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Bickering erupts between Oversight Board and Cofina Rep. over law interpretation 

By on March 1, 2018

The Financial Oversight & Management Board (FOMB) has accused its FOMB-appointed representative to the Puerto Rico Sales Tax Financing Corp. (Cofina) of “circumventing procedures” and “the authority granted to her” over her insistence to have the Commonwealth Supreme Court decide Cofina’s constitutionality. 

Bettina Whyte says the Puerto Rico Supreme Court, and not a federal court, should decide Cofina’s constitutionality because the subject is guided purely by Puerto Rican law and not federal. Against the orders of her boss, the Oversight Board, she submitted a motion asking Judge Laura Taylor Swain, of the U.S. District Court for the District of Puerto Rico, to refer five questions about Cofina to the commonwealth Supreme Court. 

“This litigation seeks to resolve whether state law transferred ownership of state-created property to a state-created entity, and whether that state-law transfer of property is valid as a matter of state constitutional law.These are issues of first impression under Puerto Rico law, will determine the outcome of this litigation, and are fundamentally important to the Commonwealth and its citizens. The Commonwealth-Cofina Dispute was commenced to resolve the question of [whether], after considering all procedural and substantive defenses and counterclaims, including constitutional issues, the sales & use taxes [(IVU by its Spanish acronym), which was] purportedly pledged by Cofina to secure debt, are property of the Commonwealth or Cofina under applicable law,” she said. 

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The discussion is part of an adversary proceeding brought by the Official Committee of Unsecured Creditors of the Commonwealth against Whyte, the Oversight Board and Cofina. The Official Committee argues that IVU funds should be part of the general fund revenues to operate the commonwealth, and not separate. 

The questions Whyte filed, in essence, asked the Commonwealth Supreme Court to interpret Cofina’s enabling law to determine if the transfer of sales & use tax collections should be deposited in the Dedicated Sales Tax Fund or not, and whether the transfer of such funds is invalid. She also asked the court to determine if IVU tax revenues should be considered “available resources” under the Puerto Rico Constitution. 

“Indeed, the U.S. Supreme Court has repeatedly instructed federal courts to respect the federalist system and refrain from declaring state law unconstitutional, before a state’s highest court has been afforded the opportunity to resolve relevant state law issues,” she said. This Court is being asked to interpret a Puerto Rico statute that has never been interpreted, and then declare it unconstitutional under the Puerto Rico Constitution. The Court should not take that drastic step without guidance from the Supreme Court of Puerto Rico,” she said. 

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The FOMB, however, says the court should deny Whyte’s motion because she had signed a stipulation stating the Title III court would resolve the Cofina-Commonwealth dispute. The Oversight Board says it appointed Whyte to serve as its Cofina representative for purposes of resolving the issue about whether sales & use tax revenues are property of the Commonwealth or Cofina, under applicable law. 

Now, the board says Whyte “seeks to circumvent these procedures, as well as the authority granted to her by the Oversight Board, by mischaracterizing the question to be determined as one of territorial law, [and] not [of] federal law, [which] must be certified to the Puerto Rico Supreme Court.” 

While the FOMB says Whyte makes a strong argument that territorial law provides that certain taxes are not available resources of the Commonwealth, it noted the proposed certification would delay the resolution of the Commonwealth-Cofina dispute. 

Whyte’s request, however, is supported by Cofina Senior Bondholders and the Mutual Funds Group. 

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