Rico, As Representative for the Commonwealth of Puerto Rico v. the Financial Oversight

United States Court of Appeals
For the First Circuit
No. 20-1065
IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
RICO, AS REPRESENTATIVE FOR THE COMMONWEALTH OF PUERTO RICO; THE
FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS
REPRESENTATIVE FOR THE PUERTO RICO HIGHWAYS AND TRANSPORTATION
AUTHORITY; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR
PUERTO RICO, AS REPRESENTATIVE FOR THE PUERTO RICO ELECTRIC
POWER AUTHORITY (PREPA); THE FINANCIAL OVERSIGHT AND MANAGEMENT
BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE PUERTO RICO
SALES TAX FINANCING CORPORATION, a/k/a Cofina; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS
REPRESENTATIVE FOR THE EMPLOYEES RETIREMENT SYSTEM OF THE
GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS
REPRESENTATIVE OF THE PUERTO RICO PUBLIC BUILDINGS AUTHORITY,
Debtors.
ANDALUSIAN GLOBAL DESIGNATED ACTIVITY COMPANY; GLENDON
OPPORTUNITIES FUND, L.P.; LMA SPC, for and on behalf of Map 98
Segregated Portfolio; CROWN MANAGED ACCOUNTS, for and on behalf
of Crown/PW SP; MASON CAPITAL MASTER FUND LP; OAKTREE-FORREST
MULTI-STRATEGY, LLC (SERIES B); OAKTREE OPPORTUNITIES FUND IX
(PARALLEL 2), L.P.; OAKTREE OPPORTUNITIES FUND IX, L.P.; OAKTREE
VALUE OPPORTUNITIES FUND HOLDINGS, L.P.; OAKTREE OPPORTUNITIES
FUND IX (PARALLEL), L.P.; OAKTREE HUNTINGTON INVESTMENT FUND II,
L.P.; OAKTREE OPPORTUNITIES FUND X, L.P.; OAKTREE OPPORTUNITIES
FUND X (PARALLEL), L.P.; OAKTREE OPPORTUNITIES FUND X (PARALLEL
2), L.P.; OCEANA MASTER FUND LTD.; OCHER ROSE, L.L.C.; PENTWATER
MERGER ARBITRAGE MASTER FUND LTD.; PUERTO RICO AAA PORTFOLIO
BOND FUND II, INC.; PUERTO RICO AAA PORTFOLIO BOND FUND, INC.;
PUERTO RICO AAA PORTFOLIO TARGET MATURITY FUND, INC.; PUERTO
RICO FIXED INCOME FUND I, INC.; PUERTO RICO FIXED INCOME FUND
II, INC.; PUERTO RICO FIXED INCOME FUND III, INC.; PUERTO RICO
FIXED INCOME FUND IV, INC.; PUERTO RICO FIXED INCOME FUND V,
INC.; PUERTO RICO GNMA AND U.S. GOVERNMENT TARGET MATURITY FUND,
INC.; PUERTO RICO INVESTORS BOND FUND I, INC.; PUERTO RICO
INVESTORS TAX-FREE FUND II, INC.; PUERTO RICO INVESTORS TAX-FREE

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FUND, INC.; PUERTO RICO INVESTORS TAX-FREE FUND III, INC.;
PUERTO RICO INVESTORS TAX-FREE FUND VI, INC.; PUERTO RICO
INVESTORS TAX-FREE FUND V, INC.; PUERTO RICO INVESTORS TAX-FREE
FUND IV, INC.; PUERTO RICO MORTGAGE-BACKED & U.S. GOVERNMENT
SECURITIES FUND, INC.; PWCM MASTER FUND LTD; REDWOOD MASTER
FUND, LTD; TAX-FREE PUERTO RICO FUND II, INC.; TAX-FREE PUERTO
RICO FUND, INC.; TAX-FREE PUERTO RICO TARGET MATURITY FUND,
INC.; SV CREDIT, L.P.,
Movants, Appellants,
v.
THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS
REPRESENTATIVE FOR THE COMMONWEALTH OF PUERTO RICO; THE
FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS
REPRESENTATIVE FOR THE EMPLOYEES RETIREMENT SYSTEM OF THE
GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO,
Debtors, Appellees,
THE PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY;
THE OFFICIAL COMMITTEE OF RETIRED EMPLOYEES OF THE COMMONWEALTH
OF PUERTO RICO,
Interested Parties, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Laura Taylor Swain, * U.S. District Judge]
Before
Howard, Chief Judge,
Lynch and Kayatta, Circuit Judges.
Benjamin Rosenblum, with whom Bruce Bennett, David R. Fox,
Geoffrey S. Stewart, Beth Heifetz, Sparkle L. Sooknanan, Jones
* Of the Southern District of New York, sitting by
designation.

