 U.S. at 18- 19, 28; see also Cont’l Ill., 696 F.2d at 700-01 (“It is sufficient that the additional requirements imposed by [the statute] impair the ability of [the state contracting agency] to carry out its covenants in the manner originally promised. . . . As in United States Trust, the covenants at issue here were not superfluous. Plaintiffs were promised financing of the plans to completion subject only to contractually specified conditions.”). In defense of the Stay Provisions, Defendants assert that the provisions “d[o] no more than permit a temporary delay in payment on bonds to allow the government time to get its financial house in order so that it can make [unreduced principal and interest] payments in the Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 42 of 56 33 future.” (Mot. at 22-23 (emphasis added).) On that basis, Defendants argue that the Stay Provisions are sanctioned by Faitoute.26 Defendants’ assertion rests entirely on conjured “facts” that directly contradict Plaintiffs’ allegations. For example, the Amended Complaint explains how the Stay Provisions frustrate Plaintiffs’ ability to enjoin preferential transfers from GDB, narrow the definition of preferential transfers, and create immunity for those transfers. (Am. Compl. ¶¶ 15, 25, 31, 34, 35, 44).27 The Amended Complaint further explains how the Receivership Provisions—which must be considered “in combination” with the Stay Provisions, W.B. Worthen, 295 U.S. at 62—provide a means for GBD to reduce its obligations to Plaintiffs and divert funds to favored creditors, including while Plaintiffs’ ability to protect themselves is crippled by the Stay Provisions. (Am. Compl. ¶¶ 34, 35, 44.) On this motion to dismiss, these allegations must be credited over Defendants’ fantastical scenario in which bondholders are repaid in full after a “temporary delay.”28 26 In fact, if the Commonwealth Government were to covenant that “it” will make full principal and interest payments in the future pursuant to the terms agreed between bondholders and GDB, then this litigation could be resolved consensually. 27 Defendants’ characterization of the Stay Provisions as “temporary” rings particularly hollow in light of GDB and the Commonwealth’s use of the Stay Provisions to cripple Plaintiffs’ efforts to stop unlawful transfers of GDB assets. The Stay Provisions permit GDB to continue to support financially distressed Commonwealth instrumentalities by continuing to allow ongoing preferential withdrawals from GDB—a continuation of what Defendant Zaragoza described as relying GDB ,“Uncle Moneybags” to “get out of scrapes at the last minute.” (See Kaminetzky Decl., Ex. B, at 1; Dkt.1 ¶ 4; Am. Compl. ¶ 25.) Such ongoing preferential transfers threaten to exhaust GDB’s assets to the detriment of all GDB creditors. (See Am. Compl. ¶ 25.) 28 Defendants also cannot sidestep the Stay Provisions’ substantial impairment of contract rights by arguing that the Stay Provisions are only temporary. In W.B. Worthen, the Supreme Court recognized that a state statute that extended the time period for foreclosure and substantially reduced interim payments to the creditor amounted to a total elimination of the foreclosure remedy. 295 U.S. at 61-62. Here, too, “delaying” key creditor rights and remedies frustrates the very purpose of providing for those remedies and substantially impairs the contractual right. Id. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 43 of 56 34 B. The Challenged Provisions of the Moratorium Act Were Neither Reasonable Nor Necessary to Serve an Important Public Purpose As the Supreme Court explained in United States Trust Co., if a state could reduce its financial obligations for whatever reasons it deemed important, “the Contract Clause would provide no protection at all.” 431 U.S. at 26. Where, as here, the Commonwealth has impaired promises made by its instrumentality to bondholders, its determination of reasonableness and necessity is entitled to only “limited deference.” Franklin I, 85 F. Supp. 3d at 609; see Parker v. Wakelin, 123 F.3d 1, 5 (1st Cir. 1997) (“Where the contract allegedly impaired is one created . . . by the state itself, . . . less deference to a legislative determination of reasonableness and necessity is required, because ‘the State’s self-interest is at stake.’” (quoting United States Trust Co., 431 U.S. at 26)). The stated legislative purpose of the Moratorium Act is to address Puerto Rico’s financial crisis and to protect the health, safety, and welfare of the people of the Commonwealth. See Moratorium Act, Statement of Motives, at 49-57. Plaintiffs acknowledge that the Commonwealth is facing a financial crisis. Accordingly, Plaintiffs have not challenged Section 201(a) of the Moratorium Act, which directs the Governor “to prioritize payment of essential services over covered obligations to promote the health, safety, and welfare of the residents of the Commonwealth” or Section 201(d), which authorizes the Governor to impose payment moratoria. See Moratorium Act §§ 201(c) & (d). But, as Plaintiffs allege, the challenged provisions are not reasonable or necessary means to accomplish these goals. In United States Trust Co., the Court held that the challenged statute was neither reasonable nor necessary to meet New Jersey’s purported emergency need for mass transit because: (1) “less drastic modification would have permitted the contemplated plan without entirely removing the covenant’s limitations on the use of Port Authority revenues and reserves Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 44 of 56 35 to subsidize commuter railroads” and (2) “the States could have adopted alternative means of achieving their twin goals of discouraging automobile use and improving mass transit.” 431 U.S. at 30-32. The Amended Complaint outlines less drastic alternatives to address GDB’s financial condition. These alternatives include: (1) placing GDB into receivership under the receivership provisions of the GDB Act—without retroactive adjustment to creditor priorities or reduction in creditor entitlements, (2) working to appropriate funds to the entities that borrowed from GDB so that they could repay their debts, (3) funding public services from other funds or incoming revenues, (4) working to collect debt owed to GDB, (5) protecting depositors from the effects of a bank run without creating a bridge bank, and (6) providing for creation of a bridge bank without disregarding bargained-for rights. (Am. Compl. ¶ 47.) The Amended Complaint also alleges that the Legislature failed to consider any alternative measure before passing the Moratorium Act. Indeed, legislative leaders acknowledged that they worked in a “rush and absolute improvisation” and that it was not the “job of the legislature” to consider the constitutionality of the Act. (Am. Compl. ¶ 48.) These allegations show that the challenged provisions of the Act are not reasonable or necessary to achieve its stated purpose. See UAW of Am. Int’l Union v. Fortuño, 633 F.3d 37, 45-47 (1st Cir. 2011) (assessing “whether the plaintiffs pled sufficient facts to allow a court to draw a reasonable inference” that the challenged law was unreasonable or unnecessary). Defendants insist that the alternatives Plaintiffs have identified were not viable. (Mot. at 29-30.) But the viability of the alternatives is a factual question that cannot be decided on a motion to dismiss. Instead, the question is whether the challenged provisions of the Moratorium Act are reasonable as a matter of law notwithstanding the existence of the alleged alternatives Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 45 of 56 36 and the fact that these alternatives were not considered. Defendants cite no case upholding the elimination of bondholder remedies, retroactive adjustments to bondholder priorities, and non- consensual limitation of bondholder claims, and Plaintiffs are aware of none. Instead, Defendants rely on Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934), which upheld, as a reasonable response to the Great Depression, a state law that empowered courts to stay temporarily the foreclosure of a mortgage on a showing of necessity. See id. at 444-47. But Blaisdell and its progeny address a state’s police powers to alter private contracts, which United States Trust Co. and its progeny distinguish from cases regarding a state’s adjustment of its own contracts or the contracts of its instrumentalities. Where, as here, a state interferes with its own instrumentality’s contract, the impairments “face more stringent examination under the Contract Clause than would laws regulating contractual relationships between private parties.” Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 n.15 (1978). In fact, “in almost every case, [the Supreme Court has] held a governmental unit to its contractual obligations when it enters financial and other markets.” Energy Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400, 412 n.14 (1983) (collecting cases). Blaisdell and its progeny thus have no application to the challenged provisions of the Moratorium Act. In any event, even if Defendants’ contentions regarding the reasonableness and necessity of the Moratorium Act could be assessed on a motion to dismiss without the benefit of evidence, they do not show that Plaintiffs fail to state a claim. Defendants contend that the Act “simply declares a moratorium in payment and stays litigation during the Covered Period.” (Mot. at 28.) As shown above, that contention is not true. See supra pp. 5-6, 21-23. The Act contains numerous other provisions that, among other impairments, retroactively adjust creditor priorities, unjustifiably discriminate among creditors, and reduce creditor claims without consent. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 46 of 56 37 Defendants do not even attempt to justify those impairments of creditor rights as necessary to the stated purposes of the Act. And there is no justification because the reprioritization of creditors merely “sacrifices the interest of parties to contracts with [the Commonwealth] in order to protect the State’s own finances.” See Cont’l Ill., 696 F.2d at 702; see also Spannaus, 438 U.S. at 248-50 (holding that a state’s alteration of pension plan liabilities of certain employers was unreasonable, in part, because it served only a narrow public interest). Finally, any need for the Moratorium Act to provide for restructuring GDB was extinguished by PROMESA, which now provides a comprehensive restructuring framework for GDB. VII. The Amended Complaint States a Takings Clause Claim Plaintiffs’ allegations show that the Moratorium Act unconstitutionally effects a taking of Plaintiffs’ contract rights without just compensation. See U.S. Const. amend. V; P.R. Const. art. II, § 9.29 In particular, the allegations establish each of the three elements of a Takings Clause claim: (1) Plaintiffs possessed a property interest in bargained-for contract rights enforceable against an instrumentality of the Commonwealth (GDB); (2) the Moratorium Act took these contract rights for the Commonwealth’s use; and (3) Plaintiffs have not been compensated for the deprivation of their rights and the Moratorium Act provides no means for seeking compensation. See, e.g., Asociación de Subscripción Conjunta del Seguro de Responsibilidad Obligatorio v. Flores Galarza, 484 F.3d 1, 27-28 (1st Cir. 2007). 29 As Defendants concede, the Puerto Rico Takings Clause is “substantially identical” to the federal Takings Clause so it need not be analyzed separately. (Mot. at 30.) Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 47 of 56 38 A. Plaintiffs Possessed a Property Interest Defendants do not deny that Plaintiffs had enforceable contract rights against GDB. (Am. Compl. ¶¶ 13-22).30 Ignoring all but one of the contract rights underlying Plaintiffs’ Takings Clause claim, Defendants quibble that the bondholders’ parity right “derives only from unenforceable assertions made in the ‘Official Statements’ in GDB’s marketing materials.” (Mot. at 14.) But the promises set forth in Official Statements are enforceable,31 and the parity right is established by the GDB board resolutions incorporated into the Indenture.32 Defendants also argue that Plaintiffs’ contract rights “are not ‘property’” protected by the Takings Clause. (Mot. at 31-32.) Defendants are wrong. In Franklin I, this Court followed well-established law in holding that bondholders’ contract rights, including the right to specified remedies, are property protected by the Takings Clause. See 85 F. Supp. 3d at 611-12 (citing United States Trust Co., 431 U.S. at 19 n.16 and Lynch v. United States, 292 U.S. 571, 579 (1934)). None of the cases on which Defendants rely are to the contrary, including because none involved contract rights enforceable against an instrumentality of the government that took those rights. B. The Moratorium Act Took Plaintiffs’ Contract Rights When a government enacts legislation that effectively eliminates a contract right that was enforceable against one of its instrumentalities, rather than merely regulating its exercise, the government “appropriate[s]” that right and effectuates “a direct taking.” Franklin I, 85 F. Supp. 30 Defendants concede that Plaintiffs, as holders of GDB bonds, were in contractual privity with GDB. (Mot. at 45 (asserting that Plaintiffs’ “expressly agreed” to certain terms of GDB bonds).) 31 Defendants appear to concede as much by invoking the parity provision in an Official Statement for their benefit elsewhere in their motion. (Mot. at 38). In any event, Defendants have no basis to contest the enforceability of the Official Statements on this motion to dismiss. 32 See, e.g., Authorizing Resolution § 1(h); see also Master Trust Indenture § 301(c) (incorporating GDB board resolutions). Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 48 of 56 39 3d at 612. Here, the Moratorium Act eliminated numerous contract rights possessed by Plaintiffs. By providing for adjustment GDB’s obligation to Plaintiffs, Sections 301(H) and 401 took Plaintiffs’ right to be free from nonconsensual impairments of GDB’s obligations as well as their right to receive principal and interest due. The Commonwealth has effectively taken these rights for its own use, as it has authorized itself to reduce or eliminate Plaintiffs’ entitlement to recoveries from GDB so that the receiver may direct part of Plaintiffs’ contractual recoveries to favored creditors. Thus, the Commonwealth has directly taken Plaintiffs’ contract rights. Franklin I, 85 F. Supp. 3d at 612. C. Plaintiffs Have Been Deprived of Just Compensation Plaintiffs alleged that they have not received just compensation for the Commonwealth’s taking of Plaintiffs’ property. This is sufficient to state a Takings Clause claim, as Defendants do not point to any means by which Plaintiff could obtain compensation, and the Moratorium Act—like the Recovery Act in Franklin—“does not provide for any means of compensation for taking [Plaintiffs’] contractual right[s].” Franklin I, 85 F. Supp. 3d at 611. Defendants assert that Plaintiffs “will not suffer any losses” because the Moratorium Act provides that “[P]laintiffs are entitled to receive no less than the amount the creditor would have been entitled to receive if the Bank had been liquidated on the date of the appointment of the receiver.” (Mot. at 35-36 (quotation omitted).) But, as shown above, the liquidation value measure imposed on Plaintiffs by the Act merely reduces the stated value of GDB’s obligation to them, without any guarantee that Plaintiffs will receive even liquidation value, while the bridge bank provisions provide GDB a means to funnel recoveries to preferred creditors notwithstanding Plaintiffs’ “entitlement” to liquidation value. See supra Part V.A.1. Regardless, Defendants are not entitled on this motion to dismiss to substantiate their Panglossian assertions for the allegations of the Amended Complaint. