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Judge Swain dismisses Puerto Rico highway authority bondholders’ suit

By on January 30, 2018

SAN JUAN – U.S. District Judge Laura Taylor Swain dismissed a suit filed by several monoline insurers 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 on behalf of the HTA on June 3, 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 approximately $4.5 million. About $4 million of the default amount was insured and paid to bondholders by National and $83,039.34 was reinsured and paid to bondholders by Assured. The HTA subsequently defaulted on a debt service payment on Jan. 1, 2017, totaling about $1 million on certain bonds insured and 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 refrain from making the scheduled July 1, 2017, payment to bondholders from its reserve account and asserting that 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 the Promesa federal law deprived the court of jurisdiction to grant the relief the bond insurers were seeking, which was an order declaring that HTA revenues must be disbursed to its bonds.

After analyzing the law, the judge concluded that “Promesa Section 305’s prohibitions on interference with debtor property interests, revenues and use and enjoyment of income-producing property” deprive her court from interfering with the debtors’ dealings.

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