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Day, Alfredo Fernández-Martínez, Delgado & Fernández, LLC, José C.
Sánchez-Castro, Alicia I. Lavergne-Ramírez, Sánchez Pirillo LLC,
John K. Cunningham, Jason N. Zakia, and White & Case LLP, were on
brief, for Andalusian Global Designated Activity Company; Glendon
Opportunities Fund, L.P.; LMA SPC, for an on behalf of Map 98
Segregated Portfolio; Crown Managed Accounts, for and on behalf of
Crown/PW SP; Mason Capital Master Fund LP; Oaktree-Forrest Multi-
Strategy, LLC (Series B); Oaktree Opportunities Fund IX (Parallel
2), L.P.; Oaktree Opportunities Fund IX, L.P.; Oaktree Value
Opportunities Fund Holdings, L.P.; Oaktree Opportunities Fund IX
(Parallel), L.P.; Oaktree Huntington Investment Fund II, L.P.;
Oaktree Opportunities Fund X, L.P.; Oaktree Opportunities Fund X
(Parallel), L.P.; Oaktree Opportunities Fund X (Parallel 2), L.P.;
Oceana Master Fund Ltd.; Ocher Rose, L.L.C.; Pentwater Merger
Arbitrage Master Fund Ltd.; Puerto Rico AAA Portfolio Bond Fund
II, Inc.; Puerto Rico AAA Portfolio Bond Fund, Inc.; Puerto Rico
AAA Portfolio Target Maturity Fund, Inc.; Puerto Rico Fixed Income
Fund I, Inc.; Puerto Rico Fixed Income Fund II, Inc.; Puerto Rico
Fixed Income Fund III, Inc.; Puerto Rico Fixed Income Fund IV,
Inc.; Puerto Rico Fixed Income Fund V, Inc.; Puerto Rico GNMA And
U.S. Government Target Maturity Fund, Inc.; Puerto Rico Investors
Bond Fund I, Inc.; Puerto Rico Investors Tax-Free Fund II, Inc.;
Puerto Rico Investors Tax-Free Fund, Inc.; Puerto Rico Investors
Tax-Free Fund III, Inc.; Puerto Rico Investors Tax-Free Fund VI,
Inc.; Puerto Rico Investors Tax-Free Fund V, Inc.; Puerto Rico
Investors Tax-Free Fund IV, Inc.; Puerto Rico Mortgage-Backed &
U.S. Government Securities Fund, Inc.; PWCM Master Fund Ltd;
Redwood Master Fund, Ltd; Tax-Free Puerto Rico Fund II, Inc,; Tax-
Free Puerto Rico Fund, Inc.; Tax-Free Puerto Rico Target Maturity
Fund, Inc.; and SV Credit, L.P.
Martin J. Bienenstock, with whom Timothy W. Mungovan, John E.
Roberts, William D. Dalsen, Stephen L. Ratner, Jeffrey W. Levitan,
Mark D. Harris, Margaret A. Dale, and Proskauer Rose LLP were on
brief, for The Financial Oversight and Management Board for Puerto
Rico, as representative for the Commonwealth of Puerto Rico and
The Financial Oversight and Management Board for Puerto Rico, as
representative for the Employees Retirement System of the
Government of the Commonwealth of Puerto Rico.
Peter M. Friedman, with whom John J. Rapisardi, Yaira Dubin,
Ashley M. Pavel, and O'Melveny & Myers LLP were on brief, for the
Puerto Rico Fiscal Agency and Financial Advisory Authority.
Catherine Steege, with whom Melissa Root, Robert Gordon,
Jenner & Block LLP, A. J. Bennazar-Zequeira, Bennazar, García &
Milián, C.S.P. were on brief, for the Official Committee of Retired
Employees of the Commonwealth of Puerto Rico.

