Ambac Assurance Corp. v. Com. of Puerto Rico (In re Fin. Oversight & Mgmt. Bd. for Puerto Rico)

• Decision Date: 27 February 2018
• Docket Number: Adv. Proc. No. 17–159–LTS in Case No. 17 BK 3283–LTS,No. 17 BK 3283–LTS (Jointly Administered),17 BK 3283–LTS (Jointly Administered)
• Citation: 297 F.Supp.3d 269
• Parties: IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of the Commonwealth of Puerto Rico, et al., Debtors. Ambac Assurance Corporation, Plaintiff, v. Commonwealth of Puerto Rico, Financial Oversight and Management Board for Puerto Rico, Puerto Rico Fiscal Agency and Financial Advisory Authority, Puerto Rico Highways and Transportation Authority, Hon. Ricardo Rosselló Nevares, Raúl Maldonado Gautier, José Iván Marrero Rosado, Gerardo José Portela Franco, José B. Carrión III, Andrew G. Biggs, Carlos M. García, Arthur J. Gonzalez, José R. González, Ana J. Matosantos, David A. Skeel, Jr., Christian Sobrino, and John Does 1–12, Defendants.
• Court: U.S. District Court — District of Puerto Rico

297 F.Supp.3d 269

IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of the Commonwealth of Puerto Rico, et al., Debtors.¹Ambac Assurance Corporation, Plaintiff,

v.Commonwealth of Puerto Rico, Financial Oversight and Management Board for Puerto Rico, Puerto Rico Fiscal Agency and Financial Advisory Authority, Puerto Rico Highways and Transportation Authority, Hon. Ricardo Rosselló Nevares, Raúl Maldonado Gautier, José Iván Marrero Rosado, Gerardo José Portela Franco, José B. Carrión III, Andrew G. Biggs, Carlos M. García, Arthur J. Gonzalez, José R. González, Ana J. Matosantos, David A. Skeel, Jr., Christian Sobrino,² and John Does 1–12, Defendants.

No. 17 BK 3283–LTS (Jointly Administered)

Adv. Proc. No. 17–159–LTS in Case No. 17 BK 3283–LTS

United States District Court, D. Puerto Rico.

Signed February 27, 2018

FERRAIUOLI LLC, By: Roberto A. Cámara–Fuertes, USDC P.R. No. 219002, 221 Ponce de León Avenue 5th Floor, San Juan, PR 00917, MILBANK, TWEED, HADLEY & MCCLOY LLP, By: Dennis F. Dunne, Andrew M. Leblanc, Atara Miller, Grant R. Mainland, 28 Liberty Street, New York, NY 10005, Attorneys for Ambac Assurance Corporation

O'NEILL & BORGES LLC, By: Hermann D. Bauer, Ubaldo M. Fernández, 250 Muñoz Rivera Avenue, Suite 800, San Juan, PR 00918–1813, PROSKAUER ROSE LLP, By: Martin J. Bienenstock, Stephen L. Ratner, Bradley R. Bobroff, Eleven Times Square, New York, NY 10036, and Timothy W. Mungovan, One International Place, Boston, Massachusetts 02110, and Michael A. Firestein, Lary A. Rappaport, 2049 Century Park East, Suite 3200, Los Angeles, CA 90067–3206, Attorneys for The Financial Oversight and Management Board for Puerto Rico, as representative of The Commonwealth of Puerto Rico and the Puerto Rico Highways & Transportation Authority

THE LAW OFFICES OF ANDRÉS W. LÓPEZ, P.S.C., By: Andrés W. López, 902 Fernández Juncos Avenue, San Juan, PR 00907, O'MELVENY & MYERS LLP, By: John J. Rapisardi, Suzzanne Uhland, Peter Friedman, 7 Times Square, New York, NY 10036, and Elizabeth L. McKeen, 610 Newport Center Drive, 17th Floor, Newport Beach, CA 92660, Attorneys for the Puerto Rico Fiscal Agency and Financial Advisory Authority and the Hon. Geraldo Portelo Franco

