Opinion
Case No. 17-3283 (LTS) Case No. 17-3566 (LTS) Adv. Proc. No. 19-00028 (LTS)
03-27-2020
IN RE: the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as Representative of the Commonwealth of Puerto Rico et al., Debtors. In re: the Financial Oversight and Management Board for Puerto Rico, as Representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Debtor. Cooperativa De Ahorro Y Crédito Vegabajeña, Plaintiff, v. The Financial Oversight and Management Board for Puerto Rico, as Representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Defendant.
CARLOS A. QUILICHINI PAZ, JESSICA M. QUILICHINI ORTIZ, P.O Box 9020895, San Juan, PR 00901, Attorneys for Plaintiff Cooperativa de Ahorro y Crédito Vegabajeña O'NEILL & BORGES LLC By: Hermann D. Bauer, Ubaldo M. Fernández, 250 Muñoz Rivera Ave., Suite 800, San Juan, PR 00918-1813, PROSKAUER ROSE LLP By: Martin J. Bienenstock, Stephen L. Ratner, Timothy W. Mungovan, Paul V. Possinger, Eleven Times Square, New York, NY 10036 and Michael A. Firestein, Jennifer L. Roche, 2029 Century Park East Suit 2400, Los Angeles, CA 90067-3010, Attorneys for the Financial Oversight and Management Board for Puerto Rico, as representative for Employees Retirement System of the Government of the Commonwealth of Puerto Rico
CARLOS A. QUILICHINI PAZ, JESSICA M. QUILICHINI ORTIZ, P.O Box 9020895, San Juan, PR 00901, Attorneys for Plaintiff Cooperativa de Ahorro y Crédito Vegabajeña
O'NEILL & BORGES LLC By: Hermann D. Bauer, Ubaldo M. Fernández, 250 Muñoz Rivera Ave., Suite 800, San Juan, PR 00918-1813, PROSKAUER ROSE LLP By: Martin J. Bienenstock, Stephen L. Ratner, Timothy W. Mungovan, Paul V. Possinger, Eleven Times Square, New York, NY 10036 and Michael A. Firestein, Jennifer L. Roche, 2029 Century Park East Suit 2400, Los Angeles, CA 90067-3010, Attorneys for the Financial Oversight and Management Board for Puerto Rico, as representative for Employees Retirement System of the Government of the Commonwealth of Puerto Rico
PROMESA
Title III
OPINION AND ORDER DENYING MOTION TO DISMISS PLAINTIFF'S COMPLAINT PURSUANT TO FED. R. CIV. P. 12 (B)(1) AND 12(B)(6) AND STAYING ADVERSARY PROCEEDING
LAURA TAYLOR SWAIN, United States District Judge Before the Court is the Motion to Dismiss Plaintiff's Complaint Pursuant to Fed. R. Civ. P. 12(b)(1) and (6) (Docket Entry No. 11 in Adversary Proceeding No. 19-00028, the "Motion") filed by the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board"), on its own behalf and as representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico ("ERS" or the "System"). The Motion seeks dismissal of the Adversary Complaint (Docket Entry No. 1, the "Complaint") filed by Plaintiff Cooperativa de Ahorro y Crédito Vegabajeña ("Cooperativa"). As explained below, the Court has subject matter jurisdiction of this action pursuant to 48 U.S.C. § 2166. The Court has considered carefully all of the submissions made in connection with the Motion and, for the following reasons, the Motion is denied. Nevertheless, in light of the recent filing of the Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al. (Docket Entry No. 11946 in Case No. 17-3283, the "Amended Plan"), the pendency of a schedule for consideration of the Disclosure Statement for the Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al. (Docket Entry No. 11947 in Case No. 17-3283, the "Disclosure Statement") and proceedings directed to consideration of confirmation of the Amended Plan, and the likelihood that certain issues that have been raised in this adversary proceeding can be resolved through proceedings in connection with the Amended Plan, this adversary proceeding is stayed pending the Court's decision regarding confirmation of the Amended Plan.
All docket entry references are to entries in Adversary Proceeding No. 19-00028-LTS unless otherwise specified.
In addition to the Motion, the Court has reviewed Plaintiff's Opposition to Motion to Dismiss Plaintiff's Complaint Pursuant to Fed. R. Civ. P. 12(b)(1) and (6) (Docket Entry No. 15); Debtor's Reply Brief in Support of Motion to Dismiss Plaintiff's Complaint Pursuant to Fed. R. Civ. P. 12(b)(1) and (6) (Docket Entry No. 18); Cooperativa de Ahorro y Crédito Vegabajeña's Sur-Reply in Opposition to Debtor's Motion to Dismiss (Docket Entry No. 21); Debtor's Supplemental Brief in Response to Court Oder [sic ] Regarding Motion to Dismiss Plaintiff's Complaint Pursuant to Fed. R. Civ. P. 12(b)(1) and (6) (Docket Entry No. 23); and Cooperativa de Ahorro y Crédito Vegabajeña's Response to Debtor's Supplemental Brief in Response to Court Order (Docket Entry No. 24).
I.