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March 19, 2020

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LYNCH, Circuit Judge. The appellant Bondholders own
bonds issued in 2008 by the Employees Retirement System of the
Government of the Commonwealth of Puerto Rico (the "System"). The
Bondholders seek to reverse the denial of their motion that they
be appointed as trustees of the System to bring avoidance actions
against the Government of Puerto Rico.
The motion was brought and denied under 11 U.S.C. § 926,
which provides "[i]f the debtor refuses to pursue a cause of action
under section 544 . . . [or] 549(a) . . . of this title, then on
request of a creditor, the court may appoint a trustee to pursue
such cause of action." 11 U.S.C. § 926(a) (emphasis added). In
denying the Bondholders' motion, the Title III court clearly did
not abuse its discretion, and so we affirm.
I.
We sketch the relevant background and facts. 1 In 1951,
the Commonwealth enacted the Enabling Act, which created the System
"as both a trust and government agency." See Emps. Ret. Sys. v.
Andalusian Glob. Designated Activity Co. (In re Fin. Oversight &
Mgmt. Bd. for P.R.), 948 F.3d 457, 463 (1st Cir. 2020); see also
1 For more, see this Court's earlier opinions resolving
claims between these parties about these bonds. See Emps. Ret.
Sys. v. Andalusian Glob. Designated Activity Co. (In re Fin.
Oversight & Mgmt. Bd. for P.R.), 948 F.3d 457, 462-66 (1st Cir.
2020); Altair Glob. Opportunities Credit Fund (A), LLC v. Fin.
Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd.
for P.R.), 914 F.3d 694, 702–09 (1st Cir.), cert. denied, 140 S.
Ct. 47 (2019).

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Law No. 447 of May 15, 1951, 1951 P.R. Laws 1298 (codified as
amended at P.R. Laws Ann. tit. 3, §§ 761–788). Before the 2017
Amendment, "[t]he System provide[d] pensions and retirement
benefits to [various government and public corporation employees
in Puerto Rico]." Andalusian, 948 F.3d at 463-64. The System was
"'independent and separate' from other Commonwealth agencies" and
was funded by contributions from employers and employees,
investment income, and a 2008 bond issuance. Id. at 464 (quoting
Altair Glob. Opportunities Credit Fund (A), LLC v. Fin. Oversight
& Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.),
914 F.3d 694, 704 (1st Cir.), cert. denied, 140 S. Ct. 47 (2019)).
The Bondholders own some of these 2008 bonds, and claim a security
interest in various assets of the System. Id.
The financial crisis in Puerto Rico led Congress in June
2016 to enact the Puerto Rico Oversight, Management, and Economic
Stability Act ("PROMESA"), which incorporated, and made applicable
to Puerto Rico, certain provisions of the Bankruptcy Code. 48
U.S.C. §§ 2161-2162. These provisions include 11 U.S.C. §§ 362,
544, 549(a), (c), (d), and 926. Id. § 2161(a). PROMESA "created
the Financial Oversight and Management Board for Puerto Rico (the
'Board') and authorizes that Board to restructure the debt of the
Commonwealth of Puerto Rico through quasi-bankruptcy proceedings."
Andalusian, 948 F.3d at 463 (internal quotation marks omitted)
(quoting Autonomous Municipality of Ponce (AMP) v. Fin. Oversight

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& Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.),
939 F.3d 356, 359 (1st Cir. 2019)). Under Title III of PROMESA,
a specially designated Title III court was established, see 48
U.S.C. § 2168(a), and it is the decision of that court which we
review.
In 2017, the Commonwealth passed Joint Resolution 188
and enacted 2017 P.R. Laws 106 (together, "2017 Amendment"), which
amended the Enabling Act. Andalusian, 948 F.3d at 465. The 2017
Amendment required the System to liquidate its assets and transfer
the proceeds to the Commonwealth General Fund, "eliminated the
employers' obligation to contribute to the System[,] and required
the Commonwealth General Fund to pay individual pensions." Id.;
2017 P.R. Laws 106, § 2.1(a), (b). 2
On October 30, 2019, the Bondholders demanded that the
Board bring two avoidance actions to have the 2017 Amendment
invalidated. 3 The assets to be returned, we are told, are estimated
2 For claims of the Bondholders also attacking the 2017
Amendment, see Complaint, Altair Glob. Credit Opportunities Fund
(A), LLC v. Commonwealth of Puerto Rico (In re Fin. Oversight &
Mgmt. Bd. for P.R.), Case No. 17-3283-LTS (Jointly Administered),
Adv. No. 17-00219-LTS (D.P.R. filed July 27, 2017), ECF No. 1;
Altair Glob. Credit Opportunities Fund (A), LLC v. United States,
138 Fed. Cl. 742, 754 (Fed. Cl. 2018).
3 On January 28, 2019, the Bondholders first demanded that
the Board pursue avoidance actions under §§ 544 and 549 on behalf
of the System and against the Commonwealth to return assets
transferred under the 2017 Amendment. The Board declined to bring
such actions. In response, the Bondholders moved the Title III
court to appoint them as trustees of the System to bring the

