The Puerto Rico Oversight Board and local government argued against bond insurer Ambac Assurance’s constitutional challenge to the Puerto Rico Oversight, Management, and Economic Stability Act Tuesday.
The oral arguments came in a board motion to dismiss Ambac’s adversary proceeding in Puerto Rico’s Title III bankruptcy under PROMESA.
In May, Ambac had filed a challenge to PROMESA based on the uniformity clause of the U.S. Constitution (Article 1, Section 8, Clause 4), which says the government must impose uniform rules of bankruptcy across the United States.
At one point in the hearing, Judge Laura Taylor Swain said during the Ambac’s attorney’s presentation that she had restrained herself several times from questioning the attorney’s argument. Other than that, she didn’t indicate her leanings.
At the end of the hearing, Swain said she would take the topic under advisement and release a ruling at a later time.
At the start of the hearing board attorney Martin Bienenstock argued that the Uniformity Clause doesn’t apply to PROMESA. Bienenstock said Ambac was arguing that PROMESA is a national law to try to get around Article 4 of the U.S. Constitution, which allows the federal government to rule the territories as it wished.
Bienenstock said the U.S. Supreme Court has ruled twice that federal taxes need not be uniform in the territories with those in the states. He said the court has issued other rulings making clear that the Territories Clause is more important than other parts of the U.S. Constitution when it comes to federal rule over the territories.
He also said PROMESA was quite similar to Chapters 9 and 11 of the bankruptcy code. In this way, it cannot be said to be “non-uniform” with existing law.
Puerto Rico Fiscal Agency and Financial Advisory Authority attorney Peter Friedman argued that the legal doctrines of estoppel and laches barred Ambac from making its arguments. According to the legal principle of estoppel, a party cannot assert a right that contradicts a previous point that it stated or agreed to by law. Laches is the negligent delay in asserting a legal right.
On estoppel, Friedman said Ambac accepted benefits under the Puerto Rico Sales Tax Finance Corp. (COFINA) bond restructuring. It is therefore bared from turning around and attacking PROMESA, which gave birth to that bond restructuring.
Regarding laches, Friedman said PROMESA was 4.5 years old and the bond bankruptcies were 3.5 years old. While Ambac has argued it has been trying to work out arguments consensually since then and only recently turned to this legal challenge, the reality has been that Ambac has tried a variety of constitutional arguments against the law for a while, Friedman said.
Official Committee of Retired Employees of the Commonwealth of Puerto Rico Ian Gershengorn also argued against Ambac. He said PROMESA was a local law for the territory of Puerto Rico and thus protected under the Territorial Clause from challenge.
Ambac attorney Elizabeth Prelogar defended Ambac’s positions and asked Swain to deny the motions to dismiss its case.
Prelogar said the Supreme Court’s Aurelius case decision supported Ambac’s position. In that decision the court found that the Oversight Board was a local government body and PROMESA’s means of appointing the board was constitutional. The court looked at the purpose of the law on this topic rather than simply citing the Territorial Clause, she said.
Accordingly, one should look at the function of the PROMESA law to see if it withstands the Uniformity Clause, she said. The purpose of the Constitution’s Uniformity Clause was to protect outside creditors from discriminatory treatment and to protect national commerce. These functions are relevant in this situation and argue against PROMESA’s legality, she said.
Concerning laches, Prelogar said the board’s injury to the insurer has become more apparent over time. She said the court had previously allowed a party to come forward years later with a suit because circumstances had changed. She said Ambac is only seeking prospective, forward-looking relief.
Concerning the estoppel argument, Prelogar said Ambac did not receive a benefit from the COFINA deal but rather it was given less than it was owed by the bonds’ face value.
She said it was not the case that, regarding the claim under judicial estoppel, Ambac may have argued against the need for a uniform bankruptcy in the past.
