Government Asks Judge to Dismiss National’s Lawsuit
SAN JUAN – The government asked a federal judge Tuesday to dismiss a suit filed by National Public Finance Guarantee Corp. challenging the constitutionality of the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, arguing the firm has no standing.
The government’s motion to dismiss was filed in court even though Judge Francisco Besosa has yet to decide whether to stay the lawsuit following the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa), which imposes a stay on lawsuits filed after December.
National is a monoline insurer that has provided financial guaranty insurance for more than $715 million in bonds issued by the Puerto Rico Highways and Transportation Authority; approximately $684 million in bonds issued by the Puerto Rico Sales Tax Financing Corp.; $66 million issued by the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA); and $985 million of general obligation debt issued by the commonwealth.
On June 15, the company sued the government, seeking to have the Moratorium Act declared unconstitutional. One week later, on June 22, the firm filed a Motion for Partial Summary Judgment. Sometime later, President Obama signed Promesa into law, significantly altering the landscape of this litigation. The law provides for an automatic stay of legal proceedings until at least Feb. 15.
The government filed a Notice of Automatic Stay on July 7. The court gave the parties until July 18 to respond to the stay.
In its petition to dismiss, which the government says it was filing as a protective measure, officials noted that National had not satisfied a requirement that it had legal standing because it was not protecting its own rights.
“Plaintiff is a monoline insurer, not a bondholder. Yet it seeks to bring this suit to vindicate the rights of bondholders…. For similar reasons, plaintiff’s claims are not ripe…. To the extent that plaintiff’s claims are based on the impairment of supposed contractual or property interests of bondholders, those claims fail because it does not yet stand in the shoes of those bondholders (and, in any event, none of those rights have yet been impaired). To the extent that plaintiff’s claims are based on a fear that it will be forced to make payments on obligations suspended pursuant to Act 21, that fear is speculative. The Court cannot adjudicate plaintiff’s claims at this point,” the government said.
The government also dismissed National’s allegation that the Moratorium Act violates the contract clauses of the constitutions of the United States and Puerto Rico.
“It is by now well settled that the Contract Clause does not prevent a state from safeguarding the welfare of its citizens during economic crisis…. Assuming arguendo that plaintiff could show substantial impairment of its contractual rights, plaintiff would still be unable to show that such impairment violates the Contract Clause. As already discussed, the Contract Clause does not prevent a state from the appropriate exercise of its police power,” the government said.
Regarding claims that the Moratorium Act violates the Takings Clause of the federal Constitution—which provides that “private property [shall not] be taken for public use, without
just compensation,” the government said National has not identified a single contractual provision giving it the rights it asserts. “Instead, plaintiff cites only bondholder agreements giving bondholders certain contractual rights. Plaintiff cannot ground a Takings Clause claim based on someone else’s rights. But even if plaintiff were attempting to assert its own rights, the contractual rights at issue would not be ‘property’ within the meaning of the Takings Clause,” it said.
“[P]laintiffs must first establish an independent property right before they can argue that the state has taken that right without just compensation…. Courts have long distinguished between contractual rights to obtain payment on a debt—which are protected by the Contract Clause—and rights to particular property acquired through a contract—which are protected by the Takings Clause,” it added.