eBlog

February 2, 2017

Good Morning! In today’s Blog, we consider U.S. Judge Laura Taylor Swain’s decision to dismiss a number of claims from bondholders of Puerto Rican debt–a challenge pitting bondholders versus Puerto Rico’s ability to finance its utilities.

Judge Laura Taylor Swain yesterday dismissed a claim that several General Obligations (GOs) bondholders in Puerto Rico filed last year in the absence of payment from the government of Puerto Rico, setting back municipal bond insurers Assured Guaranty and National Public Finance Guarantee, which had sought to protect the collections that serve as a source of repayment to the debt of the Highway and Transportation Authority (ACT), dismissing suits filed by ACP Master, Aurelius Opportunities and others, as well as the claims of Assured and NPFG, ruling their claims were insufficiently ripe to be resolved. Judge Swain held that Puerto Rico’s special revenue bonds did not have to make payments to municipal bondholders during the quasi-chapter 9 municipal bankruptcy, in a Title III adversary proceeding filed by three bond insurers, holding that while the bonds may have liens on revenue, that was not the same thing as the right to receive payments during the Title III bankruptcy. Her decision came in relation to municipal bonds issued by the Puerto Rico Highways and Transportation Authority, the Convention Center District Authority, and Puerto Rico’s Infrastructure Finance Authority—a decision which Assured Guaranty, has said it will appeal to the U.S. Court of Appeals for the First District in Boston.

In each case, Judge Swain’s dismissal rulings occurred in relation to PROMESA’s §305, a section which appears to grant the government of Puerto Rico a shield exempting it from paying off the debt for the time being. Judge Swain wrote: “The federal courts do not have the power to issue advisory opinions when there is no dispute.” In this case, Aurelius and others had sued in the wake of the Board of Fiscal Oversight (JSF)’s invoking PROMESA’s Title III, the party of general obligation bondholders seeking a declaratory judgment and injunction remedy to, among other things, declare that the resources available from the U.S. territory’s Treasury should be devoted primarily to the service of the municipal debt, especially those subject to retention through the so-called “claw back” clause; the plaintiffs also alleged that the actions of the government and those of the JSF were contrary to the U.S. Constitution, particularly the confiscation clause. In her decision, Judge Swain wrote: “Decisions on abstract or isolated points that will primarily be useful in formulating or litigating other future elections that may or may not be are beyond the authorized scope of the declaratory (sentencing) relief,” adding that  Swain explained the government has not yet taken definitive action regarding the property rights that its creditors would have, the controversy is not mature to determine if it is a confiscation of goods. Further, Judge Swain noted that PROMESA Title III cases are barely in an initial stage, noting that “at this point, even, the content of the fiscal plan is subject to constant change after the devastating hurricane of September 2017.” Judge Swain added that she could not grant a remedy of declaratory judgment or interdict the creditors with regard to the use that the government gives to its collections, because since §305 forbids it, providing that “unless the Board consents,” or the debt adjustment plan “provides” it, the court may not by any order, decree or suspension, “interfere” with the political powers or powers of government of the debtor, nor with “any of the property or collections” of the debtor or with “the use and enjoyment of any property” which leaves income to the government, noting: “The Board has not consented to any of those remedies. 

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