Assured Gauranty Corp. v Commonwealth of Puerto Rico

Case Type:
Case Status:
20-1930 (1st Circuit, Mar 03,2021) Published
The U.S. Court of Appeals for the First Circuit (Circuit) held that the judge sitting by designation on the U.S. District Court for the District of Puerto Rico solely for hearing petitions under Title III of PROMESA (Title III Court) had not abused its discretion in denying relief from the automatic stay under § 362(d) of the Bankruptcy Code (Code), as incorporated by PROMESA, requested by four entities who had insured bonds issued by the Puerto Rico Highways and Transportation Authority (HTA) and the Puerto Rico Infrastructure and Financing Authority (PRIFA).
Procedural context:
In May 2017, the Financial Oversight and Management Board (FOMB) commenced two separate proceedings for relief (Title III Proceedings) on behalf of the Commonwealth of Puerto Rico (PR or Commonwealth) and HTA under Title III of PROMESA, the acronym for the Puerto Rico Oversight, Management, and Economic Stability Act. The tendering of the petitions that triggered these cases automatically stayed two extant actions against HTA and PR, then pending in the U.S. District Courts for the District of Puerto Rico (DC-PR) and the District of Columbia (DC-DC), initiated by the four entities—Ambac Assurance Corporation, Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company (Monolines or Appellants)—that had insured bonds previously issued by HTA and PRIFA and had been forced to pay their insureds upon these entities’ 2015 default. While no such filing was made on behalf of PRIFA, no party questioned that a similar stay barred further action against it as well. The Title II Proceedings took place before the Title III Court. After two appeals, the parties commenced the latest chapter of this interminable saga before this tribunal. On January 16 and 31, 2020, Monolines moved to lift the automatic stay of claims related to the HTA and PRIFA bonds, arguing that they had “colorable claim” to property by PR. In the same month, FOMB launched adversary proceedings against the Monolines’ proofs. Ultimately, the Title III Court stayed these adversary proceedings, but allowed for limited discovery as to certain counts and as to the stay relief motions, reasoning that some of the counts may be resolved by rulings as to these motions. On July 2, 2020, the Title III Court denied both stay motions to the extent that the Monolines sought stay relief with respect to the following: (1) rum tax remittances not deposited in the so-called “Sinking Fund” (PRIFA Fund), “a series of accounts created by a trust agreement (PRIFA Trust Agreement) to house the money used to make payments on PRIFA’s bonds, as to PRIFA; and (2) revenues from tolls (HTA Toll Revenues) and taxes and fees allocated b law (HTA Allocable Revnues) not deposited in an entirely separate set of “sinking funds,” accounts created by bond resolutions adopted by HTA to be held “in trust . . . subject to a lien and charge in favor of the holders of the bonds.” Not quite done, the Title III Court then ordered the parties to file a joint status statement, after meeting and conferring, as to what other proceedings may be necessary in connection with these lift stay motions. On July 9, 2020, the Monolines, disagreeing with FOMB, insisted on the need for additional proceedings. In their view, the Title III Court had not addressed whether “cause” to lift the stay existed. After requesting and considering additional briefing as to this latest argument, the Title III Court denied the stay motions in full. The Monolines appealed these denials.
As so many well know, this tragedy stars two actor—and countless extras—with firm roots in—or just financial connections—to a U.S. island. Created in 1965, HTA had relied on the HTA Toll Revenues, the HTA Allocable Revenues, and the HTA Bonds to finance its construction, operation, and management of PR’s transit and transportation facilities. HTA Bonds had been issued in both 1968 and 1998, with principal and interest to be paid from the HTA Toll Revenues and HTA Allocable Revenues deposited into funds (HTA Funds) to be held “in trust . . . subject to a lien and charge in favor of the holders of the bonds.” Established in 1988 to facilitate the “construction, rehabilitation, acquisition, repair, preservation and replacement of the infrastructure of the Commonwealth,” PRIFA, like HTA, was authorized to issue bonds to be repaid via “all or any portion of the federal excise taxes [on rum] [(Rum Excise Taxes] or other funds which should have been transferred by the Commonwealth to [PRIFA].” In that same year, PRIFA issued bonds under a trust agreement (PRIFA Trust Agreement) for which U.S. Bank currently serves as the indenture trustee (PRIFA Bonds). Based on this accord, payments on the principal and interest were to come from “Pledged Revenues,” defined as the Rum Excises Taxes deposited to the credit of Puerto Rico, as well as other monies deposited in a series of accounted created by the Trust Agreement to house the money used to make payments on these bonds. These pledges were all subject to a provision in PR’s constitution requiring the payment of public debt before any other disbursements whenever its available revenues cannot meet the appropriate made in a given year. Notably, PR was never liable for the PRIFA or HTA Bonds. By 2015, PR’s financial situation had grown dire. As a result, its then governor ordered its Treasury Secretary to stop transferring any revenue to HTA and the Rum Excise Taxes to PRIFA. In April 2016, Puerto Rico sought to formalize this approach by enacting a law empowering the governor to prevent HTA and PRIFA from making certain payments on their debt. Inevitably, PRIFA and HTA then defaulted, and the Monolines made the required payments to these entities’ insureds. Within days of 2015’s end, the Monolines then challenged the governor’s executive orders in an attempt to force PRIFA and HTA to make payments on their debt in a case (Monolines Suit) filed with the DC-PR. Representing Congress’ response to this maelstrom, PROMESA incorporated many sections of the Code. In particular, its enactment triggered a temporary stay of certain actions, including the Monolines’ suit in federal court, against PR and its instrumentalities. While the Monolines never succeeded in winning a lifting of this stay, it expired on its own terms on May 1, 2017. The very next day, the Monolines filed additional suits in DC-PR and DC-DC. FOMB commenced the Proceeding on PR’s behalf on May 3, 2017, with HTA added on May 21, 2017.
Sandra L. Lynch; Kermit V. Lipez, and Ojetta R. Thompson

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