Puerto Rico Title III Judge Laura Taylor Swain retained control over deciding on the validity of the island's sales tax bonds and diminished the Oversight Board’s role in the case at a hearing Wednesday.
Two mutual fund groups had called on the judge to allow the Puerto Rico Supreme Court to issue a ruling on the validity of the Puerto Rico Sales Tax Financing Corp. (COFINA) bonds. They said she should lift the stay on a case that was deciding that matter and allow the Puerto Rico Supreme Court to rule on whether the legislation that established COFINA violated Puerto Rico’s constitution.
“Absent a ruling that the COFINA statute is unconstitutional, the commonwealth will have to revise its fiscal plan and current budget within the next few months to come up with funding that it currently assumes will come from COFINA’s revenues,” they stated in their written brief.
The Title III case focuses on restructuring of $17.9 billion of COFINA debt and $13 billion of Puerto RIco general obligations. A key issue in the case is whether COFINA revenue can be diverted from repayment of its bondholders.
Speaking for the COFINA holders, Kramer Levin Naftalis & Frankel attorney Philip Bentley told Swain that “Time is of the essence.” Puerto Rico’s government has said that the government will run out of money in November unless it gets access to the sales tax revenues.
Because of this lack of time, Bentley urged Swain to partially lift a stay on an existing case and have the local court rule on the issue.
Any decision by Swain on that dispute would be appealed to the local court, the movants said in their brief. So the quickest way of dealing with the matter is just have the court rule on the topic now.
Swain denied the motion saying that the movants' arguments relied on speculative assumptions. The Supreme Court is unlikely to accept a question on certification on the constitutional question, she said.
The mutual funds holding sales tax bonds haven’t shown that they are likely to be harmed significantly by allowing the stay to continue, Swain said. She said she could handle the topic when she wanted to do so.
Later on Wednesday morning, Swain ruled against the Oversight Board’s motion to appoint dedicated agents for the general obligation and COFINA creditors. She urged the parties to come up with a new mechanism.
“Let’s cut to the chase,” the judge said. “The current proposal has substantial problems. I intend to deny without prejudice this party’s application.”
Swain cited concerns over a possible conflict of interest of the Oversight Board appointing agents to represent the creditors and over what would be the correct role of a fiduciary in that situation.
She urged both sides to come up with a different strategy and find a new mechanism “that will work with all parties.” She added that any new plan should more clearly spell out whether people at the settlement table should be the same people at the litigation table.
Lawyers for monoline insurers National Public Finance Guarantee Corp., Assured Guaranty Corp., Assured Guaranty Municipal Corp. and Ambac Assurance Corp. had all argued against the Oversight Board’s motion.
National asserted that the only way the agent process could work was if the creditors had faith in the agent—so that the Oversight Board should be divorced from it. They said they believe the board’s aim is to raid COFINA to take money for the commonwealth.
Attorneys for Oversight Board, however, had countered that its choice of agents would be limited to a list provided by the creditors. The board denied it wanted to take COFINA’s assets.
