Thursday, November 15, 2018

Swain’s World: Peaje Investment Files Petition With U.S. Supreme Court

By on November 9, 2018

Editor’s note: The following originally appeared in the Nov. 8-14, 2018, issue of Caribbean Business.

The U.S. Supreme Court may be getting involved in Puerto Rico’s bankruptcy case. Peaje Investments LLC recently filed its petition to the nation’s top court, for it to decide what standard courts should follow to determine whether a lien on special revenues is “statutory” under the Bankruptcy Code.

Special revenues are derived from the operation or disposition of projects by the debtor. Peaje Investments owns $65 million in bonds from the Puerto Rico Highways & Transportation Authority (HTA), which are guaranteed by toll revenues and thus are considered special revenues. Under the Bankruptcy Code, a debtor must continue to honor payment of special revenues, but only if the lien held on those revenues was imposed by a statute. Under the Bankruptcy Code, a “lien” is defined as a “charge against or interest in property to secure payment of a debt,” and is entitled to protection depending on its type, whether it is a “statutory lien,” a “security interest” or a “judicial lien.”

Judge Laura Taylor Swain last year denied Peaje’s request for a preliminary injunction directing the HTA to continue to deposit with a fiscal agent the toll revenues that had been pledged to pay HTA bondholders, including Peaje. Swain said Peaje did not have a statutory lien on toll proceeds. The U.S. First Circuit Court of Appeals upheld Swain’s decision, stating Peaje’s lien is not a statutory lien because although the lien is imposed unilaterally by statutory and agency regulation, the lien’s elements are not all spelled out in a statute; some are specified in HTA’s regulations as a matter of discretionary agency action.

According to Peaje, the HTA has been spending all the toll revenues, and has announced its intention to continue to use these revenues indefinitely, leaving the firm unpaid. Peaje says it wants to protect its collateral.

In urging the Supreme Court to take the case, Peaje said the First Circuit’s ruling is in conflict with other Circuit Court decisions and there is a need for a single standard on special revenues. For instance, the Third and Ninth Circuits have determined a statutory lien need not be specified entirely in a statute and may arise as a matter of discretionary agency action. Likewise, the Fifth Circuit has held that a lien imposed unilaterally by operation of law, as opposed to one arising from a bilateral agreement, is properly a statutory lien. “The question presented is: Should the Court grant certiorari to resolve a conflict among the courts of appeals over the correct legal standard for determining whether a lien is a ‘statutory lien’ under the Bankruptcy Code?” Peaje asked.

The firm said the decision by the First Circuit defeats the interests of those entitled to the treatment Congress has prescribed for the holders of statutory liens, including the owners of hundreds of billions of dollars of municipal bonds secured by such liens.

In related news, the First Circuit Court of Appeals this week heard arguments on two decisions made by Judge Taylor Swain earlier this year. One of the appeals was filed by Aurelius Capital Master, a hedge fund with an exposure of more than $4.5 billion to Puerto Rico, and the other by Assured Guaranty Corp. and other monoline bond insurers against the commonwealth.

In the case of Aurelius, the firm sought a declaration that their General-Obligation (GO) bonds were constitutional debt backed by the commonwealth’s good faith and credit. They said the commonwealth had clawback revenues but was using them to pay expenses instead of the GO bondholders. Judge Swain said she lacked jurisdiction for several reasons, including that the plaintiffs sought an advisory opinion on a “hypothetical dispute” and the case was “not ripe” for adjudication.

Judge Torruella, however, asked whether the issue was not better left for the Plan of Adjustment to which the lawyer for Aurelius said it was better to get it in advance to provide guidance, which raised concerns about whether Aurelius was indeed seeking an advisory opinion, which courts are barred from giving. In response to a question, a lawyer for Aurelius acknowledged that Judge Swain had discretion in making the decision, which then raised the question by one of the justices over the need for a declaratory judgment. Judge Howard asked whether issuing a declaratory judgment would affect the behavior of the parties. The lawyer replied that the declaration would not force the commonwealth to act but would tell it what the law was and provide guidance. The lawyer for the commonwealth, Martin Bienenstock, noted that Promesa prevents them from interfering with debtors’ decisions involving assets and that such a decision will have an impact on other creditors. A lawyer for the Retirement System said Aurelius was asking for a determination in “the abstract” instead of in a clear controversy because a debt-adjustment plan had not even been proposed yet.

Assured Guaranty, on the other hand, was also appealing a ruling by Judge Swain who had said she had no jurisdiction to require the HTA to continue to make payments on its bonds. She said special revenues provisions of the Bankruptcy Code do not require the government, after petitioning for bankruptcy, to apply the special revenues to the bonds they secure. The ruling raised concerns in the municipal market over the security of special revenues. Judge Torruella noted that Section 305 of Promesa provides, absent consent by the Oversight Board or a provision in the entity’s debt adjustment plan, the federal district court may not, by any stay, order or decree, interfere with any of the property or revenues of the debtor. When the lawyer for Assured said the legislative history of the statute said otherwise, Torruella replied: “Why go to the legislative history when the language of the statute is clear?” Commonwealth lawyers, on the other hand, said the language of Bankruptcy Code’s Sections 922 and 928 did not require the commonwealth to pay. They also noted that Assured Guaranty could have sought a lift from the stay but lawyers for the monoline bond insurers said the bankruptcy law does not provide holders of special revenue bonds with the remedy of seeking a lift from the automatic stay, which in effect leaves them without legal recourse to protect their rights. Luc Despins, a lawyer for the Unsecured Creditors Committee, said the court had the option of declaring that Assured has an unsecured claim and it merely has a promise to pay. John Mudd, a lawyer, told Caribbean Business he believes the Boston court was tough on the parties but Assured had a better chance than Aurelius of having its ruling vacated.

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