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 49 of 56 40 VIII. Plaintiffs’ Amended Complaint States a Dormant Commerce Clause Claim Defendants concede that Puerto Rico is “subject to the strictures of the dormant Commerce Clause” and “generally may not enact policies that discriminate against out-of-state commerce.” (Mot. at 37 (quoting Antilles Cement Corp. v. Fortuño, 670 F.3d 310, 327 (1st Cir. 2012).) A law discriminates if it benefits in-state economic interests and burdens out-of-state interests. See, e.g., Family Winemakers of Cal. v. Jenkins, 592 F.3d 1, 9 (1st Cir. 2010); Cámara de Mercadeo, Industria, y Distribucion de Alimentos v. Vázquez, 2013 WL 5652076, at *8 (D.P.R. Oct. 16, 2013). Statutes that discriminate are “virtually per se invalid” absent a showing that the discrimination “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.” Pharm. Research & Mfrs. of Am. v. Concannon, 249 F.3d 66, 79 (1st Cir. 2001) (quotation omitted); see Antilles Cement, 670 F.3d at 331. Plaintiffs allege that the challenged provisions of the Moratorium Act discriminate on their face against Plaintiffs in two distinct ways. First, Section 301(H) of the Act provides that “the receivership process shall preserve and prioritize the safety, soundness and stability of depository financial institutions and their deposits.” (emphasis added). Section 103(kk) of the Act defines “depository institutions” as “banks and cooperative savings and credit associations (state chartered credit unions) operating in Puerto Rico, and the Public Corporation for the Supervision and Insurance of Cooperatives of Puerto Rico.” (emphasis added). Second, Section 302(A) of the Act provides that “amounts owed for any reason to [Puerto Rico] depository institutions” shall be on a parity with “[a]ny unpaid balance of money held by [GDB] in its depository accounts for the credit of a depositor and any other general or senior liability of [GDB].” (emphasis added); (see Am. Compl. ¶¶ 34, 44.). Defendants do not seek somehow to justify this facial discrimination against out-of-state economic interests. Instead, Defendants argue that Plaintiffs’ claim “primarily rest[s]” on Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 50 of 56 41 Section 302(A) and that the section does not discriminate to Plaintiffs’ detriment. (Mot. at 37.) Not so. Plaintiffs specifically quote the clause of Section 301(H) that directs the receiver to prioritize Puerto Rico financial institutions in receivership (Am. Compl. ¶ 34) and allege that this section “purports to direct the receiver to prioritize claims owed to Puerto Rico financial institutions over creditors of equal rank.” (Am. Compl ¶ 44.) Defendants offer no argument that this provision does not facially favor Puerto Rico financial institutions over other GDB creditors—nor could they given the broad powers accorded to the receiver and the receiver’s ability to discriminate among creditors of the same rank. Thus, there is no basis to dismiss Plaintiffs’ dormant Commerce Clause challenge to Section 301(H). Defendants’ argument that Section 302(A) does not discriminate against Plaintiffs also fails. The crux of Defendants’ argument is that Section 302(A) does not harm Plaintiffs by moving “amounts owed for any reason to [Puerto Rico] depository institutions” into the same class as amounts owed to GDB bondholders and depositors. (Mot. at 37.) That argument defies the fundamentals of debt priority: Plaintiffs are entitled to recover on a parity with other senior, unsecured, and unsubordinated debts, including depositors. (Authorizing Resolution at 5.) Plaintiffs are injured by having a geographically favored class of creditors granted the same priority as Plaintiffs for debts owed to them “for any reason,” as prioritizing subordinated creditors will necessarily have a dilutive effect and reduce Plaintiffs’ pro rata share of GDB recoveries and unfairly discriminates against Plaintiffs.33 See LTV Steel Corp. v. Aetna Cas. & Surety Co. (In re Chateaugay Corp.), 1993 WL 563068, at *4 (Bankr. S.D.N.Y. Dec. 27, 1993) 33 Defendants’ argument that Section 302 “works no subordination” of “non-Puerto Rican depositors” because all depositors are accorded the same priority is a non sequitur. (Mot. at 38.) Defendants confuse depositors—entities that hold unsecured claims against GDB for funds on deposit—with depository institutions— Puerto Rico banks and similar entities. Without regard to legal priorities and subordination, Section 302 favors Puerto Rican depository institutions by placing debts owed to them “for any reason”—not just for funds on deposit or senior GDB bond debt—on the same level as debts owed to Plaintiffs as GDB bondholders. Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 51 of 56 42 (observing any “plan that included both subordinated and unsubordinated claims in the same class” would involve disparate treatment and would violate 11 U.S.C. § 1123(a)(4)). IX. Plaintiffs’ Amended Complaint States a Claim for Denial of the Constitutional Right of Access to the Federal Courts Sections 201(b) and (c) of the Moratorium Act purport to stay litigation in federal court, and provide for contempt proceedings and impose penalties on creditors who pursue federal court actions in violation of the “stay.” (Am. Compl. ¶ 35.) Section 301 of the Moratorium Act also purports to divest the federal courts of jurisdiction to hear disputes relating to a GDB receivership. (Am. Compl. ¶ 34.) Those provisions of the Moratorium Act offend the Supremacy Clause of the U.S. Constitution. Congress, and not the Legislative Assembly of Puerto Rico, determines the jurisdiction of the lower federal courts. U.S. Const., art. III, § 1; see, e.g., Kontrick v. Ryan, 540 U.S. 443, 453 (2004) (“Only Congress may determine a lower court’s subject matter- jurisdiction.”). Likewise, the Commonwealth has no power to stay federal litigation or to impose penalties on litigants for bringing suit in federal courts. See, e.g., Gen. Atomic Co. v. Felter, 434 U.S. 12, 16 (1977) (“[T]he right to litigate in federal court is granted by Congress and, consequently, cannot be taken away by the State.”); Riggs v. Johnson Cty., 73 U.S. 166, 195-96 (1867) (“State laws, whether general or enacted for the particular case, cannot in any manner limit or affect the operation of the process or proceedings in the Federal courts.”); see also Whitfield v. Municipality of Fajardo, 2007 WL 6894780, at *3 (D.P.R. Nov. 8, 2007). Defendants argue that the Moratorium Act “stays only claims that threaten the public fisc” (Mot. at 45 (citing Section 201(b))), and argue that the stay mirrors the Eleventh Amendment’s bar on pursuing “collections actions” against Commonwealth instrumentalities (Mot. at 45). But this very case demonstrates that the Commonwealth uses the Moratorium Act Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 52 of 56 43 stay to deprive creditors of access to federal courts for any number of claims, not just for “collections actions.” For example, Plaintiffs’ initial Complaint sought to enjoin GDB from making unlawful preferential transfers in contravention of the GDB Act. (See Dkt. 1) It did not seek to “collect” any money for Plaintiffs. Yet, GDB asserted that the Moratorium Act stay applied to Plaintiffs’ claims for injunctive relief.34 And the Commonwealth has used the stay against other creditor groups seeking to challenge other unlawful actions of Commonwealth instrumentalities.35 Because the Commonwealth has no authority to limit the jurisdiction of federal courts or punish creditors for instituting suit in federal court, Plaintiffs have adequately alleged that the Act violates Plaintiffs’ right to avail themselves of the federal courts. 34 (See Dkt. No. 32-1, Memorandum of Law in Support of the Government Development Bank for Puerto Rico’s Motion to Dismiss the Complaint, or in the Alternative, for a Stay, at 6.) 35 See Memorandum in Opposition to AMBAC’s Jurisdictional Brief at 20-22, Ambac Assurance Corp. v. P.R. Highway & Transp. Auth., No. 16-1893 (PAD) (D.P.R. June 20, 2016), ECF No. 56 (opposing suit seeking injunctive relief for breach of fiduciary duty and other claims stayed by Moratorium Act). Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 53 of 56 44 CONCLUSION For all of the foregoing reasons, Plaintiffs respectfully request that the Court (i) deny the Defendants’ Motion to Dismiss and (ii) grant Plaintiffs summary judgment on their claim that the challenged provisions of the Moratorium Act are preempted by federal law including Section 903(1) of the Bankruptcy Code and Sections 4 and 303(1) of PROMESA. RESPECTFULLY SUBMITTED, Dated: August 5, 2016 San Juan, Puerto Rico By: /s/ Harold D. Vicente Donald S. Bernstein* Benjamin S. Kaminetzky* Brian M. Resnick* David B. Toscano* Marc J. Tobak* DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000 donald.bernstein@davispolk.com ben.kaminetzky@davispolk.com brian.resnick@davispolk.com david.toscano@davispolk.com marc.tobak@davispolk.com *Admitted pro hac vice Harold D. Vicente (USDC-PR No. 117711) VICENTE & CUEBAS P.O. Box 11609 San Juan, Puerto Rico 00910 Telephone: (787) 751-8000 hvicente@vc-law.net Attorneys for Plaintiffs Brigade Leveraged Capital Structures Fund Ltd.; Brigade Distressed Value Master Fund Ltd.; Tasman Fund LP; Claren Road Credit Master Fund, Ltd.; Claren Road Credit Opportunities Master Fund, Ltd.; Fore Multi Strategy Master Fund, Ltd.; Sola Ltd; Ultra Master Ltd; and Solus Opportunities Fund 5 LP Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 54 of 56 45 By: /s/ Harold D. Vicente Jayne S. Robinson* K. Ann McDonald* Brett G. Canna* ROBINSON MCDONALD & CANNA LLP 61 Broadway, Suite 1415 New York, New York 10006 Tel: (212) 953-3400 Fax: (212) 953-3690 jrobinson@rmc-llp.com amcdonald@rmc-llp.com bcanna@rmc-llp.com *Admitted pro hac vice Harold D. Vicente (USDC-PR No. 117711) VICENTE & CUEBAS P.O. Box 11609 San Juan, Puerto Rico 00910 Telephone: (787) 751-8000 hvicente@vc-law.net Attorneys for Plaintiffs Fir Tree Value Master Fund, L.P.; Fir Tree Capital Opportunity Master Fund, L.P.; Fir Tree Special Opportunities Fund IV, LP; and Fir Tree Special Opportunities Fund V, LP Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 55 of 56 46 CERTIFICATE OF ELECTRONIC FILING AND SERVICE I hereby certify that on August 5, 2016, I caused to be electronically filed the Plaintiffs’ Response to Defendants’ Motion to Dismiss with the Clerk of Court using the CM/ECF system, which will send notification of such filing to all counsel of record. Dated: August 5, 2016 San Juan, Puerto Rico /s/ Harold D. Vicente Harold D. Vicente (USDC-PR No. 117711) VICENTE & CUEBAS P.O. Box 11609 San Juan, Puerto Rico 00910 Telephone: (787) 751-8000 hvicente@vc-law.net Case 3:16-cv-01610-FAB Document 91 Filed 08/05/16 Page 56 of 56 1 IN THE UNITED STATES DISTRICT COURT DISTRICT OF PUERTO RICO Brigade Leveraged Capital Structures Fund Ltd., Brigade Distressed Value Master Fund Ltd., Tasman Fund LP, Claren Road Credit Master Fund, Ltd., Claren Road Credit Opportunities Master Fund, Ltd., Fir Tree Value Master Fund, L.P., Fir Tree Capital Opportunity Master Fund, L.P., Fir Tree Special Opportunities Fund IV, LP, Fir Tree Special Opportunities Fund V, LP, Fore Multi Strategy Master Fund, Ltd., Sola Ltd, Ultra Master Ltd, Solus Opportunities Fund 5 LP, Plaintiffs, - against - Alejandro J. García Padilla, in his official capacity as Governor of Puerto Rico; Juan C. Zaragoza Gómez, in his official capacity as Secretary of the Puerto Rico Department of the Treasury, and John Doe, in his/her official capacity as receiver for the Government Development Bank for Puerto Rico, Defendants. CIVIL NO. 16-01610 (FAB) DECLARATION OF BENJAMIN S. KAMINETZKY IN SUPPORT OF PLAINTIFFS’ CROSS-MOTION FOR SUMMARY JUDGMENT 1. I am an attorney and a partner in the law firm of Davis Polk & Wardwell LLP, counsel, along with Vicente & Cuebas, for plaintiffs Brigade Leveraged Capital Structures Fund Ltd., Brigade Distressed Value Master Fund Ltd., Tasman Fund LP, Claren Road Credit Master Fund, Ltd., Claren Road Credit Opportunities Master Fund, Ltd., Fore Multi Strategy Master Fund, Ltd., Sola Ltd, Ultra Master Ltd, and Solus Opportunities Fund 5 LP. I submit this declaration in support of Plaintiffs’ Cross-Motion for Summary Judgment. Case 3:16-cv-01610-FAB Document 91-1 Filed 08/05/16 Page 1 of 2 2 2. Attached hereto is a true and correct copy of each of the following documents: Exhibit A: Government Development Bank for Puerto Rico, Senior Notes, 2010 Series A, Certificate as to Resolution No. EC-2010-31 (July 29, 2010). Exhibit B: Certified Translation of Juan Zaragoza, ¿Y los chavos dónde están? [And Where did the Cents Go?], El Nuevo Dia, June 19, 2016. Exhibit C: Bernier Proposes Receivership for Puerto Rico’s Government Development Bank, Reorg Research, July 8, 2016. Exhibit D: Puerto Rico’s Bernier Favors Public Negotiations, Liquidating GDB in a Rapid Restructuring, Debtwire, July 28, 2016. Executed on August 5, 2016 in New York, New York By: /s/ Benjamin S. Kaminetzky Benjamin S. Kaminetzky Case 3:16-cv-01610-FAB Document 91-1 Filed 08/05/16 Page 2 of 2 EXHIBIT A Case 3:16-cv-01610-FAB Document 91-2 Filed 08/05/16 Page 1 of 9 1 CERTIFICATE AS TO RESOLUTION NO. EC-2010-31 I, WANDA MARCIAL, Assistant Secretary of the Board of Directors of Government Development Bank for Puerto Rico, DO HEREBY CERTIFY that attached hereto is a true and correct copy of Resolution Number EC-2010-31 (the "Resolution"), which was duly adopted by the Executive Committee of the Board of Directors of Government Development Bank for Puerto Rico at a meeting duly called and held on July 23, 2010, at which meeting a quorum was present and acting throughout. Said Resolution has not been repealed, revoked, rescinded, annulled or amended, and is in full force and effect as of the date hereof. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of Government Development Bank for Puerto Rico, this 29th day of July, 2010. (SEAL) WANDA Assistant Case 3:16-cv-01610-FAB Document 91-2 Filed 08/05/16 Page 2 of 9 Board of Directors CERTIFICATE AS TO RESOLUTION GDB GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO COMMONWB,.LTH OF ru&RTO ll.ICO PO Box42001 San Juan, PR 00940-2001 Telephone (787) 721·3360 FacsimRe (787) 726-6001 I, WANDA I. MARCIAL-TORRES, Assistant Secretary of the Executive Committee of the Board of Directors of Government Development Bank for Puerto Rico, DO HEREBY CERTIFY that attached hereto is a true and correct copy of Resolution EC-2010-31 which was duly adopted by the Executive Committee of the Board of Directors of said Bank at its meeting duly called and held on July 23, 2010, at which a quorum was present and acting throughout. Said Resolution has not been in any way repealed, revoked, rescinded or amended, and is in full force and effect on the date hereof. RESOLUTION EC-2010-31 AUTHORIZING THE ISSUANCE OF ONE BILLION FOUR HUNDRED FORTY-EIGHT MILLION SEVEN HUNDRED FORTY-ONE THOUSAND DOLLARS ($1,448,741,000.00) GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO SENIOR NOTES, 2010 SERIES A; AUTHORIZING TIIE PRINCIPAL AMOUNTS, THE MATURITY DATES, THE. INTEREST RATES AND OTHER DETAILS OF SUCH NOTES; AUTHORIZING THE EXECUTION AND DIRECTING THE AUTHENTICATION AND DELIVERY OF SAID NOTES; RATIFYING THE DISTRIBUTION OF TIIE PRELIMINARY OFFICIAL STATEMENT IN CONNECTION WITH SAID NOTES; AUTHORIZING THE PREPARATION AND DELIVERY THE OFFICIAL STATEMENT IN CONNECTION WITH SAID NOTES; A WARDING SAID NOTES AND AUTHORIZING THE EXECUTION AND DELIVERY OF A NOTE' PURCHASE AGREEMENT, A SUPPLEMENTAL INDENTURE, A CONTINUING DISCLOSURE AGREEMENT, AND ANY AGREEMENT WITH THE DEPOSITORY TRUST COMP ANY WITH RESPECT TO THE NOTES; AND PROVIDING FOR INCIDENTAL ACTIONS. Case 3:16-cv-01610-FAB Document 91-2 Filed 08/05/16 Page 3 of 9 Resolution EC-2010-31 Page2 WHEREAS, by Act No. 17 of the Legislature of Puerto Rico, approved September 23, 1948, Government Development Bank for Puerto Rico (the HBank") was duly created as a corporation and a governmental instrumentality of the Commonwealth of Puerto Rico for the purpose of aiding the Commonwealth Government in the perfonnance of its fiscal duties and more effectively to carry out its governm~ntal responsibilities to develop the economy of Puerto Rico; WHEREAS, by virtue of said Act-No. 17, as amended (the "Enabling Act"), the Bank is authorized and empowered, among other things: (a) To borrow money and contract debts for its corporate purposes upon such terms and conditions as the. Bank may from time to time determine, with or without security, to dispose of its obligations evidencing such borrowing, to make, execute and deliver trust indentures and other agreements with respect to any such borrowing, contr&cting of debt, issuance of bonds, notes, debentures or other obligations, and by the authority of the Government of Puerto Rico, to issue its bonds, notes, debentures or otl1er obligations in such form, secured in such manner, and subject to such terms of redemption with or without premium, and to sell the same at public or private sale for such price or prices, all as may be determined by its Board of Directors; and (b) To exercise such other corporate powers, not inconsistent with the Enabling Act, as are conferred upon corporations by the laws of Puerto Rico and to exercise all its powers within and without Puerto Rico to the same extent as natural persons might or could do; WHEREAS, the Enabling Act provides that no amendment to said Act or to any other law of Puerto Rico shall impair any obligation or commitment of the