WANDA VÁZQUEZ GARCED, Secretary of Justice of Puerto Rico, By: Wandymar Burgos Vargas, Deputy Secretary in Litigation, Department of Justice, P.O. Box 9020192, San Juan, PR 00902–0192, Attorney for Hon. Ricardo Antonio Rosselló Nevares, Hon. Raúl Maldonado Gautier, Christian Sobrino, and Hon. José Iván Marrero Rosado

CASILLAS, SANTIAGO & TORRES LLC, By: Juan J. Casillas Ayala, Esq., Diana M. Batlle–Barasorda, Esq., Ericka C. Montull–Novoa, Esq., El Caribe Office Building, 53 Palmeras Street, Ste. 1601, San Juan, Puerto Rico 00901–2419, PAUL HASTINGS LLP, By: Luc. A. Despins, Esq., James R. Bliss, Esq., James B. Worthington, Esq., G. Alexander Bongartz, Esq., 200 Park Avenue, New York, New York 10166, Attorneys for the Official Committee of Unsecured Creditors

PROMESA

Title III

OPINION AND ORDER GRANTING THE MOTION TO DISMISS PLAINTIFF'S AMENDED COMPLAINT PURSUANT TO FED. R. CIV. P. 12 (B)(1) AND (B)(6)

LAURA TAYLOR SWAIN, United States District Judge

Before the Court is Defendants' Motion to Dismiss Plaintiff's Amended Complaint Pursuant to Fed. R. Civ. P. 12 (b)(1) and (b)(6) (Docket Entry³ No. 48 (the "Motion") ).⁴ The Court heard argument on the instant Motion on November 21, 2017, and has considered carefully all of the arguments and submissions made in connection with the Motion. Except as explained below, the Court has subject matter jurisdiction of this action pursuant to 48 U.S.C. § 2166. For the following reasons, Defendants' motion is granted. Plaintiff's Second Claim for Relief is dismissed pursuant to Federal Rule of Civil Procedure 12(b)(1). The First and Fourth Claims for Relief are dismissed pursuant to Rule 12(b)(1) to the extent they seek to invalidate the Fiscal Plan⁵ on the basis of noncompliance with certification-related provisions of PROMESA or challenge the Oversight Board's certification decision, and are dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) in all other respects. Plaintiff's Fifth and Sixth Claims for Relief is granted pursuant to Rule 12(b)(6). The Seventh Claim for Relief is dismissed pursuant to Rule 12(b)(6) to the extent that Claim for Relief is premised on a claim of outright PRHTA Bondholder ownership or trust beneficiary status as to the funds in the Reserve Accounts and is dismissed pursuant to Rule 12(b)(1) to the extent it is premised on a lien on the Reserve Accounts. Plaintiff has withdrawn its Third Claim for Relief, which alleged denial of access to Article III courts. (See Docket Entry No. 74 (the "Opposition") at n. 4.)

I. BACKGROUND

The following recitation of facts is drawn from Plaintiff's Amended Complaint (Docket Entry No. 35, the "Amended Complaint"), except where otherwise noted.

Plaintiff is a financial guarantee insurer that has insured certain bonds issued by the Puerto Rico Highways and Transportation Authority ("PRHTA"). (Am. Compl. ¶ 42.) Additionally, Plaintiff directly owns approximately $16 million in bonds issued by PRHTA. (Id. ¶ 44.) Plaintiff alleges that PRHTA Revenue Bondholders, which include Plaintiff, "purchased their bonds, and [Plaintiff] insured the bonds, based on ironclad contractual agreements." (Id. ¶ 176.)