BACKGROUND
The following recitation of facts is drawn from the Complaint, except where otherwise indicated. A. Statutory Framework
On May 15, 1951, the Legislative Assembly of Puerto Rico (the "Legislative Assembly") enacted Act No. 447-1951 (codified, as amended, at 3 L.P.R.A. §§ 761 - 788, the "Enabling Act"), which established ERS as a trust to administer pensions and certain other benefits for retired employees of the Commonwealth, certain public corporations in Puerto Rico, and certain municipalities. 3 L.P.R.A. § 761 ; (Compl. ¶ 2). On September 18, 2011, the Legislative Assembly amended the Enabling Act through the enactment of Act No. 196-2011 ("Act No. 196"). (Compl. ¶ 8.) Act No. 196 provides, in pertinent part, that
As neither party has filed translations of the Enabling Act's relevant provisions in connection with this adversary proceeding, except where otherwise indicated, the Court relies on and cites to the English-language codified version of the Enabling Act available on Westlaw. (See 3 L.P.R.A. §§ 761 -788.)
the amounts credited to a member of the System through contributions made through wage or salary withholdings, including interest, and pursuant to the provisions of §§ 761 - 788 of this title or the provisions of any law regarding superseded pension funds, may be pledged by the participant as collateral for any loan requested by him/her from any fund, association, public enterprise, or any other lending agency created ... by the Cooperative Bank of Puerto Rico or a savings and credit union to offer loans to members and non-members. The participant may pledge up to sixty-five percent (65%) of his/her contributions or twenty-five thousand dollars ($25,000) thereof, whichever is less ....
Id. § 785 (emphasis supplied). Act No. 196 also provides that "[p]ersonal loans originated or acquired by ... savings and credit unions of the Cooperative Bank of Puerto Rico up to the limit provided in [ 3 L.P.R.A. § 785 ], and personal, mortgage, and cultural loans originated by the System shall be secured, with priority over any other debt, by the contributions made and those subsequently accrued in the System [.]" Id. § 785a (emphasis supplied). In the event of a default on such loans, Act No. 196 provides that, after notice to a borrower (sometimes referred to herein as an "employee-borrower") and a thirty-day grace period, "the individual contributions of the participants, or the balance in their savings account shall be garnished and, whichever may be the case, applied to the debt." Id. "[T]he application, garnishment, and payment to the Cooperative Bank ... or the savings and credit unions shall be carried out by the Administrator [of ERS] within sixty days" of the bank's request, which must be accompanied by a certification that thirty days have elapsed since the employee-borrower was initially notified of his or her default. Id.
On August 23, 2017, in light of ERS's then-impending insolvency, the Legislative Assembly further amended the Enabling Act through the enactment of Act No. 106-2017 ("Act No. 106"). (See Compl. ¶ 15.) Act No. 106 required the Commonwealth to assume ERS's obligations to pay public pensions and contemporaneously eliminated employer and similar contributions to ERS. See Act No. 106, § 1.3. To implement this "pay-as-you-go" system for funding pension costs, Act No. 106 directs ERS to liquidate its assets and contribute the proceeds therefrom and any other available funds to the Commonwealth. Id. § 1.4. Nonetheless, Act No. 106 expressly provides that all loan programs of any nature that ERS may have had in place at the time that Act No. 106 came into force "shall be governed by the laws under which they were granted." Id. § 7.6.
References in this Opinion and Order to section numbers of Act No. 106 are to those in the uncodified version of the statute, which is available at Docket Entry No. 4238-1 in Case No. 17-3283, Ex. G.
B. Loans Granted by Cooperativa Under Act No. 196
Cooperativa, a financial credit union located in Vega Baja, Puerto Rico, is one of numerous financial institutions that extended loans under the program established by Act No. 196. (Compl. ¶¶ 1, 8.) Specifically, Cooperativa entered into loan agreements with various participants of ERS, each of whom agreed to pledge up to the lesser of "65% or $25,000 of his or her ERS contributions" as collateral for the loans, assigning those individual contributions to the lender. (Id. ¶¶ 9, 10.) Cooperativa further alleges that, to document these pledges, participating borrowers and ERS executed "Assignment Agreement[s] for Pensioners" (Compl., Ex. A) and/or "Assignment Agreement[s] for Participants" (id., Ex. B) (the "Assignment Agreements"), as well as "Certificate[s] of Estoppel and Recognition of Notification of Assignment of Funds" ("Certificates of Estoppel") that were annexed to the Assignment Agreements. (Compl. ¶ 9.)
