Puerto Rico bankruptcy judge gives victory to insurers against muni underwriters

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Puerto Rico bankruptcy judge Laura Taylor Swain provided a victory to bond insurers in their fight against Puerto Rico bond underwriters at a Wednesday hearing.

In 2019 insurers MBIA and its subsidiary National Public Financial Guarantee filed suit in the Court of the First Instance, Superior Court of San Juan, against several large underwriters. MBIA and National said that the underwriters had deceived them in the Official Statements they prepared about the creditworthiness of the bond issuers when the bonds were issued years ago.

In February Ambac Assurance also filed a similar suit in local court.

The underwriters in the case are UBS Financial Services, UBS Securities, Citigroup Global Markets, Goldman Sachs, J.P. Morgan Securities, Morgan Stanley, Bank of America as successor to Merrill Lynch, RBC Capital Markets, Santander Securities, Samuel Ramirez, and Raymond James.

The underwriters have filed actions removing the case to the U.S. District Court for Puerto Rico. On Wednesday Swain sent the cases back to the local court.

Swain and the First Circuit Court of Appeals have repeatedly ruled against the insurers' wishes and motions in the Puerto Rico bankruptcy. Wednesday’s ruling was a rare decision in their favor.

Puerto Rico bankruptcy judge Laura Taylor Swain
Puerto Rico bankruptcy Judge Laura Taylor Swain said the local court system should handle the insures' suits.

Sources have in the past, including the late James Spiotto, said the insurers likely believed they would get a more sympathetic hearing from a local judge than from Judge Swain.

"National Public Finance Guarantee Corp. and MBIA Insurance Corp. is gratified by the ruling, earlier [Wednesday], out of the District Court supervising the Title III PROMESA proceedings, granting its motion to remand to the Commonwealth Court of First Instance its complaint against the bank underwriters of Puerto Rico debt," MBIA General Counsel Jonathan Harris said in a statement.

National was represented by Federico Hernández Denton, former Chief Justice of the Puerto Rico Supreme Court, of Vicente & Cuebas, and Philippe Selendy of Selendy & Gay PLLC.

"National appreciates the Court’s thorough and thoughtful ruling on the record. National’s complaint seeks to hold the banks accountable for their misconduct in underwriting the debt insured by National. The Commonwealth Court of First Instance is best suited to consider National’s claims arising under the Doctrina de Actos Propios and Declaración Unilateral de Voluntad, which are rooted in the Puerto Rico civil law tradition and shaped by Commonwealth courts in accordance with equity. National looks forward to appearing in Commonwealth Court," Harris said.

The insurers’ causes of action are based in local laws, Swain said Wednesday. Puerto Rico’s local legal system is strongly influenced by the Spain’s historic legal system, since Spain ruled the island until 1898.

In explaining her decision to send the case back to the San Juan Superior Court, Swain said one or two factors suggested the cases be might be handled in federal court but that more factors strongly suggested the wisdom of handling it in the local court system.

For the latter, she said the outcome of the case would likely have little effect on the bankruptcy estate. The outcome would likely have little or no effect the amount paid out. The outcome would likely have little impact on the administration of the Title III bankruptcy cases, she said.

Swain said she already faced substantial work in the Title III cases and if she were to add these adversary proceedings, they would only hinder her ability to address the other work.

Swain also said that state law issues in the case were significant. The local court’s expertise concerning them would lead it to efficiently resolve the insurers’ adversary proceedings.

Swain said she lacked subject matter jurisdiction in the case because the plaintiff’s primary causes of action were grounded in local law. While there were some federal issues involved, these were not substantial in that their resolution would not be important precedents for the federal system.

Swain said the underwriters’ claim that the outcome of the insurers’ suits against the underwriters might affect the debtors but she said this was only a chance and the effect was likely to be small.

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