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UPR’s Trustee Files Lawsuit Claiming University Diverted Debt Payment

By on August 19, 2016

SAN JUAN – U.S. Bank Trust National Association, the trustee of the University of Puerto Rico, has sued the academic institution for diverting pledged revenue from Pell Grants and student tuition for other uses rather than toward paying its debt.

The lawsuit, which includes UPR President Celeste Freytes González and the commonwealth government, requests a relief from the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa) stay and declaratory and injunctive relief to prevent the commonwealth’s diversion and expropriation of pledged revenues, including approximately $89 million in pledged tuition and fees that constitute the UPR Bonds’ collateral in debt payments.

Besides seeking a relief from the stay, the trustee wants the UPR to continue making debt payments.

The UPR stopped making deposits to the trustee’s fund to pay debt in June after Gov. Alejandro García Padilla issued an order under the Puerto Rico’s Moratorium Act that among other things suspended the UPR’s obligation to transfer “pledged revenues,” including tuition and fees, to the trustee.

“UPR collects tuition and fees from 57,000 students out of their own funds or from Pell grants or other aid received from the federal government on the students’ behalf.  Tuition and fees comprise the best and most certain UPR Bonds’ collateral, as they are paid by third parties and are not subject to the funding of Commonwealth budgets or to any diversion under the Puerto Rico Constitution,” the suit claims.

Pledged tuition and fees alone are sufficient to pay the entire $42.6 million annual debt service on the UPR Bonds. Tuition and student fees for each academic year are payable in installments, heavily weighted toward the start of each academic semester – with the bulk of this year’s  tuition and fees payable prior to Feb. 15, 2017, when the Promesa stay expires, the suit says.

People wait to hear Sen. Bernie Sanders speak at the University of Puerto Rico's Río Piedras campus.

People wait to hear Sen. Bernie Sanders speak at the University of Puerto Rico’s Río Piedras campus May 17, 2016.

“If UPR and the Commonwealth divert and expropriate pledged revenues, including tuition and fees, to meet expenses other than debt service, the diverted revenues will be lost to the Trustee and bondholders forever,” the suit says.  

“Unless injunctive relief is granted by the end of December 2016 to preserve the Trustee’s lien on enough spring semester tuition and fees to pay principal and interest due June 1, the Commonwealth and UPR’s diversion and expropriation of Pledged Revenues will force the Trustee to deplete its Reserve Account, which UPR pledged to Bondholders as separate security for the twenty-year life of their bonds,” the lawsuit says.

The UPR and the commonwealth cannot justify the expropriation of the pledged revenues, particularly from tuition and fees, the suit says. “Tuition and student fees comprise only about 6% of UPR’s total expenses (and matching revenues) projected in UPR’s budget for fiscal year 2017, and the portion of tuition and fees used to fund debt service on the UPR Bonds comprises approximately 3.0% of budgeted expenses (and matching revenues),” the suit reads.

U.S. Bank is accusing the UPR and the government of violating the Takings Clause and Contracts Clause of the Constitutions of the United States and Puerto Rico. The bank also says the Moratorium Act, on which executive order is based, were preempted by Promesa.

In addition to the injunction, the trustee seeks relief from Promesa’s stay to apply funds currently on deposit in its UPR Bond trust accounts in accordance with the terms of the trust agreement.

A source with knowledge of the lawsuit chided UPR officials in an interview with Caribbean Business because “instead of defending their fiduciary duties and making the payments, they went along with what the government says.”

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