The "Assignment Agreement for Pensioners" form annexed to the Complaint provides that the borrower (referred to in the Assignment Agreements and Certificates of Estoppel as the "Debtor") "assigns and grants to" the bank creditor (referred to in the Assignment Agreements and Certificates of Estoppel as the "Creditor") as loan collateral a "contingent lien of $_____... , the amount of which does not exceed TWENTY FIVE PERCENT (25%) of the pension or benefit they receive from the System, (the ‘Product of the Annuities’)." (Compl., Ex. A at 1-2.) Subdivision (e) of the "Representations and Guarantees" section recites that "this Agreement creates a valid lien in favor of the Creditor in relation to the pension/benefits of the Debtor to the System." (Id. at 3.) Subdivision (h) of that section provides that "[t]he Loan ... shall be guaranteed ... by the Annuities and those that are subsequently accumulated with the System, the pension, benefit or reimbursement, which exceeds the Annuities assigned by the Debtor .... The Debtor will guarantee the loan with [his or her] retirement annuity." (Id. ) An attached "Notification of Assignment" form letter addressed to the administration of ERS is captioned "Notification of Assignment of the Product of Annuities of _____ in the Government Employees and Judiciary Retirement System Administration" and informs the administration that it is "hereby notified that under the terms and provisions of the ASSIGNMENT AGREEMENT between ... [the Debtor] and ... [the Creditor] ... the undersigned accepts and agrees that the amounts [he or she] receive[s] by way of Annuities from ... [the System] have been assigned up to TWENTY FIVE PERCENT (25%), equivalent to $ ____in guarantee of a loan as collateral to the Creditor." (Id. at 8.) The following paragraph is a proviso to the foregoing provisions: "Provided, however, that the Annuities shall continue to be credited to the Debtor, until they receive written notification from the Creditor ... , with instructions to the contrary." (Id. )
A "Certificate of Estoppel and Recognition of Notification of Assignment of the Product of Annuities" constitutes a second attachment to the Assignment Agreement for Pensioners. (See id. at 9.) The Certificate of Estoppel form provides that the administration of ERS certifies, inter alia, that "[t]he undersigned has been notified that the pension/benefits [he or she] receive[s] from the Debtor have been assigned in favor of ... [the Creditor] ... under the terms and conditions of a certain Assignment Agreement ...." (Id. ) It further includes a certification "[t]hat as of the date of this notification, the Debtor has contributed the amount of ____ DOLLARS ($___), with the System (the ‘Total of Annuities’)[,]" and identifies the maximum dollar amount, constituting 25% of the Total of Annuities, that the Debtor is permitted to assign in favor of the Creditor "in accordance with [the Enabling Act] and the Assignment Agreement." (Id. ) It concludes with a certification of understanding that "even after this assignment, the Annuities shall continue to be accredited to the Debtor until the Creditor ... notifies [the System] otherwise in writing" and that payments after such notification are to be made according to the Creditor's instructions. (Id. )
The "Assignment Agreement for Participants" form annexed to the Complaint is substantially similar in content to the Assignment Agreement for Pensioners form except that it refers to an assignment and pledge of interests in amounts made by way of pay deduction and interest thereon, referring at times to the collateral as the "Product of Contributions" and at other times to security more broadly as including contributions, accumulations within the System, pension benefits, and reimbursements. (See Compl., Ex. B.) It provides that the Debtor "assigns and grants" to the Creditor as loan collateral "a contingent lien of $____ ... of the amounts made by the Debtor by way of a deduction of [his or her] salary or remuneration, including interest, to the System, (the ‘Product of Contributions’)." (Id. at 2.) The borrower represents, inter alia, that he or she is "authorized to assign [the statutory proportion] ... of the Product of the Contributions as security for the Loan." (Id. ) Subdivision (h) of the "Representations and Guarantees" section provides that the Loan is guaranteed "by the contributions and those that are subsequently accumulated within the System, the pension, benefit or reimbursement, which exceeds the contributions assigned by the Debtor .... The Debtor will guarantee the Loan with [his or her] contributions, benefits or reimbursements." (Id. at 3.) Other provisions of the agreement also refer variously to contributions and benefits as collateral or as subject to collection activity in the event of default. An attached "Notification of Assignment" form letter is captioned "Notification of Assignment of the Product of Contributions of ____in the Government Employees and Judiciary Retirement System Administration." (Id. at 9.) That document, which is addressed to the administration of ERS, recites that amounts paid by way of deductions from compensation or salary, "including interest," have been "assigned in guarantee of a loan as collateral to the Creditor[,]" with the proviso "that the contributions shall continue to be credited to the System, until they receive written notification from the Creditor ... , with instructions to the contrary." (Id. ) In the event of such notice, it continues, "you may accredit the payment of the contributions according to the instructions of the Creditor ...." (Id. )
The form of "Certificate of Estoppel and Recognition of Notification of Assignment of the Product of Contributions" that accompanies the Assignment Agreement for Participants includes a recitation that the administration of ERS has "been notified that the interest of the Debtor in the amounts of contributions made by way of deductions from wages or compensation, including interest, have been assigned in favor of ... [the Creditor]" and a statement that "we understand that even after this assignment, the contributions made by way of a deduction from the salary or remuneration of the Debtor, shall continue to be accredited with the System until the Creditor ... notifies [the System] otherwise in writing." (Id. at 10.)
In its Complaint, Plaintiff asserts that it "seeks a total of $525,422.93 in funds held by ERS but pledged prepetition by individual Commonwealth employees to Cooperativa" (Compl. ¶ 13); that it has liens "on individual retirement contributions currently held by ERS, but belonging to the individual Commonwealth employees and ERS participants" (Id. ¶ 23); and that the assets that have been pledged in support of the defaulted loans are "held but not owned by ERS in its retirement system." (Id. ¶ 32.)
C. Relevant Procedural History
On May 21, 2017, the Oversight Board filed a petition for relief under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") on behalf of ERS. Prior to that date, thirty-seven ERS participants who had entered into loan agreements with Cooperativa under Act. No. 196 had defaulted on their loans. (Compl. ¶ 12.) Cooperativa duly notified each employee-borrower regarding his or her default status, and most of those individuals sought personal bankruptcy protection after their default. (Id. ¶¶ 12, 14.) In May and June 2018, Cooperativa filed thirty-seven proofs of claim in ERS's Title III case on account of the defaulted loans and in light of the provisions of Act No. 196. (See Compl., Ex. C.) Cooperativa asserts a "secured interest in ... a total of $525,422.93 in funds held by ERS but pledged prepetition by individual Commonwealth employees to Cooperativa." (Compl. ¶ 13.)
