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Litigants Oppose Fiscal Oversight Board’s Intervention in their Suits

By on October 12, 2016

SAN JUAN – Four litigants challenging the constitutionality of the Puerto Rico Emergency Moratorium & Financial Rehabilitation Act, contended Wednesday that a U.S. Justice Department request filed on behalf of the Financial Oversight and Management Board should not delay the adjudication of their claims.

National Public Finance Guarantee Corp., Brigade Leveraged Capital Structures Fund Ltd., the Dionisio Trigo group of bondholders and U.S. Bank Trust National Association in post-trial briefs objected the delay requested by the oversight board arguing that they will suffer harm.

The plaintiffs in the four consolidated cases are waiting for federal Judge Francisco Besosa to decide if a stay imposed by the Puerto Rico Oversight, Management and Economic Stability Act should be lifted. While Promesa imposes a stay on liability claims, it allows the court to lift the stay if the litigant shows cause or irreparable harm. Last week, the fiscal board sought time to intervene in the litigations on behalf of the government, while noting that the lawsuits were covered by Promesa’s stay, but not its substantive provisions.

Brigade, which had sued the Government Development Bank (GDB), in a post trial brief opposed the delays, insisting that a decision will advance the possibility of a negotiation to restructure the debt.

“Two days of testimony, argument by the parties, and the ‘Statement of Interest’ filed by the United States Department of Justice have offered no compelling reason why the Court should delay adjudication of the constitutional claims before the Court. To the contrary, the record—and the reality facing Puerto Rico outside the courtroom—demonstrates that continuing the Promesa Stay and delaying adjudication of this case will work against the very purpose of the Promesa Stay and the interests of Puerto Rico and all of its creditors,” the company said.  

The purpose of the Promesa stay, like the automatic stay of the Bankruptcy Code, is to facilitate voluntary restructuring negotiations and to keep the parties in interest focused on charting the course of the restructuring, the firm said.

“This case is the rare case in which lifting the stay and adjudicating the pending claims on the merits will advance these goals, while maintaining the stay will frustrate them. Plaintiffs and their fellow members of the Ad Hoc Group of GDB Bondholders are the only creditors to reach a framework agreement in the months since the passage of the Moratorium Act. The testimony before the Court revealed that their—and GDB’s—efforts to consummate a restructuring based on the framework agreement have been stymied by the unconstitutional provisions of the Moratorium Act and the amendments made to the Act by Law 40.

“By lifting the stay, and clarifying the ‘rules of the road’ by determining the constitutionality of the challenged provisions of the Moratorium Act, this Court can eliminate a substantial obstacle to voluntary restructuring negotiations and provide needed guidance to the Oversight Board that will begin evaluating the Commonwealth’s—and GDB’s—fiscal plan in a matter of days,” Brigade said.

The Brigade plaintiffs are challenging provisions of the Moratorium Act that attempt to retroactively alter GDB bondholder rights by, among other things, adjusting bondholder priorities. The company is seeking an injunction.


University of Puerto Rico’s, Río Piedras campus

On the other hand, National Public Finance Guarantee reiterated its call for a lift of the stay and for a prompt resolution.

National said it showed at the hearing held in September that the commonwealth has blocked $11 million in combined monthly Puerto Rico Highway and Transportation Authority (HTA) and University of Puerto Rico (UPR) secured revenue streams—pledged for the payment of HTA and Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA) bonds—from reaching trust accounts maintained on behalf of HTA and AFICA bondholders.

“The Puerto Rico Emergency Moratorium and Financial Rehabilitation Act and the executive orders issued thereunder are flagrantly unlawful. They violate the federal Constitution on multiple grounds, as described more fully in National’s complaint. Contrary to the United States’ September 21, 2016 Statement of Interest, the Court should determine the rules of the road now.

“Postponing the decision as to the Moratorium Act’s constitutionality will only prolong uncertainty and keep parties away from the bargaining table. The Commonwealth’s actions are harmful to Puerto Rico’s long-term financial well-being and to restructuring efforts. National is not seeking monetary damages in its lawsuit. It simply wants the Commonwealth to play by the rules and cease using the PROMESA stay as a sword instead of a shield,” the monoline insurer said.

The Dionisio group of bondholders told the court to take judicial notice about the intensity of the Puerto Rican electoral process and the major complications that ensue with a change of government, transition committees, production and evaluation of financial and other data regarding government, and even the disputes regarding certification of elected officials and results of the elections could delay the board’s intervention and further harm them.

“In its Statement of Interest, the United States correctly asserts that Promesa was enacted to provide an approach to Puerto Rico’s ‘fiscal, management and structural problems and adjustments…involving independent oversight and a Federal statutory authority for the Government of Puerto Rico to restructure debts in a fair and orderly process.’

“Nevertheless, the restructuring of existing debts in a ‘fair and orderly process,’ cannot contemplate the unilateral slanting of the playing field by the Government of Puerto Rico as a result of confiscatory unconstitutional actions predicated on the Moratorium Act, as amended. A level playing field is of critical and transcendental importance to any ‘fair and orderly process,’” the Dionisio bondholders said.

Meanwhile, U.S. Bank Trust National Association, a University of Puerto Rico trustee, noted that the board’s power to “rescind” unlawful actions of the commonwealth and its instrumentalities similarly fails to provide adequate protection for the diversion of the Trustee’s collateral.

U.S. Bank Trust asked the court to reopen the record of the case, which already went to hearings, so it can present evidence to allow the trustee to refute the opinion of Prof. Jonathan Arnold, who said that “as a matter of economics,” the UPR bondholders “aren’t suffering short-term irreparable harm because of the Promesa stay.”   

Arnold’s testimony violated the court’s order that directing the parties to disclose the subject matter of their witnesses’ testimony. They said they objected his testimony.


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