In re Fin. Oversight & Mgmt. Bd. for Puerto Rico

• Decision Date: 02 July 2020
• Docket Number: No. 17 BK 3283-LTS (Jointly Administered),17 BK 3283-LTS (Jointly Administered)
• Citation: 618 B.R. 362
• Parties: IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of The Commonwealth of Puerto Rico et al., Debtors.
• Court: U.S. District Court — District of Puerto Rico

618 B.R. 362

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

No. 17 BK 3283-LTS (Jointly Administered)

United States District Court, D. Puerto Rico.

Signed July 2, 2020

FERRAIUOLI LLC, By: Roberto Cámara-Fuertes, Sonia Colón, 221 Ponce de León Avenue, 5th Floor, San Juan, PR 00917, MILBANK LLP, By: Dennis F. Dunne, Atara Miller, Grant R. Mainland, John J. Hughes, III, 55 Hudson Yards, New York, NY 10001, ARENT FOX LLP, By: David L. Dubrow, Mark A. Angelov, 1301 Avenue of the Americas, New York, NY 10019 and Randall A. Brater, 1717 K Street, NW, Washington, DC 20006, Attorneys for Ambac Assurance Corporation.

REXACH & PICÓ, CSP, By: María E. Picó, 802 Ave. Fernández Juncos, San Juan, PR 00907, BUTLER SNOW LLP, By: Martin A. Sosland, 5430 LBJ Freeway, Suite 1200, Dallas, TX 75240 and Jason W. Callen, 150 3rd Ave., S., Suite 1600, Nashville, TN 37201, Attorneys for Financial Guaranty Insurance Company.

O'NEILL & BORGES LLC, By: Hermann D. Bauer, 250 Muñoz Rivera Avenue, Suite 800, San Juan, PR 00918-1813, PROSKAUER ROSE LLP, By: Martin J. Bienenstock, Brian S. Rosen, Ehud Barak, Daniel S. Desantik, Eleven Times Square, New York, NY 10036 and Michael A. Firestein, Lary Alan Rappaport, 2029 Century Park East, Suite 2400, Los Angeles, CA 90067, Attorneys for the Financial Oversight and Management Board for Puerto Rico, as representative of the Commonwealth of Puerto Rico.

MARINI PIETRANTONI MUÑIZ LLC, By: Luis C. Marini-Biaggi, Carolina Velaz-Rivero, 250 Ponce de León Avenue, Suite 900, San Juan, PR 00918, O'MELVENY & MYERS LLP, By: John J. Rapisardi, 7 Times Square, New York, NY 10036 and Peter Friedman, 1625 Eye Street, NW, Washington, DC 20006 and Elizabeth L. McKeen, Ashley M. Pavel, 610 Newport Center Drive, 17th Floor, Newport Beach, CA 92660, Attorneys for the Puerto Rico Fiscal Agency and Financial Advisory Authority.

CASELLAS ALCOVER & BURGOS P.S.C., By: Heriberto Burgos Pérez, Ricardo F. Casellas-Sánchez, Diana Pérez-Seda, P.O. Box 364924, San Juan, PR 00936, CADWALADER, WICKERSHAM & TAFT LLP, By: Howard R. Hawkins, Jr., Mark C. Ellenberg, William J. Natbony, Ellen M. Halstead, Thomas J. Curtin, Casey J. Servais, 200 Liberty Street, New York, NY 10281, Attorneys for Assured Guaranty Corp. and Assured Guaranty Municipal Corp.

RIVERA, TULLA, AND FERRER LLC, By: Eric A. Tulla, Iris J. Caberera-Gómez, 50 Quisqueya Street, San Juan, PR 00917, HOGAN LOVELLS US LLP, By: Robin E. Keller, Ronald Silverman, 390 Madison Avenue, New York, NY 10017, Attorneys for U.S. Bank Trust National Association, in its capacity as Trustee.

CASILLAS, SANTIAGO & TORRES LLC, By: Juan J. Casillas Ayala, Israel Fernández Rodríguez, Juan C. Nieves González, Cristina B. Fernández Niggemann, P.O. Box 195075, San Juan, PR 00919, PAUL HASTINGS LLP, By: Luc A. Despins, James R. Bliss, James B. Worthington, G. Alexander Bongartz, 200 Park Avenue, New York, NY 10166, Attorneys for the Official Committee of Unsecured Creditors.

C. CONDE & ASSOCIATES, By: Carmen D. Conde-Torres, Luisa S. Valle Castro, 254 San José Street, 5th Floor, San Juan, PR 00901, COVINGTON & BURLING LLP, By: Dianne Coffino, R. Alexander Clark, 620 Eighth Avenue, New York, NY 10018, Attorneys for Bacardi International Limited and Bacardi Corporation.

MCCONNELL VALDÉS, By: Nayuan Zouairbani, 270 Muñoz Rivera Avenue, Suite 7, Hato Rey, PR 00918, Attorneys for Destileria Serralles, Inc.