PROMESA is codified at 48 U.S.C. §§ 2101 et seq. References to "PROMESA" sections in this Opinion and Order are to the uncodified version of the statute.
On October 14, 2018, Cooperativa filed its Motion for Lift of Stay Seeking the Modification of the Automatic Stay to Enforce Liens on Employee Withholding Funds Currently Held by the Employee Retirement System of the Government of the Commonwealth of Puerto Rico (Docket Entry No. 4011 in Case No. 17-3283 and Docket Entry No. 329 in Case No. 17-3566, the "Lift Stay Motion"), seeking leave, inter alia, to enforce, through an action in a Commonwealth court, its alleged statutory lien interests in individual employee pension accounts allegedly held by ERS. ERS opposed the Lift Stay Motion, and the Court heard argument during the November 7, 2018, omnibus hearing. At that hearing, the Court directed ERS to supplement the record with an affidavit to support its contention that the assets of ERS were not segregated into individual accounts. (See Transcript of November 7, 2018, Omnibus Hearing (Docket Entry No. 4198 in Case No. 17-3283), 60:19-61:16.) On November 15, 2018, ERS filed its supplement (Docket Entry No. 4238 in Case No. 17-3283), which included the Declaration of Luis M. Collazo-Rodriguez in Support of Objection of the Employees Retirement System to Motion for Lift of Stay Filed by the Cooperativa de Ahorro y Crédito Vegabajeña and in Compliance with Order [ECF No. 4194] (the "Collazo-Rodriguez Declaration"). Mr. Collazo-Rodriguez, the Administrator of ERS, averred in his Declaration, inter alia, that, while ERS had maintained individual accounts "as a mechanism to track contributions and calculate benefits," it had "never created or administered segregated funds corresponding to the retirement accounts for individual retirees or government employees participating in the retirement system." (Collazo-Rodriguez Declaration ¶¶ 3, 8.) Cooperativa filed a response to ERS's supplement on November 26, 2018. (See Docket Entry No. 4361 in Case No. 17-3283.) On December 4, 2018, the Court entered its Memorandum Order Denying Motion for Relief from Automatic Stay of Cooperativa de Ahorro y Crédito Vegabajeña (Docket Entry No. 4401 in Case No. 17-3283 and Docket Entry No. 354 in Case No 17-3566, the "Lift Stay Order"). Weighing the factors enumerated in In re Sonnax Indus., Inc., 907 F.2d 1280, 1286 (2d Cir. 1990), the Court determined that Cooperativa had not demonstrated cause to lift the automatic stay. (Lift Stay Ord. at 1.) The Court found that allowing Cooperativa to commence an enforcement action in a Commonwealth court would "disrupt the claims resolution process established by the Bankruptcy Code and incorporated into PROMESA[,]" particularly because there was "no evidence that the separate assets against which [Cooperativa] seeks to enforce its liens exist." (Id. at 7.) Cooperativa's pursuit of its claims in a different forum, the Court concluded, "would not result in an economical or expeditious resolution of [such] claims given that there has been neither a judgment validating [Cooperativa]'s claim[s] nor identification of any separate res against which such a judgment could be executed." (Id. )
Cooperativa commenced this adversary proceeding on March 14, 2019, seeking declaratory relief pursuant to Rule 7001 of the Federal Rules of Bankruptcy Procedure and 28 U.S.C. §§ 2201 and 2202, as well as an order directing ERS to release $525,422.93 to Cooperativa. Like the Lift Stay Motion, the Complaint asserts that "Cooperativa is entitled to enforce its statutory liens and recover the funds sought in its [thirty-seven] claims in this bankruptcy pursuant to the laws of the Commonwealth of Puerto Rico." (Compl. at 2.) The Complaint contains two counts and four prayers for relief. Count I seeks a declaration that Cooperativa has a valid and enforceable statutory lien on the borrowers' contributions to ERS (id. ¶¶ 22-34), and Count II alleges that ERS's denial of Cooperativa's statutory lien interest violates Act 106-2017 (id. ¶¶ 35-40). The first prayer for relief seeks a declaration that "Cooperativa's security interests represented in its [thirty-seven] proofs of claim are perfected, valid and enforceable against individual ERS participant[s'] retirement contributions currently held by ERS." (Id. at 13.) Cooperativa's second prayer for relief similarly requests a declaration that its "security interests on pledged property held by ERS [are] perfected and enforceable." (Id. ) The third prayer for relief seeks a declaration that Cooperativa's security interests "on pledged property set forth in its [thirty-seven] claims for relief and held by ERS but not released by ERS violates 2011 L.P.R. 106." (Id. ) Finally, the fourth prayer for relief requests an order "[d]irecting ERS to release $525,422.93 to Cooperativa reflected in its [thirty-seven] proofs of claim[ ] as due and owing and as previously approved and certified by ERS." (Id. )
It is unclear whether the Complaint's citation to "2011 L.P.R. 106," an apparent scrivener's error, refers to Act No. 196-2011 or Act No. 106-2017.
II.
