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Judge Swain dismisses Puerto Rico bondholder suit due to lack of jurisdiction

By on January 30, 2018

SAN JUAN – U.S. District Judge Laura Taylor Swain closed a lawsuit Tuesday filed by more than 20 hedge funds, headed by Aurelius Capital Master, that were seeking payment of their constitutionally guaranteed commonwealth bonds. She argued that the federal law Promesa did not empower her court to grant the relief.

The interpretation of Promesa put forward by Judge Swain in dismissing the suit appears to heighten the Financial Oversight and Management Board’s powers over debt payments. The judge had dismissed another suit filed by Puerto Rico Highways & Transportation Authority bondholders on similar grounds.

Judge Swain dismisses Puerto Rico highway authority bondholders’ suit

“Since section 305 [of Promesa] nonetheless disables the Court from granting certain types of relief, it is significantly (and literally) determinative of the question of whether Plaintiffs have stated claims upon which relief may be granted. Here, the relief sought in Counts One, Two and Nine through Eleven would, if granted, result in declarations and an injunction that would directly restrict the Commonwealth’s use of its revenues and its exercise of political and governmental powers. The Oversight Board has not consented to any such relief. The Court thus cannot grant the relief sought,” Judge Swain said.

“The statute bars the Court from interfering with the enumerated governmental powers, revenues and property ‘by any stay, order, or decree, in the case or otherwise’—a prohibition of sufficient breadth to encompass all forms of relief,” she added.

The events that led to the suit go back to the previous administration.

On Nov. 30, 2015, then-Gov. Alejandro García Padilla issued an executive order instructing the commonwealth to retain revenues, which were used to make a $164 million constitutional debt service payment on Jan. 1, 2016. The plaintiffs argued that the commonwealth clawed back an additional $289 million in 2016. On July 1, 2016, the commonwealth defaulted on about $817 million due on its commonwealth bonds.

In May 2017, the fiscal oversight board filed for bankruptcy on behalf of the commonwealth under Title III of Promesa.

The plaintiffs accused the commonwealth and the fiscal board of violating Promesa and abusing Title III, asserting that the failure to segregate revenues and dedicate them principally to the payment of service on constitutional debt violated their rights under the Puerto Rico Constitution and statutes. They wanted to have the revenues to pay their debt segregated in another account.

Judge Swain dismissed a plaintiffs’ request for a ruling that the revenues were “restricted” as vague and inconclusive and insufficient to frame a case or controversy. “The Court thus lacks subject matter jurisdiction of that aspect of the request,” she said.

However, the judge dismissed the rest of the suit arguing she could not order the government to make payments because she lacked jurisdiction.

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