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to have a value of at least $190.48 million plus some other forms
of property. 4 The Board declined. On November 19, 2019, the
Bondholders renewed their motion to be appointed trustees, or have
another so appointed with all costs of an independent trustee to
be borne by the System. 5 The Title III court denied this motion.
In re Fin. Oversight & Mgmt. Bd. for P.R., Nos. 17 BK 3283-LTS
(Jointly Administered), 17 BK 3566-LTS, 2020 WL 114518, at *1
(D.P.R. Jan. 7, 2020). We refer the reader to that opinion for
the full statement of the court's reasons. This appeal, which we
expedited, followed.
II.
We review for abuse of discretion the denial of a § 926
motion to appoint a trustee. See United Surety & Indem. Co. v.
actions. On February 28, 2019, the Commonwealth and System
stipulated to toll the statute of limitations for the avoidance
actions for 270 days.
4 Our January 30 decision determined that the Bondholders
did not have a prepetition property interest in postpetition
Employers' Contributions and thus limited the Bondholders' liens
on Employers' Contributions to only those Contributions already
paid, or "calculated and owed" as of the petition date.
Andalusian, 948 F.3d at 468–70, 472 & n.13. The Bondholders have
failed to make any argument as to why our January 30 decision would
not also limit their proposed claims as to postpetition Employers'
Contributions. The decision did not, however, "decide the issues
pending before the Title III court concerning liens on prepetition
Additional Uniform Contributions." Id. at 467 n. 7 (emphasis
added).
5 On appeal, the Bondholders represented that, if they are
appointed as trustees, they would bear the costs of the avoidance
litigation.

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Pedro López–Muñoz (In re Pedro López–Muñoz), 866 F.3d 487, 497
(1st Cir. 2017) (reviewing the bankruptcy court's decision not to
appoint a trustee under 11 U.S.C. § 1104(a)). A court has abused
its discretion when it leaves us "with a 'definite and firm
conviction that the court . . . committed a clear error of
judgment,'" Paolino v. JF Realty, LLC, 830 F.3d 8, 13 (1st Cir.
2016) (quoting Schubert v. Nissan Motor Corp. in U.S.A., 148 F.3d
25, 30 (1st Cir. 1998)), or has committed an error of law, Top
Entm't, Inc. v. Torrejon, 351 F.3d 531, 533 (1st Cir. 2003).
It is clear from the text of § 926 -- "the court may
appoint" -- that Congress intended to provide the Title III court
with substantial discretion in this decision. See Haig v. Agee,
453 U.S. 280, 294 n.26 (1981) ("'[M]ay' expressly recognizes
substantial discretion."). A court may appoint a trustee under
§ 926 in response to a debtor's reluctance to bring avoidance
actions. Further,
[t]his reluctance may arise from the fact that the
transfer sought to be avoided would have been made by
the debtor, such that the debtor actually favors the
transfer rather than opposes it, or it may arise from
the unwillingness of the debtor, while it is attempting
to negotiate a plan, to antagonize its creditors by
bringing causes of action against them for recovery of
prepetition transfers.
In re N.Y. City Off-Track Betting Corp., No. 09-17121(MG), 2011 WL
309594, at *4 (Bankr. S.D.N.Y. Jan. 25, 2011) (unpublished)
(quoting 6 Collier on Bankruptcy ¶ 926.02 (Alan N. Resnick & Henry

