Monday, September 16, 2019

Judge to hear request to have Puerto Rico Supreme Court decide if Sales Tax Financing Corp. is legal

By on March 2, 2018

SAN JUAN – U.S. District Court Judge Laura Taylor Swain said she will hear in the April 25 omnibus hearing a request filed by the representative of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), who wants the commonwealth’s Supreme Court to decide on the constitutionality of Cofina.

With her ruling, Judge Swain denied giving the matter an expedited process as Bettina Whyte had requested. The judge said objections must be filed by April 11.

The Financial Oversight & Management Board (FOMB) has accused Whyte, who was appointed by the board, of “circumventing procedures” and “the authority granted to her” over her insistence to have the commonwealth’s Supreme Court decide Cofina’s constitutionality.

Whyte says in court documents that the Puerto Rico Supreme Court, and not a federal court, should decide Cofina’s constitutionality because the matter is guided by Puerto Rican, not federal, law. Against board orders, she submitted a motion asking Judge Swain to refer five questions about Cofina to the commonwealth’s Supreme Court.

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“This litigation seeks to resolve whether state law transferred ownership of state-created property to a state-created entity, and whether that state-law transfer of property is valid as a matter of state constitutional law. These are issues of first impression under Puerto Rico law, will determine the outcome of this litigation, and are fundamentally important to the Commonwealth and its citizens. The Commonwealth-Cofina Dispute was commenced to resolve the question of [whether], after considering all procedural and substantive defenses and counterclaims, including constitutional issues, the sales & use taxes [(IVU by its Spanish acronym), which was] purportedly pledged by Cofina to secure debt, are property of the Commonwealth or Cofina under applicable law,” she said.

The discussion is part of an adversary proceeding brought by the Official Committee of Unsecured Creditors of the Commonwealth against Whyte, the fiscal oversight board and Cofina. The Official Committee argues that IVU funds should be part of general fund revenue to operate the commonwealth, and not separate.

The questions Whyte filed, in essence, ask the commonwealth’s Supreme Court to interpret Cofina’s enabling law to determine if the transfer of IVU collections should be deposited in the Dedicated Sales Tax Fund or not, and whether the transfer of such funds is invalid. She also asked the court to determine if IVU revenue should be considered “available resources” under the Puerto Rico Constitution.

The fiscal board, however, opposes Whyte’s motion because she had signed a stipulation stating the Title III court would resolve the Cofina-Commonwealth dispute. The fiscal board said it appointed Whyte to serve as its Cofina representative to solve the matter of whether IVU revenue is property of the commonwealth or Cofina.

The board then said Whyte “seeks to circumvent these procedures, as well as the authority granted to her by the Oversight Board, by mischaracterizing the question to be determined as one of territorial law, [and] not [of] federal law, [which] must be certified to the Puerto Rico Supreme Court.”

While the fiscal board said Whyte makes a strong argument that territorial law provides that certain taxes are not available resources of the commonwealth, it noted the proposed certification would delay the resolution of the Commonwealth-Cofina dispute.

Whyte’s request, however, is supported by Cofina Senior Bondholders and the Mutual Funds Group.

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