Judge Fusté Sends Lawsuit Filed by Monolines to Judge Besosa
SAN JUAN – Federal Judge José A. Fusté has abstained from presiding the civil lawsuits filed by Assured Guaranty Corp., Ambac Assurance Corp. and Financial Guaranty Insurance Co. against the commonwealth because of opinions he made about the “clawback” mechanism in the recent Wal-Mart ruling, in which he declared a hike in the alternative minimum tax (AMT) unconstitutional.
In an order issued last week, Fusté, who is retiring in June, said that during the Wal-Mart case, the subject of the “clawback” cases was mentioned and anyone examining the Wal-Mart opinion could believe he has an opinion made on the issue of clawbacks, or tapping into a revenue stream destined to cover the payment of other debt.
“Therefore, we asked Judge Francisco Besosa to take over these two cases, and he has agreed to do so. The undersigned has no mind made up about the ‘clawback’ issue but, out of an abundance of caution, we have determined to pass these two cases on,” Fusté stated in the order.
Bond insurers Ambac Assurance and Assured Guaranty filed lawsuits against the commonwealth on Jan. 7 for redirecting pledged revenues, known as clawbacks, to pay constitutionally guaranteed debt service, a move the monolines deem illegal and invalid under the U.S. Constitution. The lawsuit came hours after Puerto Rico’s government failed to pay roughly $36 million in interest due Jan. 4 on Infrastructure Financing Authority (Prifa) debt.
A few weeks later, another lawsuit over Puerto Rico’s debt default was filed by Financial Guaranty Insurance Co. over the clawback mechanism. The U.S. District Court in Puerto Rico decided to join the two lawsuits to save time and money.
FGIC sued Puerto Rico for diverting $164 million in revenue streams meant to pay the island’s debt.
The cases were the first against Puerto Rico since Gov. Alejandro García Padilla called the island’s $70 billion debt load “unpayable” last June. The governor said the only way to afford to pay debt backed by Puerto Rico’s constitution was to redirect or claw back revenue earmarked for debt at other agencies.
In late March, Fusté rule against the new tax that Puerto Rico had tried to impose on Wal-Mart, which had argued that the hike in the AMT would make up more than 100 percent of its profits.
Fusté had said it gave him no pleasure to throw out the tax because of the commonwealth’s fiscal crisis, but that Puerto Rico’s crisis was not an excuse “to take revenue that it’s not entitled to, to pay for essential services.” If Wal-Mart had paid on time and waited to get a refund through the usual channels, it would most likely have never seen the money again, he added.
As part of the opinion, Fusté noted the government has been cannibalizing itself at an astonishing rate because of the clawbacks. “The government has withheld $309 million in appropriations from public entities like the University of Puerto Rico and the Highway and Transportation Authority. Puerto Rico clawed back some $163 million from the accounts of its agencies, but then immediately spent it on a January 2016 public-debt obligation,” he said.
It is evident that the government has been running out of new public resources to consume, he said. “The depth of the Commonwealth’s insolvency can perhaps be measured by the shortsightedness of some of its liquidity measures. Due to the connection between the Commonwealth’s timely payment of its general-obligation bond debt, which is backed by the full faith and credit of the government, and its future access to bond markets, it would seem natural to protect, as long as possible, Puerto Rico’s ability to pay that debt. We have already passed that point.
“The Commonwealth used to set aside $93.1 million each month into a separate account so there would be sufficient money to cover its semiannual payments of matured general-obligation bonds. Puerto Rico then enacted a law to halt those set-asides, freeing up the $93.1 million per month to use on other bills and obligations in the short term, while setting itself up for failure in the long term because the Commonwealth still needs to make its general-obligation debt payments. Because it is no longer saving up enough money, Puerto Rico is now projected to default on its June 2016 general-obligation bond payment of $700 million. That would mark the first step of a disorderly default,” Fusté added.