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Big win for Puerto Rico gov’t in Highways Authority bankruptcy case

By on September 9, 2017

SAN JUAN — On Friday, federal judge Laura Taylor Swain ruled in favor of the Puerto Rico government and its financial control board by denying a complaint filed by a creditor group of the Highways & Transportation Authority (HTA).

Judge Swain ruled against Peaje Investments, which owns about $65 million in HTA bonds and sought to force the commonwealth to resume monthly deposits of toll revenues with its fiscal agent. This revenue stream guarantees the payment of bonds issued by the public corporation.

By virtue of the Moratorium Act enacted in 2016 by former Gov. Alejandro García Padilla, the Financial Emergency & Fiscal Responsibility Act signed by Gov. Ricardo Rosselló Nevares earlier this year and several executive orders, HTA has redirected pledged toll revenues for other operating expenses. In May, HTA —with the fiscal board as its representative— filed for bankruptcy protection under Title III of the federal Promesa law.

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The judge in charge of the commonwealth’s bankruptcy cases under Title III also denied Peaje’s request to lift the stay and adequate protection. The creditor group argued its collateral –Puerto Rico’s toll roads– depletes as HTA uses pledged toll revenue for other purposes.

In her decision, Judge Swain explained that the creditor group failed to demonstrate that the commonwealth doesn’t need to tap into toll revenues to ensure the functioning of its roads. Likewise, it couldn’t prove that the value of its collateral was depreciating.

As for the existence of a “statutory lien” —a key aspect as it could pave the way for future interpretations in the context of other Title III debtors— the court found that Peaje failed to show such a lien exists over toll revenues.

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Judge Swain ruled that neither the HTA enabling act, nor the 1968 Resolution —upon which the entity issued bonds— automatically created “liens” by force of law. She explained that the law that created the HTA only allows, but doesn’t establish, a lien. In the case of the 1968 resolution, “it is not a statute,” and didn’t establish a valid lien, as suggested by Peaje.

However, a footnote warns that Judge Swain’s analysis is limited to what Peaje argued and does not mean that other parts of the 1968 Resolution could give way to the creation of valid liens.

“The court concludes that Peaje has failed to establish a likelihood of success on the merits of its claim to a statutory lien that could provide a proper basis for injunctive relief,” the decision reads.

The court added that even if Peaje had proved to have a statutory lien, the commonwealth was able to demonstrate that the interests of the creditor group are adequately protected. Therefore, Peaje’s request to lift the stay and seek adequate protection didn’t proceed.

“Defendants [the government and HTA] have established that Peaje’s interests are adequately protected by defendants’ efforts to maintain the commonwealth’s toll roads in working condition to ensure that the toll revenues will be available in the future,” Judge Swain stated.

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