Bank; WHEREAS, the Executive Committee of the Board of Directors of the Bank has determined that it is in the best interest of the Ban1c to issue a new series of senior notes in an aggregate principal amount of One Billion Four Hw1dred Forty-Eight Million Seven Hundred Forty-One Thousand Dollars ($1,448,741,000.00); WHEREAS, the Bank has received an offer from UBS Financial Services Incorporated of Puerto Rico, acting 011 behalf of itself and the other underwriters (collectively, the "Principal Underwriters"), in the form of a 1').ote purchase agreement (the "Purchase Agreement") presented at this meeting, to purchase the Notes (as defined below) at the purchase price equal to the aggregate purchase price to the public shown, or derived from information shown, on the inside cover of the Official Statement (as defined in the Purcllase Agreement) less underwriters' discount of $15,574,316.47; 26924 Case 3:16-cv-01610-FAB Document 91-2 Filed 08/05/16 Page 4 of 9 Resolution EC-2010..Sl Page3 WHEREAS, the Executive Committee of the Board of Directors of the Bank has detennined that it is in the best interest of the Bank to accept the off er set forth in the Purchase Agreement; WHEREAS, in connection with the issuance of the Notes authorized by this Resolution, the Bank shall enter into a continuing disclosure agreement (the "Disclosure Agreement") to comply with the requirements of Rule 15c2-12 under the. Securities Exchange Act of 1934, as amended ("Rule 15c2-12"); NOW, THEREFORE, BE IT RESOLVED by the Executive Committee of the Board of Directors of the Bank: Section 1. Issuance of Notes: Te1ms of Notes. The issuance of the One Billion Four Hundred Forty-Eight Million Seven Hundred Forty-One Thousand Dollars ($1,448,741,000) Government Development Bank for Puerto Rico Senior Notes, 2010 Series A (the ''Notes") is hereby authorized as provided herein. The Notes shall be issued under the trust indentm:e dated February 17, 2006, as supplemented by an eighth supplemental indenture, to be dated the date of delivery of the Notes (collectively, the "Indenture"), each between the Bank and Banco Popular de Puerto Rico, as trustee (the "Trustee"), which Indenture provides for the issuance of securities in series. The terms of the Notes shall be the following: 26924 (a) Designation of series: Senior Notes, 2010 Series A. (b) Date: Each Note shall be dated its date of delivery. (c) Principal amoW1ts, maturity dates, interest rates and prices: The price of the Notes shall be 100% of their stated principal amount and shall bear interest to the_ maturity thereof at the rates set forth below, and shall be stated to mature in annual installments on the first day of August in the years and in the amounts, respectively, as follows: Year of Maturity 2011 2012 2014 2016 2018 2020 Principal Amount($) 28,316,000 107,338,000 243,866,000 489,926,000 145,593,000 433,702,000 Interest Rate(%) 2.00 3.00 4.25 5.00 5.25 5.50 (d) Interest Payment Dates: The first day of each month, commencing September 1, 2010. Case 3:16-cv-01610-FAB Document 91-2 Filed 08/05/16 Page 5 of 9 Resolution EC-2010-31 Page4 (e) Place and Time of Payment of Principal and Interest: Office of the Bank or its agent (including the Trustee) in San Juan> Puerto Rico . .Interest on the Notes will be paid in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public or private debts. The Bank shall pay principal and interest to the T1ustee not later than one Business Day prior to its due date in immediately available funds. (f) Denominations: $5,000 principal amount and ariy integral multiple of $1,000 in excess thereof. (g) Redemption Provisions: The Notes may be redeemed at the option of the Bank, in whole or in part, from any available funds, on August 1, 2011 and on any date thereafter, subject to at least 20 days prior notice, at a redemption price equal to the principal amount of the Notes to be redeemed plus accrued interest to the redemption date, without premium, and in accordance with the terms set forth in the Notes and the Indenture. · (h) Additional Provisions: The principal of and interest on the Notes shall be payable from any available funds of the Bank on a parity with all other general unsecured and unsubordinated obligations of the Bank for borrowed money, or for unsecured and unsubordinated Bank guarantees of obligations of others for borrowed money, now or hereafter outstanding. Both the principal of and the interest on the Notes shall be payable in immediately available funds in any coin or currency of the United States of America which, at the respective dates of payment thereof, is legaJ tender for the payment of public and private debts. Certain additional terms of the Notes are set forth in the form of Note attached hereto as Exhibit A. (i) Aggregate Principal Amount of Notes: One Billion Four Hundred Forty-Eight Million Seven Hundred Forty-One Thousand Dollars ($1,448,741,000.00). Section 2. Form of Notes: Execution of Notes. The Notes shall be in the form attached hereto as Exhibit A. Each of the President or any Executive or Senior Vice President of the Bank (individually, an "Authorized Officer'' and collectively, the "Authorized Officers"). acting indivi.dually, is hereby authorized, in the name and on behalf of the Bank, to execute either by manual or facsimile signature, seal an~ deliver to the Trustee, in the manner and form provided in the Indenture, the Notes (and, in addition, Notes to replace lost, stolen, mutilated or destroyed Notes, all as provided in the Indenture) in substantially such fonn and with such changes therein and modifications thereof (consistent with this Resolution) as such Authorized Officer shall deem advisable, as conclusively evidenced by such Authorized Officer's execution and delivery thereof. Section 3. Approval of Eighth Supplemental Indenture. The form, terms and provisions of the eighth supplemental indenture relating to the Notes (the "Eighth Supplemental Indenture") are hereby approved. Each of the Authorized Officers of the Bank, acting individually, is hereby 26924 Case 3:16-cv-01610-FAB Document 91-2 Filed 08/05/16 Page 6 of 9 Resolution EC-2010-31 Pages authorized to execute and deliver the Eighth Supplemental fudenture, in the name and on behalf of the Bank, in substantially the fonn attached hereto as Exhibit B, with such changes therein and moclifications thereof as such Authorized Officer shall deem advisable, as conclusively evidenced by such Authorized Officer's execution and delivery thereof. Section 4. Issuance of Notes in Book-Entry Form. The Notes shall be eligible for book- entry delivery and settlement through 111e Depository Trust Company, New York, New York ("DTC") facilities. Each of the Authorized Officers of the Bank, acting inclividuaJly, is hereby authorized, in the name and on behalf of the Bank, to execute and deliver (if necessary) to DTC, which will act as securities depository for the Notes, an issuer letter of .representations (the "DTC Agreement") substantially in the form attached hereto as Exhibit C, with such changes, insertions and omissions as may be approved by such Authorized Officer, such approval to be conclusively evidenced by bis execution thereof. Section 5. Ratification of Preliminary Official Statement and Approval of Official Statement. The Preliminary Official Statement of the Bank, dated July 16, 2010, relating to the Notes, in the fonn presented at this meeting is hereby approved and ratified, and the distribution of said Preliminary Official Statement to prospective purchasers and other investors by the Principal Underwriters is hereby in all respects ratified, confirmed and approved. The Preliminary Official Statement was deemed final by the Bank as of the date thereof in accordance with paragraph (b )(1) of Rule I 5c2-12, except for the' information not required to be included therein under said Rule. The Official Statement, dated July 23, 2010, re1ating to the Notes is hereby approved in the fonn presented at this meeting with such appropriate changes, insertions and omissions as may be approved by any Authorized Officer of the Bank, his signing of the Official Statement to be conclusive evidence of his approval of any such changes, insertions and omissions, and the Principal Underwriters are hereby authorized to use said Official Statement in connection with the public offering and sale of the Notes. Section 6. Award of