Puerto Rico revenue bonds can continue not paying debt service during the bankruptcy, an appeals court decided late Wednesday.
The U.S. Court of Appeals for the First Circuit upheld a lower court decision to maintain the bankruptcy’s automatic stay for rum tax bonds from the Puerto Rico Infrastructure and Finance Authority and revenue bonds from the Highways and Transportation Authority.
Judge Sandra Lynch wrote the unanimous opinion for a panel of judges that included Kermit Lipez and O. Rogeriee Thompson.
Bond insurers Assured Guaranty and Ambac Assurance have made several efforts in both the U.S. District Court for Puerto Rico, which is handling the bankruptcy, and in the Court of Appeals for the First Circuit to restart the bonds’ payment of debt service. They have generally been unsuccessful.
On Wednesday the Appeals Court rejected their request to overturn a decision by the District Court in September to maintain the bonds’ automatic stay. National Public Finance Guarantee and Financial Guaranty Insurance Company joined as litigants in the HTA case. FGIC and U.S. Bank Trust National Association stood along with Assured and Ambac in the PRIFA case.
The HTA and PRIFA stopped paying their bonds in 2015. The HTA has $4.17 billion of bonds outstanding. PRIFA has about $1.8 billion of rum tax bonds outstanding, about $800 million of which is insured.
The U.S. government passed the Puerto Rico Oversight, Management, and Economic Stability Act in summer 2016 and this act put a temporary stay on litigation to resume payment of the bonds.
In May 2017 the board first put Puerto Rico and then HTA into PROMESA Title III bankruptcy. The former bankruptcy covers PRIFA. The bankruptcies stay legal efforts to collect money from the bonds. This is called an “automatic stay.”
The bond insurers had argued according to a decision in Grella v. Salem Five Cent Savings Bank (1994) all they needed to show was a “colorable claim” (a reasonable claim) on the bond revenue and the court would need to lift the automatic stay. In response, Lynch said even if the court were to find the insurers had a colorable claim the court, according to a portion of Title 11 bankruptcy included in PROMESA, would have other options besides lifting the stay.
The District Court judge had used factors outlined in an earlier decision Sonnax Industries v. Tri Components Products Corp. (1990) to determine whether to lift the stays. The District Court had focused on five of the 12 Sonnax factors. Four of the five said it was important to consider the judicial efficiency of lifting the stay.
District Court Judge Laura Taylor Swain said, “lifting the automatic stay … would interfere with, and would not promote, the interests of judicial economy” because “it would result in fragmented and possibly premature litigation of factual and legal issues, many of which are currently before the court in the Revenue Bond Adversary Proceedings, that are indisputably central to the restructurings of the commonwealth and its instrumentalities.”
Assured and Ambac have adversary cases (lawsuits) continuing in the HTA and Puerto Rico bankruptcies concerning the HTA and PRIFA bonds. These are in the District Court.
Swain also addressed a Sonnax factor that said the impact of the stay on the parties should be considered. The insurers have “fail[ed] to demonstrate how the hardship they would allegedly face from a continuation of the stay renders them differently situated than virtually any other creditor of a Title III debtor this is required to pursue its claims exclusively in this court.”
Lynch, writing for the Appeals Court, said Swain had not abused her “discretion” in using the Sonnax factors. Lynch said, “the Title III court will eventually decide on a final basis whether the Monolines [insurers] have a property interest in the Revenue Bond Adversary Proceedings.”
The insurers also argued the board is delaying resolution of their claims by supporting the stay. Lynch said the impact of the stay on the insurers is “minimal given that … Puerto Rico has already put up $2.9 billion, more than the debt service on the PRIFA and HTA bonds that the Monolines would be entitled to if their claims are successful.”
“Lifting the stay so that [the insurers] can restart proceedings elsewhere will not be faster than adjudicating their claims in the Revenue Bond Adversary Proceedings,” Lynch wrote.
The Puerto Rico Oversight Board told The Bond Buyer the Oversight Board was "gratified that the U.S. Court of Appeals for the First Circuit, in a 3-0 decision, affirmed the U.S. District Court for the District of Puerto Rico’s denials of certain monoline insurers’ motions requesting permission to take actions to seize critical commonwealth revenues.”
Assured Guaranty Managing Director Robert Tucker told The Bond Buyer, "While Assured Guaranty respectfully disagrees with the First Circuit’s decision, it’s important to note that the decision focused narrowly on procedural and venue issues, and specifically avoided considering the merits of our property interest claims, which remain to be substantively decided. As stated last week, Assured Guaranty will continue to work diligently and constructively toward a comprehensive resolution of the remaining issues with the [Oversight Board] and Puerto Rico government parties in a manner that respects our rights and is aimed at bringing the Title III process to a fair and expeditious conclusion. Until such consensual resolution is reached, we intend to continue to take all necessary steps to enforce our rights under the obligations that we have insured in Puerto Rico.”