DISCUSSION
ERS moves pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure ("Rule 12(b)(1)") to dismiss the Complaint "to the extent that it seeks non-justiciable advisory opinions" for lack of subject matter jurisdiction and pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rule 12(b)(6)") to dismiss the Complaint in its entirety for failure to state a claim upon which relief may be granted. ERS's arguments appear to turn primarily on base assumptions that Puerto Rico law did not require ERS to segregate employee contributions after they were received by the System; that Cooperativa has a lien, if at all, only on the participants' rights to receive benefits from general ERS assets; and that there are in fact no segregated assets constituting participant property from which Cooperativa could be paid.
Rule 12 of the Federal Rules of Civil Procedure is made applicable in this adversary proceeding by PROMESA section 310 and Rule 7012 of the Federal Rules of Bankruptcy Procedure.
As courts presented with motions to dismiss under both Rule 12(b)(1) and Rule 12(b)(6) should ordinarily decide jurisdictional questions before addressing the merits, Deniz v. Municipality of Guaynabo, 285 F.3d 142, 149 (1st Cir. 2002), the Court begins its analysis with ERS's arguments under Rule 12(b)(1).
A. Rule 12(b)(1) : Subject Matter Jurisdiction
The party invoking the jurisdiction of a federal court bears the burden of proving the existence of such jurisdiction. Johansen v. United States, 506 F.3d 65, 68 (1st Cir. 2007). The Court also has an independent duty to assess whether it has subject matter jurisdiction of an action. See Fed. R. Civ. P. 12(h)(3) ; FW/PBS, Inc. v. City of Dallas, 493 U.S. 215, 231, 110 S.Ct. 596, 107 L.Ed.2d 603 (1990). ERS contends that the Court lacks subject matter jurisdiction of Cooperativa's first, second, and third prayers for relief because they each seek rulings that are advisory in nature and are thus non-justiciable. (Mot. at 17-18.) ERS asserts that the declarations requested in those prayers for relief—that Cooperative has perfected, valid, and enforceable security interests against property held by ERS and pledged as collateral for the loans at issue, and that ERS's failure to release such property violates Commonwealth law—"amount to nothing more than abstract statements" that "would not change the rights of the parties and would not resolve a concrete dispute." (Id. at 17.)
Article III, Section 2 of the Constitution of the United States limits the exercise of federal judicial power to actual cases and controversies. U.S. Const. art. III, § 2; Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, 239-41, 57 S.Ct. 461, 81 L.Ed. 617 (1937). The authority conferred on federal courts by the Declaratory Judgment Act, 28 U.S.C. § 2201, is likewise limited to controversies that are within the constitutionally-constrained scope of federal jurisdiction. Aetna, 300 U.S. at 240, 57 S.Ct. 461. A justiciable controversy must be "a real and substantial controversy admitting of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts." Id. at 241, 57 S.Ct. 461 (citations omitted). Federal courts are not empowered to issue advisory opinions where there is no such actual controversy. See id.; Golden v. Zwickler, 394 U.S. 103, 108, 89 S.Ct. 956, 22 L.Ed.2d 113 (1969) ; Shell Oil Co. v. Noel, 608 F.2d 208, 213 (1st Cir. 1979).
The constitutional requirement that controversies be justiciable and admit of specific relief through a decree of a conclusive character demands more than strong or even significant disagreement to obtain declaratory relief. The issue must be raised, and the relief sought, in a fashion that would address a specific live controversy of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. See Golden, 394 U.S. at 108, 110, 89 S.Ct. 956. Rulings on isolated or abstract points that will principally be useful in formulating or litigating future choices that might or might not be made are outside the authorized scope of declaratory relief. See, e.g., Pub. Servs. Comm'n. of Utah v. Wycoff Co., 344 U.S. 237, 244-46, 73 S.Ct. 236, 97 L.Ed. 291 (1952) ("The disagreement must not be nebulous or contingent but must have taken on fixed and final shape so that a court can see what legal issues it is deciding, what effect its decision will have on the adversaries, and some useful purpose to be achieved in deciding them .... [W]hen the request is not for ultimate determination of rights but for preliminary findings and conclusions intended to fortify the litigant against future regulation, it would be a rare case in which the relief should be granted.").
1. Count I
Count I, asserting that the "contributions" against which Cooperativa wants to execute on its asserted interest do not belong to ERS, seeks an order declaring that Cooperativa has a valid and enforceable statutory lien on individual borrower and ERS participants' pledged contributions. (Compl. ¶¶ 9-13, 22-34.) Correspondingly, the first prayer for relief seeks an order "[d]eclaring that Cooperativa's security interests represented in its [thirty-seven] proofs of claim are perfected, valid and enforceable against individual ERS participant[s'] retirement contributions currently held by ERS[,]" and its second prayer for relief requests a declaration that its "security interests on pledged property held by ERS [are] perfected and enforceable." (Id. at 13.) ERS's legal arguments as to the nonjusticiability of these claims invoke the decisions of this Court and the First Circuit in In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 300 F. Supp. 3d 328 (D.P.R. 2018) (" ACP Master"), aff'd, 919 F.3d 638 (1st Cir. 2019) (" ACP Master II"). ERS's reliance on the ACP Master decisions is misplaced, in that the plaintiff-bondholders' relevant efforts in that case were focused on obtaining declarations regarding creditor rights with respect to assets consisting of revenues of the Commonwealth that the plaintiffs contended could only be used for certain purposes. The plaintiffs there did not show that the relief, if granted, would affect the Commonwealth's behavior toward the plaintiffs. Rather, they argued that the requested declarations would aid in the formulation of eventual plans of adjustment, and the First Circuit noted that such "abstract declarations" would have ramifications for the potential claims of other creditors. See ACP Master II, 919 F.3d at 645-47. The plaintiffs had sought, among other relief, declarations that the Commonwealth lacked property interests in certain tax-related revenues as well as declarations that they held statutory liens on such revenues. See ACP Master, 300 F. Supp. 3d at 335. This Court dismissed the plaintiffs' claims as non-justiciable under Rule 12(b)(1), and the First Circuit affirmed that decision. Id. at 338-39 ; ACP Master II, 919 F.3d at 645-47. The First Circuit explained that the declarations sought by the plaintiffs "would ‘reach far beyond the particular case’ as they unleash ramifications to be resolved in future litigation and implicate the potential claims of other creditors without them having a say in the current suit." ACP Master II, 919 F.3d at 646 (quoting Wycoff, 344 U.S. at 243, 73 S.Ct. 236 and citing Hewitt v. Helms, 482 U.S. 755, 761, 107 S.Ct. 2672, 96 L.Ed.2d 654 (1987) ). Further, the First Circuit agreed with this Court that subject matter jurisdiction was lacking because the relevant claims sought "abstract declarations that [were] unrelated to any current concrete dispute, such as a claim objection proceeding, request for adequate protection or relief from stay, or confirmation-related proceeding." Id. at 646.