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J. Sommer eds., 16th ed. rev. 2010)). But "courts should be very
hesitant to appoint a trustee." Collier on Bankruptcy ¶ 926.02
(Richard Levin & Henry J. Sommer eds., 16th ed.).
Here, the Bondholders bear the burden of showing that
the Board unjustifiably refused to bring an avoidance action
against the Commonwealth on behalf of the System. See PW Enters.,
Inc. v. N.D. Racing Comm'n (In re Racing Servs., Inc.), 540 F.3d
892, 900 (8th Cir. 2008).
The Bondholders' primary argument is that the Title III
court erred as a matter of law in not confining its analysis to
the two factors commonly used for evaluating motions for derivative
creditor standing in the context of commercial reorganization
bankruptcies. They say those two factors are (1) the costs and
benefits to the individual debtor, here the System, and (2) whether
the avoidance claims are colorable. In fact, the Title III court
acknowledged the relevance of the commercial bankruptcy approach
and its goals, said it considered the goals of this approach, but
that it also recognized this was a governmental bankruptcy
proceeding, which required a "more holistic approach." The error,
the Bondholders say, came in the court's taking into account that
the System is a governmental, not a commercial, entity. The
Bondholders are flatly wrong that the court's choice to consider
all of the facts and so to approach differently the appointment of
a trustee in a governmental insolvency than in a commercial one

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was legal error. Nothing in the text of § 926 limits or even
discusses the factors a court may take into consideration. That
textual reading alone refutes the Bondholders' argument.
Further, the Bondholders' argument is refuted by the
obvious differences between governmental bankruptcies and
commercial private party bankruptcies. That distinction has been
recognized by case law from courts addressing municipal bankruptcy
issues under chapter 9 of the Bankruptcy Code. Cf. Newhouse v.
Corcoran Irrigation Dist., 114 F.2d 690, 690-91 (9th Cir. 1940)
("The bankruptcy of a public entity, however, is very different
from that of a private person or concern."). Unlike a commercial
bankruptcy, which attempts to "balanc[e] the rights of creditors
and debtors," the "principle purpose of chapter 9," and by analogy
PROMESA, "is to allow municipal debtors the opportunity to continue
operations while adjusting or refinancing their creditor
obligations." 6 In re N.Y. City Off-Track Betting, 2011 WL 309594,
at *5 (citing H.R. Rep. 95-595, at 263 (1977), as reprinted in
1987 U.S.C.C.A.N. 5787, 6221); see also In re Richmond Unified
School Dist., 133 B.R. 221, 225 (Bankr. N.D. Cal. 1991) ("[M]any
of the principles that apply in the other chapters of the
6 For instance, in In re Richmond Unified School Dist.,
the court held that a school district could dismiss its chapter 9
case, even assuming that the dismissal would harm the creditors
and a conflict of interest existed. 133 B.R. 221, 224-26 (Bankr.
N.D. Cal. 1991).

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Bankruptcy Code are of limited assistance in construing of
Chapter 9.").
The Bondholders argue that allowing the consideration of
governmental interests in deciding whether to appoint a trustee
under § 926 contravenes PROMESA's instruction not to
"substantive[ly] consolidat[e]" separate debtors. See 48 U.S.C.
§ 2164(f) ("[N]othing in [Title III] shall be construed as
authorizing substantive consolidation of the cases of affiliated
debtors."). But the Title III court's consideration of the
governance interests of the public debtors does not amount to
"substantive consolidation." Even if we limit our focus to the
interests of the System itself, governance of the Commonwealth
remains relevant: the Enabling Act that created the System
specified that "[t]he funds of the System . . . shall be used and
applied . . . for the payment of retirement and disability
annuities, death benefits and annuities, and other benefits . . .
in order to achieve economy and efficiency in the administration
of the Government of the Commonwealth of Puerto Rico." P.R. Laws
Ann. tit. 3, § 761 (emphasis added). PROMESA's prohibition of
"substantive consolidation" does not rewrite the text of § 926 or
cause us to ignore the clear differences between governmental and
commercial bankruptcies. The Title III court's consideration of
governance interests in deciding whether to appoint a trustee under
§ 926 was proper.

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The Bondholders' next claim of legal error is that the
Title III court improperly gave special deference to the Board's
decision not to sue the Commonwealth on behalf of the System. This
is not accurate, as is evidenced by a reading of the court's
opinion. See In re Fin. Oversight & Mgmt. Bd. for P.R., 2020 WL
114518, at *2-4.
The next set of Bondholder arguments, in our view, are
not claims of legal error but are rather claims that the court
abused its discretion in its weighing of the various
considerations.
The Title III court did not abuse its discretion in
considering sections 303 and 305 of PROMESA as relevant 7 to the
trusteeship question. See 48 U.S.C. § 2163 (stating, as PROMESA
section 303, that Title III "does not limit or impair . . . the
exercise of the political or governmental powers of the territory
or territorial instrumentality."); id. § 2165(2) (prohibiting, as
PROMESA section 305, the Title III court from interfering with
"any of the property or revenues of the [Title III] debtor").
7 We also reject the Bondholders' mischaracterization of
the Title III court rulings. The Title III court did not, as the
Bondholders seem to argue, create a per se rule that sections 303
and 305, codified at 48 U.S.C. §§ 2163, 2165, eliminate, or limit,
its discretion to appoint a trustee. Rather, the Title III court
correctly interpreted these provisions as supporting a
consideration of the unique interests and needs of the government
debtor.