Notes. The offer submitted by the Principal Underwriters in the form of the Purchase Agreement, offering to purchase the Notes at a purchase price equal to the aggregate purchase price to the public shown, or derived from information shown, on the inside cover of the Official Statement less underwriters' discount of $15,574,316.47, and upon the terms and conditions set forth in the Purchase Agreement, is hereby accepted, and the Notes are hereby awarded to the Principal Underwriters. The Authorized Officers of the Bank, acting individually, are hereby authorized and dfrected to execute and deliver the Purchase Agreement in the form presented at this meeting, with such appropriate changes, insertions and omissions as may be approved by any such Authorized Officer, his execution of the Purchase Agreement to be conclusive evidence of his approval of any such changes, insertions or omissions. Section 7. Direction to Authenticate and Deliver Notes. The Notes, upon their execution in the fonn and manner provided in the Indenture and this Resolution shall be delivered to the Trustee who is hereby authorized and directed to authenticate and deliver the Notes to or upon the order of the Principal Underwriters in accordance with the provisions of Section 303 of the Indenture. 26924 Case 3:16-cv-01610-FAB Document 91-2 Filed 08/05/16 Page 7 of 9 Resolution BC-2010-31 Page6 Section 8. Printing of Legal Opinion on Notes. In the event that the Notes shall no longer be held by a securities depository, there may be printed on the reverse of ea.ch Note the legal opinion of O'Neill & Borges, Bond Counsel, respecting the validity of the Notes; and there may also be printed on the reverse of each Note, immediately following such legal opinion, a certi;ficate, signed with the facsimile signature of any Authorized Officer of the Bank, substantially as follows: "I HEREBY CERTIFY that the foregoing is a true and correct copy of the legal opinion upon the Notes therein described which was manually signed by O'Neill & Borges, San Juan, Puerto Rico, and was dated the date of delivery of and payment for said Notes. [Facsimile signature] [President] [Executive or Senior Vice President] Government Development Bank for Puerto Rico." Section 9. Continuing Disclosure. The form of the Disclosure Agreement relating to the Notes, to be executed by the Bank and the Trustee, presented to this meeting is hereby approved, and the Authorized Officers of the Baille, acting individually, are hereby authorized and directed, in tbe name and on behalf of the Bank, to execute and deliver the Disclosure Agreement substantially in the fonn presented to this meeting and attached hereto as Exhibit D, with such appropriate changes, insertions and on~issions as may be approved by any such Authorized Officer, his execution of the Disclosure Agreement to be conclusive evidence of his approval of any such changes, insertions and omission~. Section 1 O. Fwther Actions. The Authorized Officers and other officers, employf?es and agents of the Bank are, and each of them hereby is, authorized and dh·ected, in the name and on behalf of the Bank, to do or cause to be done any and aU things required to be done by the Bank under the terms and provisions of the Notes, the Indenture, the Eighth Supplemental Indenture, the Purchase Agreement, the DTC Agreement, and the Disclosure Agreement. and to take all such further actions and execute and deliver such further instruments and docwnents in the name and on behalf of the Bank, as such Autbo1ized Officers, other officers, employees and agents determine to be necessary or appropriate in order to carry out and give effect to the provisions of such documents, any other documents and agreements authorized to be executed hereby, apd this Resolution; and all actions taken by the foregoing persons in connection with the txansactions contemplated by this Resolution are hereby ratified, approved and confinned. Section 11. Effective Date. The provisions of this Resolution shall become effective immediately upon its adoption. 26924 Case 3:16-cv-01610-FAB Document 91-2 Filed 08/05/16 Page 8 of 9 Resolution EC-2010-31 Page'l IN WITNESS WHEREOF I SET my hand and the corporate seal of Government I I. ~•s NT SEC~~ (SEAL) Case 3:16-cv-01610-FAB Document 91-2 Filed 08/05/16 Page 9 of 9 EXHIBIT B Case 3:16-cv-01610-FAB Document 91-3 Filed 08/05/16 Page 1 of 4 Case 3:16-cv-01610-FAB Document 91-3 Filed 08/05/16 Page 2 of 4 http://www.elnuevodia.com/opinion/columnas/yloschavosdondeestan-columna-2211901/ El Nuevo Día INVITED SPEAKER by Juan Zaragoza Sunday, June 19, 2016 And where did the cents go? “It’s not that I’m afraid of death. I just don’t want to be there when it happens.” — WOODY ALLEN If Woody Allen were a Puerto Rican he would’ve said: It’s not that I’m afraid of taking a loan. I just don’t want to be there when they come to collect. With this as a restriction, I establish the premise upon which this column is based. One of the greatest mysteries in the modern history of this country, which is not lacking in mysteries, is where the money, the cash, the cents went that once upon a time gushed like water out of a cracked pipe? Where did all that money go that for decades was used and misused without restraint for works and un-works and to construct and deconstruct? The answer to the mystery rests on the extremities of an optical illusion, fed by a mirage carefully constructed by acts of fiscal irresponsibility. But above all it is based on the universal law that establishes that if you borrow indefinitely without having to repay, the day will come when you feel like you’ve never borrowed and that there was never anything wrong with spending more than you had. If between tax year 2000 and tax year 2015 the Government of Puerto Rico spent $24 billion more than it collected or received from various sources, where did the money come from? The answer is all too simple: it was obtained by taking repeated loans that increased public debt from approximately $24.2 billion to $69.2 billion between 2000 and 2015. It was also obtained by refinancing whenever each period was expiring, thereby transferring the debt to the pockets of future generations. If you earn $30,000 per year, take a loan of $120,000 and only make provision for debt repayment of approximately $120 per month, what will your finances look like? And that is precisely what we did over several decades of fiscal indiscipline: we borrowed nearly $70 billion, in other words a multiple of what enters the bank account each year, while only allocating 5% of that revenue to payment of the debt. This was based on another universal principle: “those who come later pick up the pieces.” And guess what? Those coming behind are us. In addition to having its bondholders organized in the manner of a cooperative, our government relied for decades on a wealthy relative, Uncle Moneybags, who always got it out of scrapes at the last minute. This was none other than the Banco Gubernamental de Fomento [Government Development Bank — BGF], which like a financial alchemist distorted its original purpose and went about converting deposits made in good faith and in the expectation of repayment into lines of credit and loans for state and municipal deficits without any source of repayment. Today the Treasury dare not ask so much as a favor from that source because instead of securing a loan from the BGF it runs the risk of having to lend it money in order to subsidize that operation. Case 3:16-cv-01610-FAB Document 91-3 Filed 08/05/16 Page 3 of 4 Finally, in view of the monthly fluctuation in income (as is the case with anyone who works independently), the Treasury has had recourse, in the way of a credit card, to short-term loans or TRANS that are taken at the beginning of the year and paid at year-end. For decades these fluctuated between $500 million and $800 million until 2006 when discretion was replaced by the IVU [Impuesto sobre Ventas y Uso — Sales Tax] and what was collected from that point onward was diverted into a fund to pay off the debt. Thereafter, the need for cash to start off the year increased to approximately $1.1 billion. Today we don’t even have that, being required to have recourse to other government entities to lend us $400 million to start off the year. Consequently, we’re short of cash from the start of the year. The closing of the cooperative, the