Here, by key contrast, Cooperativa alleges that the funds it seeks to collect are owned by participants, assigned to the bank in connection with the loan transactions, and burdened by a statutory lien or security interest giving the bank a claim superior to that of the borrowers on borrower money that is, according to the Complaint, merely held by ERS. Cooperativa further claims that, under the terms of the statutorily-sanctioned loan arrangements, it has a current right to collect the subject monies of participants who have defaulted on their loans. In Exhibit C to the Complaint, Cooperativa identifies specific sums of money that, it alleges, are the property of the defaulting ERS participants. Cooperativa has previously sought stay relief to pursue these determinations and collect the monies.
If granted by the Court, the declaratory relief sought by Cooperativa would in fact settle a dispute that would affect ERS's behavior toward Cooperativa with respect to the disputed funds. Indeed, a ruling in Cooperativa's favor on this claim would affect ERS's current rights and legal obligations in connection with property that, according to the Complaint, ERS has unlawfully withheld from Cooperativa. Count I of the Complaint and the first and second prayers for relief thus do not seek advisory opinions.
In this regard, the Court is obliged in connection with this motion practice to construe Cooperativa's complaint liberally and take all of its well-pleaded factual allegations as true, giving Cooperativa the benefit of all reasonable inferences. See ACP Master II, 919 F.3d at 644. The Court has done so in reaching the foregoing conclusions. The factual and legal bases of Cooperativa's claims are, of course, hotly disputed by ERS, which asserts that Cooperativa's borrowers have nothing more than claims against ERS (and now the Commonwealth) for the payment of accrued plan benefits from general assets, and that Cooperativa's lien or security interest, if any, affects only the participant's right to be paid whatever will eventually be determined and distributed in respect of the participant's ERS interests or benefits pursuant to a confirmed plan of adjustment. This controversy is framed sufficiently by the Complaint to support the exercise of subject matter jurisdiction.
Accordingly, the Motion is denied insofar as it seeks dismissal of Count I of the Complaint and the first and second prayers for relief under Rule 12(b)(1) for lack of subject matter jurisdiction.
2. Count II
Count II of the Complaint and the third prayer for relief, which together request a declaration that ERS has violated Act No. 106 and/or Act No. 196 by failing to release the funds at issue, likewise present a live controversy of sufficient immediacy and reality to establish subject matter jurisdiction. The Complaint appears to allege that ERS has violated one or both of those statutes by denying Cooperativa's alleged statutory lien on individual ERS participants' pledged funds (Compl. at 13) and "refus[ing] to release the pledge[d] funds" (id. ¶ 40), thereby failing to administer the loans extended by Cooperativa in accordance with the statute under which they were granted, namely, Act No. 196 (see id. ¶ 16). The relief requested in Count II and the third prayer for relief, when read in conjunction with the fourth prayer for relief, would, if granted, "speak directly to [ERS's] ability to deal with" funds that, based on the allegations in the Complaint, are currently in its possession. ACP Master, 300 F.3d at 338. Accordingly, Count II of the Complaint and Cooperativa's third prayer for relief frame a justiciable controversy, and the Motion is denied insofar as it seeks dismissal of those claims under Rule 12(b)(1) for lack of subject matter jurisdiction.
The Court next addresses ERS's arguments under Rule 12(b)(6) concerning the merits of Cooperativa's claims.
B. Rule 12(b)(6) : Failure to State a Claim
To survive a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6), a complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The Court accepts as true the non-conclusory factual allegations in the complaint and draws all reasonable inferences in the plaintiff's favor. Miss. Pub. Employees' Ret. Sys. v. Boston Scientific Corp., 523 F.3d 75, 85 (1st Cir. 2008). At the pleading stage, the complaint must allege enough factual content to nudge a claim "across the line from conceivable to plausible." Ashcroft v. Iqbal, 556 U.S. 662, 680, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 570, 127 S.Ct. 1955 ).
