Puerto Rico flooded with lawsuits as Promesa stay ends
SAN JUAN – Hours after the end of Promesa’s stay, there has been movement in some of the lawsuits against the government and at least three new ones filed against it and the Financial Oversight and Management Board.
Even though Promesa’s stay on litigation ended, the bankruptcy process established by the federal law’s Title III includes a stay.
One of the lawsuits, filed Tuesday, was by several funds headed by Aristeia Horizons, senior bondholders of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) bonds, and accuses the government of showing an unwillingness to negotiate its debt and challenges the administration’s recently certified its fiscal plan.
“What is more, the Fiscal Plan ignores Promesa’s mandate to ‘respect relative lawful priorities or lawful liens’ by effecting a taking of Plaintiffs’ property interest in the dedicated sales tax (DST) and concretizing the Commonwealth’s breach of its non-impairment obligation under the Cofina Resolution, substantially impairing Plaintiffs’ contractual relationship with Cofina.
According to the Fiscal Plan, the total estimated cash flow available to pay debt service over the next ten years will be less than the DST statutorily owned by Cofina alone during such period. Cofina’s DST ranges from $724 million in 2018 to $1.031 billion in 2026. The cash available for all Commonwealth and Cofina debt service under the Fiscal Plan, meanwhile, ranges from $404 million in 2018 to $808 million in 2026.
“Even if all of the cash flow allegedly available to pay debt service reflected in the Fiscal Plan were remitted to Cofina, the amounts available for debt service would fall short of the DST in seven of the next nine years, including immediately in fiscal year 2018, which begins on July 1, 2017. Plaintiffs thus have been deprived of their property interest in the DST without just compensation or due process…,” the suit reads.
Ambac Assurance Corp., which insures $3.1 billion in Cofina bonds, also filed several lawsuits. One is an injunctive and declaratory relief to protect Cofina bonds from the alleged government looting.
The suit says the government and the oversight board treat Cofina’s property as commonwealth property, to be used for everyday expenses while depriving Cofina of its sole revenue stream; “turn Puerto Rico constitutional and statutory law on its head, giving Cofina’s obligations (and all other Commonwealth bonds) last priority when in fact Puerto Rico law requires that Cofina’s funds remain untouched; and in the process, impose a 77.4% haircut on debt obligations while actually increasing spending over a 10-year period.”
In certifying the fiscal plan, the fiscal board “consciously intended” for Cofina’s property to be appropriated, according to the lawsuit.
Ambac contends the fiscal plan violates Promesa. “First, on Friday, April 28, 2017, the Legislative Assembly passed a purported ‘Fiscal Plan Compliance Law’ which, as its name indicates, further implements the expropriation of protected assets mandated by the Fiscal Plan.
As it concerns Cofina, the Fiscal Plan Compliance Law purportedly requires that all funds belonging to Commonwealth public corporations, including the S Revenues belonging to Cofina, must first flow through the general fund of the Commonwealth (the “General Fund”) to be used for general Commonwealth needs at the discretion of the Secretary of the Treasury. In so providing, the Fiscal Plan Compliance Law attempts to fundamentally dismantle the very structure that made Cofina a successful financing vehicle,” the suit continues.
The Puerto Rico government publicly disclosed a Title VI proposal that, “far from offering a path to conciliation, opportunistically sought to ‘check the box’ on a consensual restructuring process in order to smooth the road to bankruptcy. The proposal advanced draconian cuts to Cofina’s bonds (notwithstanding Puerto Rico law putting those funds out of the reach of the Commonwealth), failed to recognize the seniority of the senior Cofina bonds, and included a ‘death trap’ mechanism offering creditors 2.5 cents on the dollar for their bonds if they refuse to capitulate,” the suit further says
Another suit filed by Ambac targets the government’s debt service moratorium, which began with the previous administration’s Moratorium Act. The insurer points at the new administration’s replacement, the Puerto Rico Financial Emergency and Fiscal Responsibility Act, “together with the Moratorium Act which attempted to conceal but functionally preserved, the unlawful elements of the Moratorium Act.”
Ambac says that as a result of the conduct there will be further payment defaults by each of the entities, in addition to prior payment defaults by Puerto Rico’s Infrastructure Financing Authority (PRIFA) and Highways & Transportation Authority (HTA). “For example, the Commonwealth covenanted, both in the Authorities’ bond resolutions and their enabling statutes, not to take any actions that would interfere with the rights of the Authorities’ creditors. The Fiscal Plan and Fiscal Plan Compliance Law flagrantly violate that contractual and statutory covenant,” the suit says, adding that the defendants have “substantially impaired Ambac’s contractual rights and the Taking Clause.”
“As the insurer of a wide variety of Commonwealth debt across numerous structures, many with maturities extending out decades, Ambac is committed to Puerto Rico’s long-term success. But that success—and any sustainable restructuring—can be achieved only by an approach that respects lawful priorities and liens, as Congress required in extending Puerto Rico the PROMESA lifeline,” the suit says.
Meanwhile, there has been movement in some of the lawsuits already filed against the government, including those by Brigade Leveraged, Oriental Bank, National Public Finance and and the Trigo lawsuits, as motions were filed to withdraw Michael F. Williams and Peter A. Farrell of Kirkland & Ellis LLP from representing the government. The firm had represented the government when former Gov. Alejandro García Padilla was in office. The current government will be represented by the Justice Department.