Scotiabank de Puerto Rico v. Garcia Padilla, explained

by | Jul 25, 2017 | Courts | Comments

Filed on September 28, 2016, in the Federal District Court of Puerto Rico, Scotiabank de Puerto Rico v. García Padilla, et al. is yet another lawsuit filed against Puerto Rico that calls into question the constitutionality of state statutes. The presiding judge for the case is Francisco A. Besosa. The defendants include the governor of Puerto Rico, which at the time of filing was Alejandro Garcia-Padilla, former Puerto Rico Department of the Treasury Juan C. Zaragoza-Gómez, Luis G. Cruz-Batista, the Metropolitan Bus Authority of Puerto Rico, Hector Ivan Santos and Miguel A. Torres-Diaz. There are only two plaintiffs; Scotiabank de Puerto Rico and the Bank of Nova Scotia.

The plaintiff, Scotiabank, filed a lawsuit against the defendants for the following reasons:

  1. This is an action filed under the Puerto Rico Oversight Management and Economic Stability Act of 2016 (PROMESA) for relief from PROMESA’s stay and for both declaratory and injunctive relief to prevent the Commonwealth’s diversion and expropriation of certain tax revenues pledged as collateral to secure a loan extended by Scotiabank to AMA.
  2. Scotiabank also seeks a judgement declaring that the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, also known as the Moratorium Act, and certain executive orders that are listed within it are unlawful because they violate PROMESA, are preempted by federal law, and violate the United States Constitution.
  3. Scotiabank is based in Puerto Rico and has extended “substantial credit” to AMA. On March 30, 2012, Scotiabank made a loan to AMA in which the original principal amount was $37,543,293. Scotiabank received various property and contractual rights, including a lien on specific tax revenues that were allocated to AMA and had been pledged as security for repayment of the loan. The pledged revenues were supposed to be directly deposited by the Treasury into an account that was maintained by AMA at Scotiabank against which Scotiabank could debit all payments of principal and interest due under AMA loan.
  4. As of right now, the AMA loan is secured due to the assignment of the Commonwealth’s tax on the sale of cigarettes. However, Act 31 states that these pledged revenues are to be “used solely for the payment of principal of and interest on the bonds and other obligations of AMA.”
  5. AMA has been in default of the Loan Agreement since 2015, and has not made any payments under the Loan Agreement since November 30, 2015. This is because the defendants have instead diverted the Cigarette Tax Revenues to purposes other than the repayment of the debt.
  6. On June 30, 2016, the Governor of Puerto Rico issued Executive Order 30 as a result of the Moratorium Act, which essentially declares that Puerto Rico is in a state of emergency and cannot currently be held responsible for their debt. To date, Puerto Rico has not used the revenues retained under Executive Order 30 to service its constitutional public debt obligations.
  7. The Moratorium Act and other executive actions that have been taken by the commonwealth have impaired Scotiabank’s contractual and property rights with respect to the Cigarette Tax Revenues, resulting in loss and irreparable harm to Scotiabank.
  8. Executive Order 30 violates PROMESA. PROMESA prohibits the Commonwealth from taking certain actions after it was enacted. In PROMESA it states, that the Commonwealth of Puerto Rico “shall not enact new laws that either permit the transfer of any funds or assets outside the ordinary course of business or that are inconsistent with the constitution or laws of the territory as of the date of enactment of this Act.” Executive Order 30, which the Governor signed shortly after the enactment of PROMESA, lets the Commonwealth avoid its obligation to deposit the Cigarette Tax Revenues into the AMA Account and to divert the money into other places. This constitutes as a transfer “outside the ordinary course of business,” which is inconsistent with the laws of the Commonwealth.
  9. The Moratorium Act and Executive Order 30 are preempted by federal law. Both the Bankruptcy Clause of the United States Constitution and the Bankruptcy Code preclude the Commonwealth from enacting any bankruptcy law that allows for a composition of indebtedness of Commonwealth “instrumentalities without creditor consent.”

To summarize the list of reasons, the Moratorium Act and Executive Order 30 violate the United States Constitution and PROMESA according to Scotiabank. Scotiabank is currently seeking a relief from PROMESA’s stay for cause and a judgment declaring that the Moratorium Act is unconstitutional. As last recorded, there have been six claims for relief, both declaratory and injunctive.