PROMESA Title III

OPINION AND ORDER IN CONNECTION WITH PRELIMINARY HEARING REGARDING AMENDED MOTION OF AMBAC ASSURANCE CORPORATION , FINANCIAL GUARANTY INSURANCE COMPANY , ASSURED GUARANTY CORP. , ASSURED GUARANTY MUNICIPAL CORP. , AND U.S. BANK TRUST NATIONAL ASSOCIATION , CONCERNING APPLICATION OF THE AUTOMATIC STAY TO THE REVENUES SECURING PRIFA RUM TAX BONDS

LAURA TAYLOR SWAIN, United States District Judge Ambac Assurance Corporation ("Ambac"), Assured Guaranty Corp. ("AGC"), Assured Guaranty Municipal Corp. (together with AGC, "Assured"), and Financial Guaranty Insurance Company (collectively, the "PRIFA Insurers") hold or insure more than $829 million in bonds issued by the Puerto Rico Infrastructure Financing Authority ("PRIFA"). The PRIFA Insurers and U.S. Bank Trust National Association, in its capacity as the successor trustee ("U.S. Bank" or the "Trustee" and, together with the PRIFA Insurers, the "PRIFA Movants"), seek relief from the automatic stay in order to pursue litigation in alternative fora to enforce their asserted property rights in certain rum tax revenues that have, according to the PRIFA Movants, been pledged to secure those PRIFA bonds. (See Amended Motion of Ambac Assurance Corporation, Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Guaranty Municipal Corp., and U.S. Bank Trust National Association, Concerning Application of the Automatic Stay to the Revenues Securing PRIFA Rum Tax Bonds , Docket Entry No. 10602 in Case No. 17-3283,² the "PRIFA Stay Relief Motion.") In the alternative, the PRIFA Movants seek entry of an order requiring the Commonwealth of Puerto Rico (the "Commonwealth") to provide adequate protection for the PRIFA Movants’ alleged collateral. The Financial Oversight and Management Board for Puerto Rico (the "Oversight Board"), as representative of the Commonwealth, opposes the PRIFA Stay Relief Motion and asserts that the PRIFA Movants have no property or security interest in the relevant rum tax revenues. (See Supplemental Opposition of Commonwealth of Puerto Rico to Amended PRIFA Bondholder Motion to Lift Automatic Stay [ECF No. 10602] , Docket Entry No. 10611, the "Opposition.") The Puerto Rico Fiscal Agency and Financial Advisory Authority, the Official Committee of Unsecured Creditors, Bacardi International Limited, Bacardi Corporation, and Destileria Serralles, Inc. have filed various briefs in opposition to the PRIFA Stay Relief Motion.

The Court held a preliminary hearing on the issues of standing and secured status in connection with the PRIFA Stay Relief Motion on June 4, 2020 (the "Preliminary Stay Relief Hearing"), and has considered carefully all of the arguments and submissions made in connection with the PRIFA Stay Relief Motion.³ The Court has subject matter jurisdiction of this contested matter pursuant to 48 U.S.C. § 2166(a). For the reasons that follow, the Court concludes that the PRIFA Movants have not made the preliminary showing necessary to allow the PRIFA Stay Relief Motion to proceed to a final hearing to the extent that the PRIFA Movants seek stay relief or adequate protection with respect to liens or other property interests in the Rum Tax Remittances (as defined herein) other than those Rum Tax Remittances that have been deposited into the Sinking Fund.

I. BACKGROUND

The following facts are undisputed, unless otherwise indicated.

A. The PRIFA Enabling Act

The United States Department of the Treasury (the "U.S. Treasury") collects a federal excise tax on rum produced in Puerto Rico and sold on the mainland (the "Rum Taxes"). (Opp. ¶ 27.) Section 7652 of Title 26 of the United States Code provides that "[a]ll taxes collected under the internal revenue laws of the United States on articles produced in Puerto Rico and transported to the United States ... shall be covered into the treasury of Puerto Rico." 26 U.S.C.A. § 7652(a)(3) (Westlaw through P.L. 116-145 ); see also id. § 7652(e)(1) ("All taxes collected under section 5001(a)(1) on rum imported into the United States ... shall be covered into the treasuries of Puerto Rico and the Virgin Islands."). The Rum Taxes are therefore "covered into the treasury of Puerto Rico" by the U.S. Treasury after collection (the "Rum Tax Remittances").

In June 1988, the Commonwealth Legislature enacted Act No. 44-1988 (the "PRIFA Enabling Act"). (Mot. ¶ 9.) PRIFA was created to provide "financial, administrative, or other assistance to public corporations and instrumentalities of the Commonwealth, to allow them to fulfill their public purpose to provide, preserve, operate, maintain, repair, replace, and improve parts of the infrastructure of Puerto Rico." 3 L.P.R.A. § 1901. The PRIFA Enabling Act authorizes PRIFA to "[b]orrow money and issue bonds ... for any of its corporate purposes," and to "pledge any property for the payment of the principal of and interest on any bonds issued by [PRIFA] ... and pledge all or a portion of such revenues as [PRIFA] may receive including, but not limited to, and subject to the provisions of § 8 of Article VI of the Constitution of the Commonwealth of Puerto Rico, all or any portion of the federal excise taxes or other funds which should have been transferred by the Commonwealth to [PRIFA]." Id. § 1906(l), (m). If PRIFA secures its bond issuances by a pledge of any of its revenues, "[s]uch pledge shall be valid and binding from the time it is made without the need for a public or notarized instrument," and "[t]he revenues so pledged, including those subsequently received by [PRIFA], shall immediately be subject to said lien without the need of the physical delivery thereof or any other act." Id. § 1907(a).

Section 1914 of the PRIFA Enabling Act, titled "Special deposit," requires that the Commonwealth appropriate a specified portion of the Rum Tax Remittances to PRIFA each fiscal year:

[T]he first proceeds of the federal excise taxes remitted to the Department of the Treasury of Puerto Rico on each fiscal year, pursuant to [ 26 U.S.C. § 7652(a)(3) ] ... in the case of Fiscal Years 2006-07 to 2008-09, and in subsequent years until Fiscal Year 2056-57, the participation shall be for an amount of up to one hundred and seventeen million dollars ($117,000,000), which when received by the Department of the Treasury of Puerto Rico, shall be covered into a Special Fund to be maintained by or on behalf of [PRIFA], designated as the ‘Puerto Rico Infrastructure Fund’, and be used by [PRIFA] for its corporate purposes .... In case the funds collected from said

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