PRHTA was created in 1965 pursuant to Act No. 74–1965 (the "Enabling Act") to, among other things, oversee and manage the development of roads and various means of transportation in the Commonwealth of Puerto Rico (the "Commonwealth" or "Puerto Rico"). (Id. ¶ 45; see generally 9 L.P.R.A. § 2002.) PRHTA issued several series of bonds (the "PRHTA Bonds") pursuant to Resolution No. 68–18 (docket entry no. 51–4, the "1968 Resolution") and Resolution No. 98–06 (docket entry no. 51–5, the "1998 Resolution" and, together with the 1968 Resolution, the "Resolutions"). Plaintiff asserts that the PRHTA Bonds are secured by liens on (i) the revenues derived from PRHTA's toll facilities (the "Pledged Toll Revenues"); (ii) gasoline, diesel, crude oil, and other special excise taxes levied by the Commonwealth (the "PRHTA Pledged Tax Revenues"); and (iii) special excise taxes consisting of motor vehicle license fees collected by the Commonwealth (the "Vehicle Fees," together with the PRHTA Pledged Tax Revenues, the "PRHTA Pledged Special Excise Taxes" and, collectively, the "Pledged Special Revenues"). (Id. at 46.)

The PRHTA Resolutions establish sinking funds (collectively, the "Sinking Funds"). (Resolutions § 401.) Each Sinking Fund includes three separate accounts (the "Accounts"): (i) a bond service account, (ii) a redemption account, and (iii) a reserve account. (Id. ) Pursuant to the Resolutions, PRHTA is required to deposit Pledged Special Revenues on a monthly basis with the fiscal agent. (Am. Compl. ¶ 208; Resolutions § 401.) Once the revenues are received, the fiscal agent is required to deposit the funds in the Accounts based on a protocol set forth in the Resolutions. (Resolutions § 401.)

On April 6, 2016, the Governor of the Commonwealth⁶ signed into law the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (Act No. 21–2016, the "Moratorium Act").⁷ (Am. Compl. ¶ 85.) The Moratorium Act recited that it was enacted to address the "desperate" fiscal emergency facing the Commonwealth and to avoid the "potential catastrophic effects of allowing creditors to exercise their enforcement remedies," which "would undeniably harm the health, safety and welfare of the residents of the Commonwealth." (Moratorium Act § 102.) The Moratorium Act authorized the Governor to declare a "state of emergency" over any governmental entity of the Commonwealth. (Am. Compl. ¶ 85 (citing Moratorium Act § 201(a) ).) Upon the declaration of a state of emergency, the Moratorium Act authorized the Governor to, among other things, "prioritize payment of ‘essential services’ over ‘covered obligations.’ " (Id. ¶ 86.) A "[c]overed obligation" included, in relevant part, "any interest obligation [or] principal obligation ... of a government entity" that became due before the Moratorium Act expired. (Id. ¶ 88 (citing Moratorium Act § 103(l) ).) If a state of emergency was declared with respect to a government entity, the Covered Obligations of such government entity could be suspended. (Id. (citing Moratorium Act §§ 103(l), 201(b) ).) Section 201(b) of the Moratorium Act granted the Governor the power to impose a stay on creditor remedies during the covered period. (Id. ¶ 89.)

Following the enactment of the Moratorium Act, the Governor issued a series of executive orders (collectively, the "Moratorium Orders") that Plaintiff asserts declared moratoriums on the PRHTA Bonds. (Id. ¶¶ 5, 96.) Specifically, on May 17, 2016, the Governor issued an executive order (docket entry no. 35–3, "Executive Order 18") declaring a state of emergency over PRHTA until June 30, 2016, stopped the flow of certain revenues to the PRHTA Revenue Bonds, and stayed all litigation arising from nonpayment of the PRHTA covered obligations. (Id. ¶ 96.) On June 30, 2016, the Governor issued an executive order (docket entry no. 35–4, "Executive Order 30") that, among other things, extended the PRHTA state of emergency until January 31, 2017. (Id. ) Also, on June 30, 2016, the Governor issued another executive order (docket entry no. 35–5, "Executive Order 31") that, among other things, suspended the Commonwealth's obligation to transfer certain revenues to PRHTA. (Id. )

In 2016, Congress passed, and the President signed into law, the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA")⁸ to address a "fiscal emergency" that had been created in Puerto Rico as a result of "a combination of severe economic decline, and, at times, accumulated operating deficits, lack of financial transparency, management inefficiencies and excessive borrowing." 48 U.S.C.S. § 2194(m)(1) (Lexi...