Financial Guaranty Insurance Co.
The suit was filed Tuesday in U.S. District Court, District of Puerto Rico. Puerto Rico's government diverted or "clawed back" the revenues to use for general obligation bond payments, starting with its Jan. 1 general obligation bond payment.
United States District Judge Gustavo Gelpi on Thursday consolidated FGIC's suit with a similar suit filed on Jan. 7 by Assured Guaranty and Ambac Assurance in the same court. Judge José Fusté will hear the case.
Puerto Rico's clawback was from the pledged funds for Puerto Rico Highways and Transportation Authority, Puerto Rico Convention Center District Authority, and Puerto Rico Infrastructure and Finance Authority bonds. According to the Government Development Bank for Puerto Rico, through Jan. 1 Puerto Rico had clawed back $164 million from these bonds for use for the Jan. 1 GO bond payment.
According to FGIC's complaint in the case, FGIC had an exposure of $465 million to PRHTA, $97 million to PRCCDA, and $349 million to PRIFA. The complaint indicates that the total outstanding bond principal of PRHTA was $4.4 billion, of PRCCDA was $420 million, and of PRIFA was $1.6 billion.
PRIFA's rum tax bonds don't have debt service reserves and PRIFA didn't pay $36 million in rum tax bond interest on Jan. 1. FGIC, as the insurer of some of these bonds, paid at least $6.4 million in claims, according to FGIC's complaint.
This complaint said that Puerto Rico rested its clawback on section 8 of article VI of its constitution, the Puerto Rico Management and Budget Office Organic Act of 1980, and gubernatorial executive orders of Nov. 30, 2015, and Dec. 8, 2015. FGIC argued the Puerto Rico constitution and the orders violated the United States Constitution.
Specifically, FGIC cited the "Contracts Clause" – Article I, Section 10, Clause 1 of the U.S. Constitution. "Although the liens granted to the authority bondholders are subject to payment first of public debt, that does not authorize the defendants to 'claw back' or divert the pledged funds under the circumstances described in the executive orders, namely where other available resources exist from which the public debt could be paid."
FGIC also cited the "takings clause" of the Fifth Amendment of the Constitution, due process clauses of the Fifth and Fourteenth Amendments, and the equal protection clause of the 14th Amendment. The insurer also said that Puerto Rico's actions are preempted by federal law.
Along with the governor, FGIC is suing Puerto Rico Secretary of the Treasury Juan Zaragoza G-mez, Puerto Rico Tourism Co. Executive Director Ingrid Rivera Rocafort, GDB President Melba Acosta Febo, Office of Management and Budget Director Luis Cruz Batista, Secretary of State Victor Suárez Melendez, Secretary of Justice César Miranda Rodríguez, and Sub-Secretary of the Treasury Juan Flores Galarza.
FGIC is asking the court to void the two executive orders authorizing the clawback of revenues and bar Puerto Rico from introducing a clawback of authority bond revenues in the future.
The law firms Rexach & Pic-, CSP and Butler Snow LLP are representing FGIC. Assured and Ambac are being represented by four other firms.
Neither the Puerto Rico Department of Justice nor the GDB responded to requests for comment for this story.