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There was no abuse of discretion in considering these
special governmental concerns as informing the § 926 decision.
This is so for several reasons, including because "the appointment
by the court of a trustee to undo [a transfer in the exercise of
the debtor's political or governmental functions, or in control of
its income or property] may constitute an interference with those
powers or with that property, contrary to the mandatory dictates
of section 904" (a section which mirrors PROMESA section 305). In
re N.Y. City Off-Track Betting, 2011 WL 309594, at *4 (quoting 6
Collier on Bankruptcy, supra, ¶ 926.02).
That the 2017 transfer was made pursuant to the
Legislature's enactment of a Puerto Rico joint resolution and
statute further supports that the Title III court did not abuse
its discretion. Id. ("Given that the transfers at issue were made
pursuant to [state] law, it appears that appointing a trustee to
avoid these transfers may engender the very concerns alluded to in
Collier [on Bankruptcy ¶ 926.02]."). It follows that the Title
III court did not abuse its discretion when it considered the role
of sections 303 and 305 of PROMESA, the powers granted to the
Board, and that the Board is "an entity within the territorial
government [of the Commonwealth]." 48 U.S.C. § 2121(c)(1).
We also cannot say the Title III court abused its
discretion when it considered the Commonwealth's potential
defenses to the requested trustee avoidance actions. The

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Bondholders are wrong, to start, that the "colorab[ility]"
standard is an exclusive standard. See In re Racing Servs., Inc.,
540 F.3d at 901 ("While by no means exhaustive, among the factors
the court should consider in conducting this analysis are: (1)
'[the] probabilities of legal success and financial recovery in
event of success'; (2) the creditor's proposed fee arrangement;
and (3) 'the anticipated delay and expense to the bankruptcy estate
that the initiation and continuation of litigation will likely
produce.'" (alteration in original) (quoting Unsecured Creditors
Comm. of Debtor STN Enters., Inc. v. Noyes (In re STN Enters.),
779 F.2d 901, 905-06 (2d Cir. 1985))).
We turn to the Title III court's assessment of the
potential defenses under Bankruptcy Code §§ 544(b) and 549(a) to
any trustee action under § 926. 8 Under § 544 (and except as to
certain charitable contributions not at issue here):
the trustee may avoid any transfer of an interest of the
debtor in property or any obligation incurred by the
debtor that is voidable under applicable law by a
creditor holding an unsecured claim that is allowable
under section 502 of this title or that is not allowable
only under section 502(e) of this title.
8 We neither address nor take a view on the appellees'
substantive arguments that §§ 544 and 549 do not apply to the
purported transfers at issue here, including the argument that
§ 544 applies only to transfers that took place before the
bankruptcy petition was filed.

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11 U.S.C. § 544(b)(1). Subject to a few exceptions not at issue
here, § 549 states that:
the trustee may avoid a transfer of property of the
estate . . . (1) that occurs after the commencement of
the case; and (2)(A) that is authorized only under
section 303(f) or 542(c) of this title; or (B) that is
not authorized under this title or by the court.
Id. § 549(a).
The Bondholders argue that the Title III court abused
its discretion by analyzing the strength of the defenses to the
proposed claims, instead of merely whether the claims were
colorable. Not so. Claims may be colorable but not strong, and
that is surely relevant at least where, as here, the Bondholders
have other actions pending seeking the same relief as would be
sought if the motion had been granted. 9
The Title III court recognized that the Bondholders have
brought other Title III court actions, which the Bondholders
concede seek the same relief as would be sought in the proposed
9 The out-of-circuit cases to which the Bondholders cite
do not support the proposition that the Title III court must
restrict its analysis to whether claims are colorable in the
governmental bankruptcy context before denying a § 926 motion.
These cases concern the commercial debtor context, and, for the
most part, impose requirements on finding derivative creditor
standing, not restrictions on denying it. See In re Racing Servs.,
Inc., 540 F.3d at 899; In re STN Enters., 779 F.2d at 905. We
have already reached the primary contention -- that commercial
bankruptcy rules bind here -- on which this argument rests, and
the secondary argument fails.