death of Uncle Moneybags and the cancellation of the credit card has been a progressive process over the past two years. This has left the Government not only with a cash deficit from the first of the year, but also exclusively reliant on what is generated each month. That’s why it has had recourse to financing itself from those who can least afford it, the suppliers and contributors awaiting repayment. This being the case, the tax year that began on July 1, 2015, opened with debts owed to suppliers amounting to $506 million and repayments due amounting to approximately $295 million, and all this will snowball next year. The consequence of the years when we were children of irresponsibility is that we find ourselves with a critical liquidity problem that cannot be resolved with a balanced budget. The laggardly discipline of operating within budget is not sufficient to return the water that has been drawn from the well. Nor can it be resolved by resuscitating Uncle Moneybags, changing cooperatives or taking out a new credit card. Unlike the lost cash, the solution to the problem is not to be found along mysterious paths. It is to be secured by following two routes that like the strings on a guitar run along parallel tracks but vibrate to the same melody. These are fiscal discipline, duly vaccinated against the virus of politicking, and economic development, vaccinated in its turn against the virus of egoism. It goes without saying that this isn’t possible if those who lend us money keep taking away the little we have to keep operating, or if someone comes round to our house to tell us how we should spend what little we have. Case 3:16-cv-01610-FAB Document 91-3 Filed 08/05/16 Page 4 of 4 EXHIBIT C Case 3:16-cv-01610-FAB Document 91-4 Filed 08/05/16 Page 1 of 3 Case 3:16-cv-01610-FAB Document 91-4 Filed 08/05/16 Page 2 of 3 Case 3:16-cv-01610-FAB Document 91-4 Filed 08/05/16 Page 3 of 3 EXHIBIT D Case 3:16-cv-01610-FAB Document 91-5 Filed 08/05/16 Page 1 of 5 Share article Puerto Rico’s Bernier favors public negotiations, liquidating GDB in a rapid restructuring 28 Jul 2016, 16:09 EDT Proprietary In an exclusive interview with Debtwire Municipals, David Bernier, Popular Democratic Party president and gubernatorial candidate, said that a quick restructuring of Puerto Rico’s USD 105bn debt complex and a jump-start to the island’s economy will be his first orders of business if elected. Bernier and Ricardo Rossello, the New Progressive Party candidate, are currently neck-to-neck in their race to become Puerto Rico’s next governor. “Delaying the [commonwealth audited] financial reports lacerated investors’ confidence. There has to be absolute transparency. The negotiation process has to begin with a clear analysis of where the government’s finances stand,” Bernier told Debtwire Municipals. “If there is good faith, a deal can be reached in a short period of time.” Bernier has called on party lawmakers to include a USD 1.1bn influx into the ailing Employee Retirement and Teachers Retirement systems in the FY17 budget. “My commitment is to reaching a good-faith deal based on transparency and the acknowledgement the government has to fulfill its responsibilities,” Bernier said. “I believe a public negotiation of the island’s debt would be very positive because everyone would be clear on the repercussions of doing one thing or another.” Neither Cleary Gottlieb, nor Millstein & Co. will head the restructuring if Bernier becomes governor. “I am not considering them,” he said. Bernier has hired Public Resource Advisory Group to advise a local task force he appointed to develop a five-year economic growth plan for the island, which the candidate will present in September. “Every proposal we make in our governing plan will pass through the critical eye of our task force on economic development,” said Bernier. “I will have a completely new cabinet,” he said, when asked whether there would be any holdovers from Governor Alejandro Garcia Padilla’s financial team. My Account Help Privacy Policy Disclaimer Terms & Conditions© 2016 MERGERMARKET GROUP. ALL RIGHTS RESERVED. Case 3:16-cv-01610-FAB Document 91-5 Filed 08/05/16 Page 2 of 5 Bernier said he was not in favor of the governor’s decision to default on USD 780m in general obligation debt service on 1 July, adding he supports continuing to pay interest to island creditors in exchange for a five-year moratorium on principal payments as part of any restructuring. Bernier would systematically invest these savings in the economy and cut government expenses to begin to address Puerto Rico’s fiscal problems. Haircuts, however, are a must, given the island’s unique circumstances amongst debt-ridden municipalities throughout the United States: “Puerto Rico faces a unique reality due to its level of poverty, level of violence, very low level of labor participation, insular reality and the fact that the island’s private sector is very small. All this must be considered when deciding what actions to take,” Bernier said. Both the US Treasury and US Congress have acknowledged there must be haircuts to bondholders, otherwise they would not have lobbied for and passed The Puerto Rico Oversight and Management, and Economic Stability Act (PROMESA), Bernier said. “I initially opposed the fiscal control board because I did not think it was necessary and did not like how it goes against the island’s democratic structure, but now that it is a reality, we will work in a coordinated manner with the members of the board,” Bernier said. Law 154 and CFCs The key to quickly solving Puerto Rico’s debt crisis is to jumpstart the economy by supporting high-end manufacturing, which accounts for 54% of the island’s GDP. The best way is to extend the US Treasury’s tax credit on Law 154 tax to multinational corporations and to discount the repatriation of funds under the Controlled Foreign Corporation (CFC) section of US Tax Code, Bernier said. “By giving certainty to the economy, you strengthen it. If they [US Congress and Treasury] truly want to help us turn around the economy in a short time, implementing these changes is the best way to do it,” he said. The Treasury’s tax credit on Law 154, which accounts for USD 2bn in annual revenue, is set to expire at the end of the 2017 calendar year. The discount on repatriation of multinational corporation funds in exchange for parking these monies for a set period in Puerto Rico mimics Section 936. The 10-year phase-out and disappearance of this tax credit in 2005 resulted in the loss of more than 84,900 manufacturing jobs and USD 30bn in deposits in the island’s financial sector. This economic impact was multiplied because each manufacturing job generated 3.3 additional jobs on the island, according to the Puerto Rico Manufacturing Association (PRMA). “I agree that our economy can’t be founded on tax breaks, but if we are looking to quickly right Case 3:16-cv-01610-FAB Document 91-5 Filed 08/05/16 Page 3 of 5 our economy, we have to look to our strengths. These measures would have a significant impact and create good, stable jobs,” Bernier said. Then the commonwealth can attract foreign investment in other areas, such as island’s aerospace industry. Bernier will meet with the Congressional Task Force on Economic Growth in Puerto Rico, which Senate Finance Committee Chairman Orrin Hatch (R) presides over, to discuss these matters.. Other members are: Republican Senator Marco Rubio, Republican House Reps. Tom MacArthur and Sean Duffy, Democratic Senators Robert Menendez and Bill Nelson, Democratic House Rep. Nydia Velazquez, and Washington Resident Commissioner Pedro Pierluisi. “This task force will be more important to Puerto Rico than the fiscal control board,” Bernier said. Liquidate the GDB The Government Development Bank for Puerto Rico (GDB) should be liquidated and its USD 5bn in debt paid to kick off Puerto Rico’s debt restructuring, said Bernier. “We could continue voluntary negotiations with remaining creditors under a framework in which the weight of the debt on the economy already has been reduced significantly. It is of the utmost importance the GDB’s assets be liquidated under the best market conditions to avoid cuts to local and outside creditors’ principal,” Bernier said. With the announced resignation of GDB President and Chairwoman Melba Acosta on 31 July and the vacancy of most of its board, the GDB is not