Wednesday, September 23, 2020

Legal battle over Puerto Rico’s sales tax money begins

By on September 16, 2017

Editor’s note: The following article originally appeared in the September 14 print edition of Caribbean Business.

SAN JUAN — The legal battle over who is entitled to hundreds of millions of dollars in Puerto Rico’s sales tax revenues each year officially began late last week. It is a key conflict that sets the pace for the commonwealth’s bankruptcy case under Title III of the federal Promesa law.

On Friday, Sept. 8, the official committee of unsecured creditors, which represents the commonwealth government, sued Bettina Whyte, who stands for the interests of the Sales Tax Financing Corp. (Cofina)—a lockbox entity that has more than $17 billion in bonds under its belt and receives a portion of sales tax collections to pay for its debt service.

According to the complaint, the commonwealth seeks to stop these transfers and tap into this money by arguing the Cofina structure is “unconstitutional and void,” and as such, the contested sales tax revenues belong exclusively to the government.

The U.S. District Court of Puerto Rico. (Juan J. Rodríguez/CB)

Litigation over the Cofina money between the entity’s creditors and the government had already been agreed upon in early August among key parties. The commonwealth government, the financial control board and Cofina creditors signed off on a timeline and process to solve the matter—a “gateway” conflict in the island’s debt-restructuring saga.

As the stipulation provides, federal Judge Laura Taylor Swain—in charge of the island’s Title III cases—is expected to rule on the commonwealth vs. Cofina issue by Dec. 15.

A host of arguments comprise the commonwealth’s bid to assert control over the contested sales tax money, which tops $753 million this fiscal year, and increases annually.

Chief among them, counsel for the commonwealth agent, Paul Hastings LLC, calls into question the validity of Cofina, by assuring the structure is unconstitutional. It argues that the legislation that created the entity, Act 91 of 2006, evaded or violated the Puerto Rico Constitution, particularly the commonwealth’s constitutional debt limit.

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“As a result, all of the sales tax revenues at issue are exclusively Commonwealth property,” reads the complaint. This includes future sales tax money, as well as the money currently in deposit with the Bank of New York Mellon, which acts as Cofina’s fiscal agent.

Other arguments include that the entity’s enabling legislation, Act 91, did not transfer to Cofina ownership or a right to receive future sales tax revenues. At best, it was nothing more than an “unsecured promise” that future sales tax money would be deposited into Cofina when deposited by the government, according to the complaint.

“Like any other pre-petition promise of a debtor, that promise can be breached, revoked and/or rejected after the filing of a Title III petition, giving Cofina, at most, an unsecured claim in the Commonwealth’s Title III case,” adds the document, in reference to the beginning, in early May, of Cofina’s Title III bankruptcy case—the second one filed by the island’s fiscal board.

According to the stipulation on how to solve the conflict, counsel for the Cofina agent—Willkie, Farr & Gallagher—must file its answer to the complaint by Sept. 15.

Toll revenues to remain with HTA

That same Friday, Judge Swain ruled in favor of the Puerto Rico government and the financial control board by denying a complaint filed by a creditor group over toll revenues.

The judge ruled against Peaje Investments, which owns about $65 million in Highways & Transportation Authority (HTA) bonds, and sought to force the commonwealth to resume monthly deposits of toll revenues with its fiscal agent. This revenue stream guarantees the payment of bonds issued by the public corporation.

By virtue of local legislation and executive orders, the HTA has redirected this money for other operating expenses. In May, the HTA—with the fiscal board as its representative—filed for bankruptcy protection under Title III of Promesa.

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In her decision, Swain explained that the creditor group failed to demonstrate that the commonwealth does not need to tap into toll revenues to ensure the functioning of its roads. Likewise, it could not prove that the value of its collateral—–Puerto Rico’s toll roads—was depreciating.

As for the existence of a “statutory lien,” the court found Peaje also failed to show such a lien exists over toll revenues. Judge Swain ruled that neither the HTA enabling act, nor the 1968 Resolution—upon which the entity issued bonds—automatically created “liens” by force of law.

The court added that even if Peaje had proved to have a statutory lien, the commonwealth was able to demonstrate that the interests of the creditor group are adequately protected by the government’s efforts “to [keep] the commonwealth’s toll roads in working condition.”

The latter would ensure toll revenues are available in the future, Judge Swain added.

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