ERS contends primarily that dismissal of the Complaint for failure to state a claim upon which relief may be granted is warranted because Cooperativa fails to allege an enforceable lien against or security interest in property held by ERS. (Mot. at 11-16.) ERS also argues that, pursuant to PROMESA section 305, the Court lacks the power to interfere with property of ERS. (Id. at 18-21.) Finally, ERS asserts generally that any claims that Cooperativa may have should be resolved through the Title III claims resolution process in the context of the Court's consideration of a plan of adjustment. (Id. at 10-11.) The Court addresses each argument in turn below.
1. Validity and Enforceability of Alleged Lien (Counts I and II)
As discussed above, the Complaint asserts that, pursuant to Act No. 196, Cooperativa obtained a statutory lien against, or security interest in, the contributions made to ERS by or on behalf of Commonwealth employees with whom Cooperativa had entered loan agreements, and that such contributions continue to belong to the participants, subject to Cooperativa's lien or security interests. (See Compl. ¶ 11.) The Complaint also asserts that ERS "agreed to the assignment of each individual salary contribution[ ] to be used as collateral for the individual loan agreements" when it executed the Assignment Agreements and Estoppel Certificates. (Id. ¶ 10.) The Complaint alleges that "ERS has both a statutory and contractual obligation to: (1) acknowledge ... Cooperativa's enforceable statutory liens and (2) release the individual retirement contributions which were pledged to Cooperativa prepetition and which ERS continues to hold so that Cooperativa can enforce its lien interests." (Id. ¶ 30.)
Cooperativa uses the terms "statutory lien" and "security interest" somewhat interchangeably, although the terms describe different rights. "[T]here are two types of secured claims: (1) voluntary (or consensual) secured claims, each created by agreement between the debtor and the creditor and called a ‘security interest’ by the [Bankruptcy] Code, and (2) involuntary secured claims, such as a judicial or statutory lien, which are fixed by operation of law and do not require the consent of the debtor." U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (internal citations omitted). "Under the [Bankruptcy] Code, a statutory lien ‘aris[es] solely by force of a statute on specified circumstances or conditions.’ " In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 899 F.3d 1, 11 (1st Cir. 2018) ("Peaje") (quoting 11 U.S.C. § 101(53) ), cert. denied sub nom. Peaje Investments LLC v. The Fin. Oversight & Mgmt. Bd. for Puerto Rico, ––– U.S. ––––, 139 S. Ct. 1169, 203 L. Ed. 2d 197 (2019) ; compare 11 U.S.C. § 101(53), with id. § 101(51) (defining "security interest" as a "lien created by agreement"). The Court need not parse the legal ramifications of Cooperativa's terminology at this stage of the proceedings, as Cooperativa's principal claims rest on another disputed threshold factual assertion—that the funds in which it claims an interest belong not to ERS, but to Cooperativa's borrowers.
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As noted above, Act No. 196 provides that employee-borrower contributions to ERS, up to the lesser of sixty-five percent and $25,000, "may be pledged by the participant as collateral for any loan requested by him/her from any ... savings and credit union to offer loans to members and non-members." 3 L.P.R.A. § 785. Under Act No. 196, any such loans "shall be secured, with priority over any other debt, by the contributions made and those subsequently accrued in the System[.]" Id. § 785a. Section 785a describes itself as operating to create a statutory lien in connection with the loan program established thereunder. See id. ("The statutory lien created in this [s]ection ... shall remain in full force and effect in the event that mortgage or personal loans are transferred by the Administrator [of ERS] to third parties ...."). More generally, the statute and loan documentation materials also refer to interests in plan benefits, "Products of Contributions," and other rights and liabilities in connection with ERS participation.
Cooperativa's allegations that contributions were made and assigned or pledged in a manner that attached to the contributions themselves are, read liberally and in light of the somewhat ambiguous statutory and loan documentation language, sufficient at the pleading stage to support a reasonable inference that there are or should be separate funds held for the participant upon which Cooperativa could exercise its alleged rights. ERS asserts vigorous factual and legal arguments to the contrary, but cannot prevail at this stage of the litigation on that basis. ERS maintains, inter alia, that the Complaint should be dismissed because Cooperativa "has not alleged that either it or the employee-borrowers had an interest in identifiable property held by ERS[,]" and, even assuming they did, Cooperativa "does not allege that separate property traceable to the particular employee-borrowers exists." (Mot. at 13-14.) ERS asserts, citing evidence that it proffered in the context of the earlier Lift Stay Motion practice, that, while it "maintained individual accounts for accounting purposes that reflected the notional value of each employee's contributions and accredited investment earnings, no segregated funds corresponding to such retirement accounts existed or were maintained or required to be maintained by ERS." (Id. at 13.) ERS suggests that the Court's determination that Cooperativa had not identified "any separate res" in the Lift Stay Motion practice is preclusive of any ability of Cooperativa to do so in this adversary proceeding. (Id. at 14.) Relatedly, ERS contends that the employee-borrower contributions to which Cooperativa claims a right cannot be traceable to specific ERS participants because, pursuant to Act No. 106, "ERS's available funds and assets were to be transferred to the Commonwealth to help fund Act [No.] 106's ‘pay-as-you-go’ policy." (Id. (citing Act No. 106, §§ 1.4, 1.5).) Here, as discussed, the Complaint alleges plausibly that Act No. 196 granted Cooperativa liens on property held by ERS at the time the loans in question were issued, and that Cooperativa continues to hold such liens. At this pleading stage, the factual proffers set forth in ERS's legal briefs regarding the nature and current status of Cooperativa's claimed collateral do not overcome Cooperativa's allegations in this regard. Nor do ERS's characterizations of the mechanics and supposed effects of Act No. 106 preclude Cooperativa from pursing its claims in this adversary proceeding. On a motion to dismiss under Rule 12(b)(6), the Court must accept as true Cooperativa's well-pleaded factual allegations and draw all reasonable inferences in its favor, Boston Scientific, 523 F.3d at 85, and the Court "must ordinarily ignore matters outside the pleadings," Rodriguez-Robledo v. Puerto Rico Elec. Power Auth., 90 F. Supp. 2d 175, 178 (D.P.R. 2000) (citing Maldonado v. Dominguez, 137 F.3d 1, 6 (1st Cir.1998) ). ERS may not rely on factual allegations in its legal memorandum to support its Motion. See Rainwater v. United States, No. 08 CIV 5115 PKC, 2010 WL 5248585, at *4 (S.D.N.Y. Dec. 15, 2010).
