Thursday, December 2, 2021

Boston Court to hear appeals in Puerto Rico from hedge funds, bond insurers

By on November 2, 2018

SAN JUAN – The U.S. First Circuit Court of Appeals is slated to hear oral arguments Monday on appeals filed by Aurelius Capital Master, a hedge fund with a more than $4.5 billion exposure to Puerto Rico, as well as Assured Guaranty Corp. and other monoline bond insurers against the commonwealth.

Each party will have 20 minutes to argue their case before justices Jeffrey Howard, Juan Rafael Torruella and O. Rogeriee Thompson, who together with other First Circuit justices will be in Puerto Rico for four days to hear oral arguments on a host of cases.

The appeals may have an impact on the importance and value of special revenue bonds and general obligation (GO) bonds. Special revenue bonds are those that are paid by a specific activity, such as tolls or utility projects. Different U.S. jurisdictions have increasingly relied on special revenue bonds for financing. These bonds continue to be attached to property after a bankruptcy and often are exempted from the automatic stay. GOs are backed by the full faith and credit of a state, or in this case Puerto Rico.

In January, U.S. District Judge Laura Taylor Swain dismissed a lawsuit filed by several monoline insurers, such as Assured Guaranty, seeking an order requiring the Puerto Rico Highways & Transportation Authority (HTA) to continue to make payments on its bonds after arguing that the court lacked jurisdiction.

The island’s Financial Oversight and Management Board filed for Title III bankruptcy under the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa) on behalf of the HTA in 2017, and shortly thereafter, Assured Guaranty Corp., Assured Guaranty Municipal Corp., Financial Guaranty Insurance Co. and National Public Finance Guarantee Corp. sued, contending that HTA’s failure to make payments violated certain bankruptcy code statutes and seeking relief from the court.

On July 1, 2016, the HTA had defaulted on a debt service payment on its bonds aggregating about $4.5 million. About $4 million of the default amount was insured and paid to bondholders by National and $83,000 was reinsured and paid to bondholders by Assured. The HTA subsequently defaulted on a debt payment on Jan. 1, 2017, totaling about $1 million on certain insured bonds, which was paid to bondholders by National.

On June 20, 2017, the Puerto Rico Fiscal Agency and Financial Advisory Authority (Fafaa), on behalf of HTA, ordered the Bank of New York Mellon, as fiscal agent, to not make the scheduled July 1, 2017, payment to bondholders from its reserve account, asserting the payment would constitute an act to exercise control over HTA’s property in violation of the automatic stay.

Judge Swain sided with the government’s assertion that her court lacked the power to order payment of pledged special revenues to HTA bondholders. She also sided with government assertions that Section 305 of Promesa deprived the court of jurisdiction to grant the relief the bond insurers were seeking, an order declaring HTA revenues must be disbursed.

In the case of Aurelius and several other funds, they sued to have a declaration that their GOs were constitutional debt backed by the commonwealth’s good faith and credit. They said the commonwealth had clawback revenues but was using them to pay expenses instead of the GO bondholders.

The commonwealth moved to dismiss the case on several grounds, including that the court lacked subject matter jurisdiction over the GO bondholders’ claims because these did not satisfy the “case or controversy” requirement. Judge Swain said she lacked jurisdiction for several reasons, including that the plaintiffs sought an advisory opinion on a “hypothetical dispute” and the case was “not ripe” for adjudication.

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