Puerto Rico Title III bankruptcy Judge Laura Taylor Swain has dismissed two major bondholder and bond insurer challenges.

In an order released Tuesday afternoon, Swain rejected the argument that the Puerto Rico Highways and Transportation Authority, Convention Center District Authority and Infrastructure Financing Authority were required to continue to pay their bonds because bonds were secured by liens on pledged special revenue streams. She also rejected the insurers’ argument that the funds in the reserve account were the property of the bondholders and thus should be released to them.

Puerto Rico Title III bankruptcy Judge Laura Swain introduced Chief Mediator Barbara Houser on Wednesday.
Title III Puerto Rico bankruptcy Judge Laura Taylor Swain said there is a difference between holding a lien and being entitled to a court order for payment. U.S. Courts

Bond insurers Assured Guaranty Corp., Assured Guaranty Municipal Corp., Financial Guaranty Insurance Co., and National Public Finance Guarantee Corp. filed the adversary complaint in the Title III case.

Swain also issued a rejection of several hedge funds’ argument that their general obligation and commonwealth-guaranteed bonds deserved special protections because of their guarantee by Puerto Rico’s Constitution.

Commenting on these developments, Puerto Rico Title III observer and attorney John Mudd tweeted, “Plaintiffs are likely to appeal these rulings by Judge Swain and in any event, the meaty issues, i.e., liens and Constitutional priorities, were dismissed without prejudice and as per the opinion, left for a more appropriate date. The rulings on section 922 and 928 [of the U.S. Bankruptcy Code found in the Assured decision], however, are important and as they are simply statutory interpretation issues, have the easiest standard of review, i.e., de novo review.”

The bond insurers pointed to section 922(d) of the Bankruptcy Code as exempting the PRHTA bonds from the automatic stay on payment because they are special revenue bonds.

In her ruling, Swain drew a distinction between acknowledging that the bondholders might have a lien on revenue and agreeing that she might have to order the PRHTA to pay the bonds.

“Based on the plain language of [U.S. Bankruptcy Code] Section 928, its context within the Bankruptcy Code, and the confirmatory content of its legislative history, the court concludes that Section 928 does not mandate the turnover of special revenues,” Swain said.

Bankruptcy Code Section 922(d) “does not address actions to enforce liens on special revenues, which are stayed by [Bankruptcy code] Section 362 (a)(4), and it does not sanction non-consensual interference with governmental properties and revenues, which is constrained by PROMESA Section 305,” Swain wrote. In Section 922(d), “there is no indication that Congress intended to require continued payments, or to grant bondholders power to compel such payments.”

Regarding the bond insurers’ claim that the reserve funds belong to the bondholders, Swain pointed to language in the bond resolution that contradicts this.

The insurers made an alternate claim that the reserve funds hold money “in trust” for them and the bondholders.

Swain said this is a plausible argument but that there are also indicators that PRHTA also has some interest in the trust. She pointed out that public funds are the origin of these funds. “Under these circumstances, [the Puerto Rico Oversight, Management, and Economic Stability Act] Section 305’s prohibitions on interference with debtor property interests, revenues and use and enjoyment of income-producing property deprive this court of power to interfere with the debtors’ dealings with the Reserve Fund property,” Swain said.

Robert Tucker, Assured Guaranty's senior managing director of investor relations and communications, said the company "respectfully disagree(s) with the Court's dismissal of our HTA adversary complaint and its reading for the special revenues provisions of the Bankruptcy Code, which are expressly incorporated in Title III of PROMESA.

"We continue to believe the text of the special revenue provisions, its legislative history and relevant precedent support the conclusion that pledged revenues are to be applied to the payment of debt service during the pendency of the Title III case," Tucker said. "This case, in our view, was an opportunity for the Court to uphold the express protections that Congress sought to provide to revenue bondholders through enactment of the special revenues provisions – to provide reasonable assurance of timely payment on revenue bonds and to provide revenue bondholders with the benefit of their bargain and unimpaired rights to their collateral during the pendency of the Title III case. Regrettably, the Court’s failure to enforce these well-recognized protections for revenue bondholders in accordance with existing precedent will only serve to cause unnecessary delays in achieving consensual settlements and substantial litigation expenses that HTA can ill afford."

Tucker also noted that, while Assured continues to review the Court's opinion and is committed to evaluating all its options, "we currently intend to file an appeal of the Court's decision to the First Circuit."

Additionally, an NPFG spokespersona said "we respectfully disagree with the decision and are evaluating our options."

Concerning the hedge funds’ challenge, Swain said PROMESA section 305’s limitation on her freedom to act was key. The section says without Oversight Board consent she cannot interfere with the governmental powers or revenues of Puerto Rico. In her decision she noted that this section’s provisions are limited by Section 306. However, in this case she said she would need board approval to act in the way the plaintiffs requested.

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