operational. As such, a receiver should be appointed to review the GDB’s assets and liabilities as well as protect creditors’ interests, said Bernier. The receiver will determine what GDB assets can be sold to cover the bank’s debt. Creditors would be paid off under a point-of-entry model. This is similar to what the G25, an ad hoc group of the island’s credit unions, have proposed for Puerto Rico’s overall restructuring. Under this model, creditors would receive what they invested to acquire GDB debt in addition to a set amount of profit for those who did not buy at par. The GDB’s fiduciary responsibilities and employees can easily be transferred to the Puerto Rico Fiscal Agency and Financial Advisory Authority (PRFAFAA), Bernier said. A USD 126.8m tranche of Series H 2011 GDB senior notes, sold at par with a 5.2% coupon maturing in 2026, last traded in odd lots at 24.5 cents to yield 27.271%, according to Electronic Municipal Market Access. Moody’s Investors Service rated the issue at Ca as of 1 July this year, while Standrad & Poor’s gave it a CC rating as of 14 July last year. by Xavira Neggers Crescioni in San Juan Case 3:16-cv-01610-FAB Document 91-5 Filed 08/05/16 Page 4 of 5 View deal connections View company connections Tax-Backed Puerto Rico Case 3:16-cv-01610-FAB Document 91-5 Filed 08/05/16 Page 5 of 5 IN THE UNITED STATES DISTRICT COURT DISTRICT OF PUERTO RICO Brigade Leveraged Capital Structures Fund Ltd., Brigade Distressed Value Master Fund Ltd., Tasman Fund LP, Claren Road Credit Master Fund, Ltd., Claren Road Credit Opportunities Master Fund, Ltd., Fir Tree Value Master Fund, L.P., Fir Tree Capital Opportunity Master Fund, L.P., Fir Tree Special Opportunities Fund IV, LP, Fir Tree Special Opportunities Fund V, LP, Fore Multi Strategy Master Fund, Ltd., Sola Ltd, Ultra Master Ltd, Solus Opportunities Fund 5 LP, Plaintiffs, - against - Alejandro J. García Padilla, in his official capacity as Governor of Puerto Rico; Juan C. Zaragoza Gómez, in his official capacity as Secretary of the Puerto Rico Department of the Treasury, and John Doe, in his/her official capacity as receiver for the Government Development Bank for Puerto Rico, Defendants. CIVIL NO. 16-01610 (FAB) DECLARATION OF MARC J. TOBAK IN SUPPORT OF PLAINTIFFS’ CROSS-MOTION FOR SUMMARY JUDGMENT 1. I am an attorney and associate of the law firm of Davis Polk & Wardwell LLP (“Davis Polk”), counsel, along with Vicente & Cuebas, for plaintiffs Brigade Leveraged Capital Structures Fund Ltd., Brigade Distressed Value Master Fund Ltd., Tasman Fund LP, Claren Road Credit Master Fund, Ltd., Claren Road Credit Opportunities Master Fund, Ltd., Fore Multi Strategy Master Fund, Ltd., Sola Ltd, Ultra Master Ltd, and Solus Opportunities Fund 5 LP. I submit this declaration in support of Plaintiffs’ Cross-Motion for Summary Judgment. Case 3:16-cv-01610-FAB Document 91-6 Filed 08/05/16 Page 1 of 2 2 2. Davis Polk receives periodic reports of Plaintiffs’ holdings of debt issued by the Government Development Bank for Puerto Rico (“GDB”). 3. Based on my review of the reports provided by Plaintiffs, Plaintiffs held in the aggregate more than $750,000,000 of GDB Senior Notes of the following series, as of March 31, 2016: • GDB Senior Notes 2006 Series B • GDB Senior Notes 2010 Series A • GDB Senior Notes 2010 Series B • GDB Senior Notes 2010 Series C • GDB Senior Notes 2010 Series D • GDB Senior Notes 2011 Series B • GDB Senior Notes 2011 Series H • GDB Senior Notes 2011 Series I • GDB Senior Notes 2012 Series A 4. Based on my review of the reports provided by Plaintiffs, Plaintiffs held in the aggregate more than $750,000,000 of GDB Senior Notes of the series identified in Paragraph 3 above, as of July 31, 2016. I declare under penalty of perjury that the foregoing is true and correct. Executed on August 5, 2016 in New York, New York By: /s/ Marc J. Tobak Marc J. Tobak Case 3:16-cv-01610-FAB Document 91-6 Filed 08/05/16 Page 2 of 2 IN THE UNITED STATES DISTRICT COURT DISTRICT OF PUERTO RICO Brigade Leveraged Capital Structures Fund Ltd., Brigade Distressed Value Master Fund Ltd., Tasman Fund LP, Claren Road Credit Master Fund, Ltd., Claren Road Credit Opportunities Master Fund, Ltd., Fir Tree Value Master Fund, L.P., Fir Tree Capital Opportunity Master Fund, L.P., Fir Tree Special Opportunities Fund IV, LP, Fir Tree Special Opportunities Fund V, LP, Fore Multi Strategy Master Fund, Ltd., Sola Ltd, Ultra Master Ltd, Solus Opportunities Fund 5 LP, Plaintiffs, - against - Alejandro J. García Padilla, in his official capacity as Governor of Puerto Rico; Juan C. Zaragoza Gómez, in his official capacity as Secretary of the Puerto Rico Department of the Treasury, and John Doe, in his/her official capacity as receiver for the Government Development Bank for Puerto Rico, Defendants. CIVIL NO. 16-01610 (FAB) PLAINTIFFS’ STATEMENT OF UNDISPUTED MATERIAL FACTS IN SUPPORT OF CROSS-MOTION FOR SUMMARY JUDGMENT TO THE HONORABLE COURT: COME NOW Plaintiffs, by and through their undersigned counsel, and, pursuant to Local Civil Rules 56(b) and (e), very respectfully submit this Statement of Undisputed Material Facts in Support of their Cross-Motion for Summary Judgment: 1. Plaintiffs collectively hold more than $750,000,000 of outstanding bonds issued by the Government Development Bank for Puerto Rico (“GDB”) of the following series: GDB Senior Notes 2006 Series B; GDB Senior Notes, 2010 Series A; GDB Senior Notes 2010 Case 3:16-cv-01610-FAB Document 91-7 Filed 08/05/16 Page 1 of 3 2 Series B; GDB Senior Notes 2010 Series C; GDB Senior Notes 2010 Series D; GDB Senior Notes 2011 Series B; GDB Senior Notes 2011 Series H; GDB Senior Notes 2011 Series I; and GDB Senior Notes 2012 Series A. (Tobak Decl. ¶¶ 3,4.) 2. The terms of the GDB bonds held by Plaintiffs are set forth in documents including, but not limited to, the following: a. GDB’s organic act and charter (the “GDB Act”), 7 L.P.R.A. §§ 551 et seq.; b. A Master Trust Indenture with Banco Popular de Puerto Rico, as Trustee (succeeded by Wilmington Trust Company, as Successor Trustee), dated February 17, 2006 (Am. Compl., Ex. D); and c. For each series of bonds, a resolution of GDB’s Board of Directors authorizing the issuance of and specifying the terms of that series of bonds (e.g., Kaminetzky Decl., Ex. A). 3. The Commonwealth of Puerto Rico enacted the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (the “Moratorium Act”) on April 6, 2016. (Am. Compl., Ex. A.) 4. On May 5, 2016, certain provisions of the Moratorium Act were amended by Law 40 of 2016. (Am. Compl., Ex. C.) 5. On June 30, 2016, President Barack Obama signed into law the Puerto Rico Oversight, Management, and Economic Stability Act, Pub. L. 114-187, 130 Stat. 549 (2016). Case 3:16-cv-01610-FAB Document 91-7 Filed 08/05/16 Page 2 of 3 RESPECTFULLY SUBMITTED, in San Juan, Puerto Rico, this 5th day of August, 2016. Dated: August 5, 2016 San Juan, Puerto Rico By: /s/ Harold D. Vicente Donald S. Bernstein* Benjamin S. Kaminetzky* Brian M. Resnick* David B. Toscano* Marc J. Tobak* DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000 donald.bernstein@davispolk.com ben.kaminetzky@davispolk.com brian.resnick@davispolk.com david.toscano@davispolk.com marc.tobak@davispolk.com *Admitted pro hac vice Harold D. Vicente (USDC-PR No. 117711) VICENTE & CUEBAS P.O. Box 11609 San Juan, Puerto Rico 00910 Telephone: (787) 751-8000 hvicente@vc-law.net Attorneys for Plaintiffs Brigade Leveraged Capital Structures Fund Ltd.; Brigade Distressed Value Master Fund Ltd.; Tasman Fund LP; Claren Road Credit Master Fund, Ltd.; Claren Road Credit Opportunities Master Fund, Ltd.; Fore Multi Strategy Master Fund, Ltd.; Sola Ltd; Ultra Master Ltd; and Solus Opportunities Fund 5 LP By: /s/ Harold D. Vicente Jayne S. Robinson* K. Ann McDonald* Brett G. Canna* ROBINSON MCDONALD & CANNA LLP 61 Broadway, Suite 1415 New York, NY 10006 Tel: (212) 953-3400 Fax: (212) 953-3690 jrobinson@rmc-llp.com amcdonald@rmc-llp.com bcanna@rmc-llp.com *Admitted pro hac vice Harold D. Vicente (USDC-PR No. 117711) VICENTE & CUEBAS P.O. Box 11609 San Juan, Puerto Rico 00910 Telephone: (787) 751-8000 hvicente@vc-law.net Attorneys for Plaintiffs Fir Tree Value Master Fund, L.P.; Fir Tree Capital Opportunity Master Fund, L.P.; Fir Tree Special Opportunities Fund IV, LP; and Fir Tree Special Opportunities Fund V, LP Case 3:16-cv-01610-FAB Document 91-7 Filed 08/05/16 Page 3 of 3