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Judge yet to rule on Puerto Rico sales tax ownership dispute

By on May 9, 2018

SAN JUAN – U.S. District Judge Laura Taylor Swain took under advisement Wednesday that it be the Puerto Rico Supreme Court where the constitutionality of the Puerto Rico Sales Tax Financing Corp. (Cofina) is addressed, as well as whether the island’s sales and use tax belongs to corporation or to Puerto Rico’s general fund.

The issue is important because while Cofina’s enabling law, Act 91, says the sales and use tax (IVU by its Spanish acronym) belongs to Cofina, the law also calls for part of the money to go to the general fund. The law also created a Dedicated Sales Tax Fund, to be held and owned by Cofina separate from the central government’s general fund, and provided, among other things, that each fiscal year the first receipts of IVU, in an amount specified under the law, be deposited in the dedicated fund to pay sales tax revenues. The rest goes to the general fund.

That has repercussions when determining which is the debtors’ or estate’s property and on how the latter’s assets will be distributed.

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Supporters of allowing the local Supreme Court to decide the issue contended that it is a matter of local law and that the federal court should show deference to local courts before declaring a Puerto Rican law unconstitutional. The legality of the transfer of sales tax revenues to Cofina has not been analyzed by the local courts.

Opponents argued that the matter contains federal implications. The Supreme Court traditionally does not accept certified questions that involve federal law, even when they are mixed with commonwealth law matters. Holders of general obligation bonds, whose debt is guaranteed by the local constitution, argue the sales and use tax are available resources under the constitution and should be used to pay them.

The dispute is part of the Official Committee of Unsecured Creditors v. Bettina Whyte adversary proceeding, the latter of which is the Cofina bondholders representative in the process. Whyte, who was hired by the island’s fiscal oversight board, is pushing to certify certain questions to the local top court regarding the legality of Cofina despite the board’s opposition.

“The transfer of ownership to Cofina has never been interpreted by any court. Those factors make it appropriate for certification as a deference to the local court,” noted Whyte’s attorney, Antonio Yanez.

While Yanez said the matter could only be answered by commonwealth law, Judge Swain noted that at some point she was going to have to make a determination regarding what is property of the debtors.

While the case is ready to be decided on a motion for summary judgement and Judge Swain had said in April she was going to decide on the matter, Whyte issued an emergency motion to certify the questions to the Supreme Court.

Lawyers representing Cofina and other entities supporting the certification of questions to the commonwealth Supreme Court said there were matters involving interpretation of the Civil Code and Property Law that were best left to the top court.

Gregory Silbert, a lawyer representing National Public Finance, said there was no reason to certify questions to the commonwealth’s high court because the issue is simple: The sales and use tax money belongs to Cofina.

Although certifying local law questions can provide helpful guidance for federal courts in some circumstances, the process by its very nature is cumbersome and time-consuming and can stop a case in its tracks, some lawyers argued.

Rafael Escalera, who represents the Cofina Senior Bondholders Coalition, said he expected the top court would act swiftly, which Judge Swain echoed when saying the court has acted expeditiously in answering questions from the federal court in matters involving elections or that have a fixed timetable. “Here there is not a particular timetable or target,” she said.

Martin Bienenestock, a lawyer for the fiscal board, acknowledged that neither Cofina nor the commonwealth can have an adjustment plan without learning what is property of the debtor. “Anything that does not answer that question is a waste of time,” he said.

In the context of these cases under the Promesa law’s Title III, determining the effect of the Cofina statutes in the Cofina-Commonwealth dispute will require the court to evaluate whether the statutes and any applicable provisions of the Puerto Rico Constitution are local property laws the court should disregard as a matter of federal law.

Although determinations of what is property may be determined by local law, determining what is property of the estate under the Bankruptcy Code or property of the debtor under Promesa is a question of federal law, the fiscal board’s lawyer argued.

Mark Stancil, a lawyer representing the Ad Hoc Group of General Obligation Bondholders, told Judge Swain that Congress made a choice of having a district choice deal with the case, to which the Judge said Promesa does not give her exclusive jurisdiction or excludes the use of other authorities in making a decision.

Stancil said the issue was complicated and that the case could not afford to be extended a long time. “This is a sensitive and politically charged issue,” he stressed.

Escalera told the court that “the possibility of success lies in trust” and in placing that trust in Puerto Rico institutions

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