The National Public Finance Guarantee Corp. v. Garcia-Padilla, et al. lawsuit, explained

by | Jun 16, 2017 | Courts | Comments

Originally filed on November 15, 2016, the National Public Finance Guarantee Corp. v. Garcia-Padilla, et al case concerns the constitutionality of state statutes. The case is currently in the United States District Court of Puerto Rico in San Juan, Puerto Rico. The plaintiffs include MBIA, Inc. and the National Public Finance Guarantee Corporation and the interested parties consist of the United States of America and the Financial Oversight and Management Board. Luis F. Cruz Batista, Juan C. Zaragoza-Gómez, and Alejandro Garcia-Padilla are listed as the official defendants.

Some background: On April 6, 2016, the Commonwealth of Puerto Rico established the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, also known as the Mortarium Act, in an attempt to solve the financial crisis. The act aimed to give the Puerto Rican Government the “tools” it needs “to continue providing essential services to the people of Puerto Rico” while dealing with their financial crisis. The act gave the Governor to issue executive orders that:

-Declare a “state of emergency” with respect to the Commonwealth or its instrumentalities.
-Suspend payment of principal and interest on “covered obligations” during a “covered period” through January 31, 2017.
-Expropriate property or rights in property interests
-Suspend or modify and statutory or other obligation to transfer money for the payment of, or to secure, any covered obligation

As a result of the power granted to Alejandro Garcia-Padilla, the Governor of Puerto Rico at that point in time, he issued a series of executive orders, known collectively as the “Executive Orders.” The five executive orders that are relevant to this case are:

-Executive Order 10: declared a state of emergency with respect to the Government Development Bank of Puerto Rico (GDB), imposed limits on transfers to their creditors, and suspended payment of any obligations guaranteed by GDB.

-Executive Order 14: declared a moratorium on the payment of GDB covered obligations.

-Executive Order 18: declared a state of emergency with respect to Puerto Rico Highways and Transportation Authority (PRHTA) and suspended their obligation to transfer toll revenues pledged to their bondholders.

-Executive Order 30: extended the emergency period with respect to PRHTA, suspended their obligation to make certain debt payments, and suspended the Commonwealth’s obligation to make payments on bonds or notes issued or guaranteed by the Commonwealth, excluding payments to GDB/

-Executive Order 31: continued suspension of PRHTA’s obligation to transfer pledged toll revenues, declared a state of emergency with respect to the University of Puerto Rico (UPR) and the Puerto Rico Finance Corporation (PRPFC) and suspended UPR’s obligations to transfer pledged revenues to UPR bondholders.

The Plaintiffs’ Claims in the Underlying Litigation include:

Civil No. 16-1610- Plaintiffs allege that they are investors who collectively hold more than $750 million worth of outstanding bonds issued by the GDB. They challenge certain provisions of the Moratorium Act “that retroactively and unconstitutionally strip them” of certain “contractual and property rights embodied in their existing GDB bonds.”

Civil No. 16-2101- Plaintiff National Public Finance Guarantee Corporation alleges that it provides insurance for approximately $3.84 billion of debt issued by both PRHTA and the Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financial Authority. They claim that the Moratorium Act has effectively “taken these property interests and substantially impaired these contractual rights.”

Civil No. 16-2257- The plaintiffs, known as the “Trigo plaintiffs,” allege that they are a group of predominantly Puerto Rican individuals and corporations who together hold more than $100 million worth of GDB and PRPFC bonds. They state that the Moratorium Act “creates a framework and scaffolding for the systematic stripping of assets” of the GDB and the PRPFC “that will render each unable to meet its obligations to the bondholders.”

Civil No. 16-2510- The plaintiff, the U.S. Bank Trust National Association, alleges that it is a national banking association and the trustee under a certain trust agreement authorizing and securing UPR bonds with an outstanding principal amount of $431,790,000. It argues that Executive Order 31 allows UPR and the Commonwealth to “divert and expropriate pledged revenues,” including approximately $89 million in tuition and fees, “to meet expenses other than debt service.” According to the U.S. bank, this “threatens irreparable harm” both to its interest as trustee and to bondholders by inviting the “permanent loss of collateral pledged to secure” the UPR bonds.

On June 30, 2016, President Barack Obama signed PROMESA into law. The legislation seeks to address the dire fiscal emergency in Puerto Rico. Among PROMESA’S provisions is an automatic stay of all liability-related litigation against the Commonwealth of Puerto Rico. Congress deemed that this was “essential to stabilize the region for the purposes of resolving” Puerto Rico’s financial crisis. The court may, however, grant relief from the stay to “a party in interest” either “for cause shown,” or “to prevent irreparable damage” to the party’s interest in property.

On August 22, 2016, the Court found that plaintiffs’ claims in Civil No. 16-1610, Civil No. 16-2101, and Civil No. 16-2257 were brought “with respect to a Liability,” and therefore fell “squarely within the scope of cases automatically stayed pursuant to PROMESA.”
The rest of the case goes on to explain the Plaintiffs’ claims in greater detail, all based on the foundation that the Moratorium Act is not in accordance with the Constitution. The majority of the defendants’ claims are based on the PROMESA act and how they should not be on trial for this at the moment, possibly attempting to postpone the trial until they are either able to solve the problem or are not found at fault for the problem.

The court eventually decided that, with respect to the plaintiffs’ constitutional Claims, the Balance of Equities favors that the stay be maintained. “The Court agrees with the Commonwealth defendants, GDB, PRPFC and UPR that this monetary damage incurred by plaintiffs during the stay could be quantified and therefore would not be ‘permanent’ or ‘irreparable.’” The court finalized their decision that there is no need to resolve the plaintiffs’ constitutional claims at this time.