Relevant Document:Agenda
At the conclusion of today’s preliminary hearing on heavily litigated revenue bond stay relief motions, Judge Laura Taylor Swain reserved decision on the “gating issues” of whether the revenue bondholders hold valid and enforceable liens or security interests in the pledged revenue with respect to the Puerto Rico Highways and Transportation Authority, the Puerto Rico Infrastructure Fund and the Puerto Rico Convention Center District Authority, and on the issue of standing. Judge Swain did not provide any details regarding the expected timing of her decision.
The revenue bondholder movants consist of monoline insurers Assured, National, Ambac and FGIC along with the respective bond trustees. The PROMESA oversight board opposes the stay relief, joined in part by the Puerto Rico Fiscal Affairs and Financial Advisory Authority, or AAFAF, and the official committee of unsecured creditors in the Title III cases.
Today’s arguments regarding the gating issues, particularly with respect to whether the bondholders have enforceable liens or security interests, paralleled the arguments raised in the extensive briefing in connection with the stay relief motions, which concluded with the submission of responses by the movants to surreplies filed by the oversight board. Reorg’s summaries of that briefing is linked below:
Today, Judge Swain heard from Mark Ellenberg of Cadwalader, Wickersham & Taft, counsel for Assured Guaranty, and Atara Miller of Milbank, counsel for Ambac, on behalf of the movant bond insurers and bond trustees. Ellenberg focused his argument on the lien and security issues in the context of HTA as well as standing in general, while Miller focused on those issues in the context of PRIFA and CCDA as well as pre-emption across the three issuers. In advance of the hearing, the bond insurers and bond trustees filed demonstratives that included, among other things, copies of slide decks for their arguments regarding
HTA,
PRIFA and
CCDA. Douglas Mintz of Orrick and Nayuan Zouairabani of McConnell Valdés, appearing on behalf of the GDB Debt Recovery Authority, challenged the oversight board's position with respect to pre-emption and appropriations in the context of HTA bonds.
As in their briefs, the arguments by the monoline parties in favor of stay relief and claiming a security interest in the pledged revenue focused on the commonwealth’s accounting systems and commonwealth practices the movants contend establish that they have a property interest in the disputed funds, as well as the intent of the bond resolutions and related legislation.
Miller argued that the oversight board’s pre-emption argument would have to apply also to general obligation bonds. “There is simply no such thing as selective pre-emption,” she said, characterizing the proposed commonwealth plan of adjustment as “nothing more” than the oversight board picking “winners and losers,” arguing later that the oversight board uses GOs as “justification for perpetual clawback.” During his remarks, Ellenberg also addressed the nature of a clawback, characterizing it as a carve-out from the bondholders’ liens, rather than a transfer of ownership to HTA, and drawing comparisons to a carve-out provided under a DIP facility.
Miller summarized the arguments by the oversight board, in the context of PRIFA, into two points: 1) the rum taxes belong to the commonwealth, which is free to transfer them or not “at its whim,” and 2) the bondholders have no interest in the revenue until it is “physically deposited” into the transfer account. According to Miller, the oversight board is “wrong on both counts.” Miller argued that the oversight board’s “restrictive definition” of the bondholders’ lien - that the liens are limited to funds in the sinking fund - “defies logic” and is “contrary” to the plain language of the trust agreement. She argued, however, that it is “clear” that the bondholders’ liens extended to revenue in the infrastructure fund, whereas the oversight board's definition would mean that PRIFA bondholders would not be secured by any PRIFA account or “any money at all” until PRIFA pays the trustee what is owed on the PRIFA bonds. She focused on the nature of a lien, which provides security in the event a debtor does not pay.
In the context of sinking funds, Ellenberg also stressed that liens should extend to all funds that are required to be deposited into a sinking fund and not just those actually deposited.
Martin Bienenstock of Proskauer, counsel for the oversight board; Elizabeth L. McKeen of O'Melveny, for AAFAF; Luc Despins of Paul Hastings, for the UCC; and Dianne Coffino of Covington & Burling, for Bacardi, presented arguments on behalf of the parties objecting to the stay relief motions.
Parties opposed to stay relief argued that the movants are asking the court to rely upon the intent underlying the documents governing the respective pledged revenue, highlighting that there is no definitive language establishing a lien or security interest in the property. The oversight board argued that the movants’ reliance on the commonwealth’s accounting practices is not the appropriate means to establish their asserted property interests, stressing instead that the plain language of the applicable documents governs the parties’ respective property rights. McKeen argued that the parties’ course of performance is “irrelevant,” explaining instead that if the bondholders did not obtain rights to certain funds pursuant to statutes, they did not obtain such rights based on the commonwealth’s accounting practices.
Ultimately, the opponents argue, the movants have only “garden variety” unsecured claims despite their attempts to “cobble[] together” statutory provisions.” During his argument, Despins stressed that the commonwealth knew “how to grant a security interest” and that maybe they “failed” to do so with respect to the various revenue bonds.
The oversight board acknowledged, however, that with respect to the HTA pledged revenue, the HTA bondholders have a valid lien on the revenue held in a sinking fund. Further, although counsel for AAFAF acknowledged that the movants “clearly have liens” on specific accounts, she stressed that “that’s all they have.” The clarity of the applicable liens, McKeen argued, stands in “sharp contrast” with “everything else” claimed by the movants, which counsel argued comprised a “muddled set of doctrines and incorrect facts.” Counsel acknowledged that in certain instances, the relevant transfer accounts were “empty.” The objecting parties also argued that the movants only have an expectancy interest, not an ownership interest, in the excise tax revenue.
McKeen also rejected an earlier contention that AAFAF “vehemently opposed” the oversight board’s pre-emption argument, explaining that AAFAF did believe that parts of PROMESA are pre-emptive, but the issue of pre-emption was not necessary for the court to reach today.
Earlier in the hearing, the oversight board objected to a request by Miller to move into evidence a series of exhibits. After hearing from Miller and Bienenstock, Judge Swain elected to take MIller’s request under advisement, noting that the various materials were in the court record and directed the parties to meet and confer and then submit a joint letter outlining their positions regarding the evidence. The court asked the parties to submit a joint status report by June 11.