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avoidance actions. 10 See In re N.Y. City Off-Track Betting, 2011
WL 309594, at *4 (denying a § 926 motion to appoint a trustee to
pursue fraudulent conveyance action, when such action could also
be brought in state court).
10 In Altair, Adv. No. 17-00219-LTS, the Bondholders argue
in the Title III court that the 2017 Amendment violated the
automatic stay and its prohibition on "any act to obtain
possession of property of the estate or of property from the estate
or to exercise control over property of the estate." 11 U.S.C.
§ 362(a)(3). There, the Bondholders seek to have declared void
the transfer of assets and diversion of contributions from the
System to the Commonwealth or, in the alternative, that their
security interest "follow[ed] [their] collateral" or that the 2017
Amendment "violated the Takings and Contracts Clauses of the United
States and Puerto Rico Constitutions." Complaint at 5, Altair,
Adv. No. 17-00219-LTS, ECF No. 1.
In Altair v. United States, the Bondholders argued in
the Court of Federal Claims that "Congress authorized the Oversight
Board to design, approve, and direct the Legislature to enact Joint
Resolution 188 and Act 106-2017, resulting in the appropriation of
[the Bondholders'] property, without just compensation," and so
violated the Takings Clause of the Fifth Amendment. 138 Fed. Cl.
at 754. There, the Bondholders seek compensation for the 2008
bonds as well as attorney's fees and costs. Id.
We are mindful that the Board argues that we should
decline to appoint a trustee to pursue claims on behalf of the
System because the Bondholders can fully pursue their claims in
other actions, while simultaneously arguing in those actions that
the Bondholders cannot pursue some of those claims because only
the System has the right to pursue those claims. See Defendant's
Motion to Dismiss at 15-16, 28-31, Altair, Adv. No. 17-00219-LTS,
ECF No. 41. But those standing arguments may not prevail, and the
Bondholders have additional theories of relief that are not subject
to the standing claims. Compare id. at 28-31 (asserting a standing
defense to the Bondholders' unjust enrichment claims), with id. at
23-28 (asserting no standing defense to the Bondholders' "takings"
claims). In consequence, it was not an abuse of discretion for
the Title III court to consider the existence of the Bondholders'
other actions pursuing the same ultimate relief as a factor that
supported its decision not to appoint a trustee under § 926.

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There is an additional fact which supports the Title III
court's decision not to appoint a trustee. The Board has
represented to this Court and to the Title III court that, if the
other Title III proceeding determines that the Bondholders have a
valid lien on the $190.48 million the Board agrees was transferred
from the System to the Commonwealth, the Board will recognize that
lien and distribute to the Bondholders the value of that amount.
The Board further represented that it would waive any arguments it
has under UCC § 9-332(b) as to the Bondholders' liens. Any
prospect that the Bondholders would show that the Commonwealth
improperly transferred assets from the System, fail to show that
they have a lien on such assets, but still establish that they
would benefit as unsecured creditors does not outweigh the other
considerations the Title III court detailed when denying
appointment of a trustee, such that the court abused its
discretion. Even acknowledging the Bondholders' claim that the
assets transferred out of the System amounted to some uncertain
amount more than $190.48 million, 11 it was not an abuse of
11 While the Bondholders’ briefs allude in passing to
unspecified assets in addition to the $190.48 million that the
Board has set aside for possible distribution if deemed in another
suit to be subject to the Bondholders’ security interest, the
briefs never develop any argument that the values of those
unspecified assets is so substantial as to warrant a different
balancing of interests by the Title III court in this action --
much less that those assets amounted to $2 billion, as contended
for the first time at oral argument. Any such argument is

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discretion for the Title III court to seek to avoid a proliferation
of actions seeking essentially the same remedy. Each such
proceeding potentially drains assets which could be put to other
uses.
III.
Nothing in this opinion purports to address any issues
in the other cases regarding the 2017 Amendment or the Bondholders'
liens or claims.
Affirmed. Costs are awarded to the Board.
therefore waived. See Pignons S.A. Mecanique v. Polaroid Corp.,
701 F.2d 1, 3 (1st Cir. 1983).

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