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Puerto Rico revenue bond litigation heats up

Legal struggles over revenue bonds issued by the Puerto Rico Highways and Transportation Authority, Infrastructure and Finance Authority, and Convention Center District Authority intensified this week.

On Thursday the Puerto Rico Oversight Board filed three adversary proceedings totaling 2026 pages, each concerning one of the authorities’ bond types. In each, the board challenged bond insurers’ bond claims.

The bond insurers fighting for the bond payments are Assured Guaranty Corp., Assured Guaranty Municipal Corp., National Public Finance Guarantee Corp., Ambac Assurance Corp., and Financial Guaranty Insurance Co.

The board’s adversary complaint concerning PRIFA contains 102 counts objecting to the bond insurers' claims. Its complaint concerning HTA includes 202 counts objecting to the claims. Finally, its CCDA complaint holds 111 objections to the claims.

The board’s filings Thursday responded to a court-ordered schedule, a board spokesperson said.

The board may not really believe all the arguments it is making, but may be creating as many as it can in an effort to get the defendants to agree to a settlement, said James Spiotto, Chapman Strategic Advisors managing director.

However, Spiotto also said that issues around the authorities' bonds must be decided upon before the central government debt goes to the court for confirmation of a plan of adjustment. Otherwise, it will be unclear how much money the central government will have to pay on its debt and other expenditureso other .

Spiotto said that it could take the court more than a year to resolve the revenue bond issues.

In its counts, the board seeks to convince the judge to disallow the bond insurers' claims because, for example, the revenue bonds are not secured by a statutory lien, not secured by an equitable lien, and not backed by ownership of the retained rum tax remittances.

As of February 2017 the HTA had $4.1 billion of debt outstanding, PRIFA had $2.2 billion of debt, and the CCDA had $386 million.

Since the board’s filing of the adversary proceedings there have been additional legal actions concerning the bonds.

On Tuesday, the bond insurers filed an objection to the board’s response to mediation team recommendations on how to handle the revenue bonds’ litigation. The insurers were willing to accept a compromise between its position and that of the board that the mediation team had recommended on litigation procedures. But the board has challenged the compromise, the insurers said.

“The court should hold a final hearing on the lift stay motions, and the revenue bond adversary proceedings should be stayed pending resolution of the lift stay motions and the enforcement actions,” according to the insurers. They hope to pursue “enforcement actions” once they gain relief from the automatic stay in which they will go to a court outside the current Puerto Rico bankruptcy court to get an order to enforce their claims.

The bond insurers also tell the judge that the board’s interpretation of the Puerto Rico Oversight, Management, and Economic Stability Act’s section 305 is too narrow. The judge should interpret the section in a way that the insurers can raise “any proper affirmative defense.”

Separately on Thursday the insurers filed a motion to amend their motion concerning the automatic stay to the revenues securing PRIFA rum tax bonds.

In their motion last Thursday, the insurers tried to do four things, including wanting to add an amendment that argues that a 2019 decision from the First Circuit Court of Appeals impacts the resolution of their motion for a lift to the stay. They also hope to add an amendment about developments on instructions in Puerto Rico's cash management system that accompany rum tax remittances related to the PRIFA bonds. The amendment would also cover developments in sub-accounts within Puerto Rico's central bank account.

On Wednesday the board filed its opposition to the motion. The board argued that the motion should be denied because it would be “futile, serve no useful purpose, and prejudice the Commonwealth [of Puerto Rico].”

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