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Judge Swain to determine legality of Puerto Rico Sales Tax Financing Corp. bonds

By on May 25, 2018

SAN JUAN – U.S. District Judge Laura Taylor Swain denied Thursday against certifying questions to the Puerto Rico Supreme Court related to the legality of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), a crucial issue in a dispute with holders of commonwealth bonds.

The ruling means Judge Swain herself will decide the legality of Cofina and who owns the sales and use tax.

After hearing oral arguments in the dipute on May 9, Judge Swain ruled against allowing the top local court to make determinations into Cofina’s legality as requested by Cofina’s representative in the dispute, Bettina Whyte, arguing that Whyte ignored the issue arises from federal questions and not just purely Puerto Rican law, and that certifying the questions would delay the resolution of the proceeding under the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa) bankruptcy-like Title III.

On Aug. 10, the court approved an order authorizing the Official Committee of Unsecured Creditors and Whyte to serve as the commonwealth’s and Cofina’s agent, respectively, as part of a court proceeding to determine whether the sales and use taxes are property of Cofina or the commonwealth.

Whyte and other groups sought to certify certain questions to the Supreme Court to determine Cofina’s legality, arguing that the exercise involved the analysis of Puerto Rican law.

The commonwealth agent, the Financial Oversight and Management Board (FOMB), and the Ad Hoc Group of General Obligation Bondholders objected their efforts, arguing the analysis involves using federal bankruptcy law.

The issue of determining who owns sales and use taxes is important to determine what are the assets of the debtors and to be able to distribute debt.

Federal courts use the rules of the Supreme Court of Puerto Rico to determine if whether questions are referred to the commonwealth court. The federal court must determine if the controversy involves questions of Puerto Rican law; if the questions may determine the outcome of the case; if there are no clear precedents and if the case makes an account of all the facts relevant to said questions showing clearly the nature of the controversy giving rise to the questions.

“Although the issues raised by the Commonwealth-COFINA Dispute are novel and are of great importance to the people of Puerto Rico, the parties seeking certification characterize the scope of the issues before the court too narrowly and ignore the federal bankruptcy context in which the Commonwealth-COFINA Dispute arises,” Judge Swain said.

While the judge also found that Whyte did not waive her right to seek certification by proceeding with a motion for summary judgment motion because that was needed to frame the questions correctly, she said that to resolve the central question of ownership of the sales and use tax, the court will have to use federal bankruptcy law arguments raised by the parties.

Certification is also unwarranted, Judge Swain said, because it would delay the resolution of the dispute, impede progress toward a plan of adjustment and postpone the conclusion of the Title III proceedings.

“Although the parties present differing views on the speed with which the Supreme Court of Puerto Rico would reach a decision on the proposed questions if certified, certification will at least entail another round of briefing and argument and…any decision by the Supreme Court of Puerto Rico would still be subject to further bankruptcy law considerations as to what ultimately constitutes property of which debtor under PROMESA and various incorporated Bankruptcy Code provisions,” she added.

Daniel Patrick Moynihan U.S. Courthouse (edenpictures on VisualHunt)

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