For all of these reasons, Count I states a cognizable claim for entitlement to an order declaring that Cooperativa has a valid and enforceable lien on employee-borrower contributions to ERS that were pledged as collateral for their loans, and Count II states a viable claim predicated on ERS's refusal to acknowledge that lien and turn over the funds in dispute.
2. PROMESA Section 305 (Count II)
ERS also asserts that Count II of the Complaint, and the third and fourth prayers for relief, should be dismissed as barred by PROMESA section 305. (Mot. at 18-21.) To that end, ERS argues that section 305 "deprives a court of power to order a Commonwealth debtor to turn over property or revenues to a creditor during the pendency of the Title III case." (Id. at 20.) ERS further contends that section 305 is "not limited to remedies that are directly coercive" and therefore can apply to certain claims seeking declaratory relief. (Id. (citing ACP Master, 300 F. Supp. 3d at 341 ).) Section 305 of PROMESA provides as follows:
Subject to the limitations set forth in subchapters I and II of this chapter, notwithstanding any power of the court, unless the Oversight Board consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with—
(1) any of the political or governmental powers of the debtor;
(2) any of the property or revenues of the debtor; or
(3) the use or enjoyment by the debtor of any income-producing property.
48 U.S.C. § 2165. "Section 305 [is] respectful and protective of the status of the Commonwealth and its instrumentalities as governments, much like section 904 of the municipal bankruptcy code respects and protects the autonomy of states and their political subdivisions." In re Fin. Oversight & Mgmt. Bd. for P.R., 899 F.3d 13, 21 (1st Cir. 2018) (citing 11 U.S.C. § 904 ).
Here, Cooperativa has adequately alleged that the funds to which it claims entitlement are not ERS's property. Accordingly, ERS has not established as a matter of law that Cooperativa's claims pertaining to those funds are precluded under section 305 of PROMESA, and the Motion is denied to the extent that it seeks dismissal of Count II of the Complaint and the third and fourth prayers for relief pursuant to section 305.
3. Title III Claims Resolution Process (Counts I and II)
Lastly, ERS advances a general argument that Cooperativa's claims should not be resolved in the context of this adversary proceeding and, instead, would be more appropriately addressed in the context of confirmation of a plan of adjustment. (Mot. at 10-11.) ERS, again working on the premise that Cooperativa can only collect, if at all, from general debtor assets, characterizes this adversary proceeding as Cooperativa's "attempt[ ] to jump to the front of the line and ask[ ] the Court to determine and enforce payment of its claims [against the debtor's assets] now, seeking payment priority against all other creditors." (Id. at 11.) As explained above, the issues of the potential source of payment as well as Cooperativa's claims of liens and security interests remain to be resolved. In connection with the Lift Stay Motion practice, the Court concluded that litigation of Cooperativa's claims in a Commonwealth court would disrupt the claims resolution process by diverting debtor resources from focus on the restructuring. (Lift Stay Ord. at 7.) Now that the Oversight Board has filed its proposed Amended Plan and Disclosure Statement, and the Court has set in progress a schedule for litigation of issues in connection with the Oversight Board's effort to confirm that Amended Plan, there will be opportunities, through claim objections and other contested matters relating to that process, to address the issues raised in this adversary proceeding. The Court therefore deems it prudent and in the interest of judicial economy to stay this adversary proceeding pending the Court's decision regarding confirmation of the Amended Plan, without prejudice to litigation of the issues raised in this adversary proceeding in connection with the confirmation process. (Cf. Final Order Regarding (a) Stay Period, (b) Mandatory Mediation, and (c) Certain Deadlines Related Thereto (Docket Entry No. 12189 in Case No. 17-3283) (staying various adversary proceedings and contested matters pending the Court's decision regarding confirmation of the Amended Plan).)
III.
CONCLUSION
For the foregoing reasons, the Motion is denied in its entirety. This adversary proceeding is hereby stayed pending the Court's decision regarding confirmation of the Amended Plan, without prejudice to litigation in conjunction with the plan confirmation process that may be necessary to resolve issues raised in this adversary proceeding. The parties are directed to file a joint status report within fourteen days of the date on which the Court's decision with respect to confirmation of the Amended Plan is issued, identifying any further activity that may be required to resolve the claims asserted in this adversary proceeding.
This Opinion and Order resolves Docket Entry No. 11.
SO ORDERED.