In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, No. 17 BK 3283-LTS (Jointly Administered)

• Decision Date: 02 July 2020
• Docket Number: No. 17 BK 3283-LTS (Jointly Administered)
• Citation: 618 B.R. 642
• 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. 642

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, N.W., 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, Gabriel A. Miranda, 250 Muñoz Rivera Avenue, Suite 800, San Juan, PR 00918-1813, PROSKAUER ROSE LLP, By: Martin J. Bienenstock, Jeffrey Levitan, Timothy W. Mungovan, Ehud Barak, Eleven Times Square, New York, NY 10036 and Michael A. Firestein, Lary Alan Rappaport, 2029 Century Park East, Suite 2400, Los Angeles, CA 90067 and Colin R. Kass, 1001 Pennsylvannia Ave., N.W., Washington, DC 20004, Attorneys for the Financial Oversight and Management Board as Representative of the Commonwealth.

MARINI PIETRANTONI MUÑIZ LLC, By: Luis C. Marini-Biaggi, Carolina Velaz-Rivero, 250 Ponce de León Ave., 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.

SEPULVADO, MALDONADO & COURET, By: Albéniz Couret Fuentes, 304 Ponce de León Ave. Suite 990, San Juan, PR 00918, REED SMITH LLP, By: Eric A. Schaffer, Luke A. Sizemore, Jared S. Roach, 225 Fifth Avenue, Suite 1200, Pittsburgh, PA 15222, Attorneys for The Bank of New York Mellon.

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.

OPINION AND ORDER IN CONNECTION WITH PRELIMINARY HEARING REGARDING MOTION CONCERNING APPLICATION OF THE AUTOMATIC STAY TO THE REVENUES SECURING THE CCDA BONDS

LAURA TAYLOR SWAIN, United States District Judge

Before the Court is Ambac Assurance Corporation, Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Guaranty Municipal Corp., and the Bank of New York Mellon's Motion Concerning Application of the Automatic Stay to the Revenues Securing the CCDA Bonds (Docket Entry No. 10104 in Case No. 17-3283,² the "CCDA Stay Relief Motion"). Through the CCDA Stay Relief Motion, Ambac Assurance Corporation ("Ambac"), Financial Guaranty Insurance Company ("FGIC"), Assured Guaranty Corp. ("AGC"), Assured Guaranty Municipal Corp. (together with AGC, "Assured"), and the Bank of New York Mellon ("BONY"), in its capacity as trustee (the "Trustee") to the holders of bonds issued by the Puerto Rico Convention Center District Authority ("CCDA") (collectively, the "CCDA Movants"), seek a declaration that the automatic stay imposed by Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA")³ does not apply to an anticipated lawsuit (the "CCDA Enforcement Action") against CCDA and the Puerto Rico Tourism Company (the "Tourism Company"), among other defendants, relating to bonds issued by CCDA. In the alternative, the CCDA Movants seek relief from the automatic stay pursuant to subsections 362(d)(1) and 362(d)(2) of the Bankruptcy Code, 11 U.S.C. §§ 362(d)(1), (2),⁴ in order to pursue the CCDA Enforcement Action. Further in the alternative, the CCDA Movants seek an order directing the Commonwealth to provide adequate protection for their alleged collateral.

On June 4, 2020, the Court held a preliminary hearing (the "Preliminary Stay Relief Hearing") on the CCDA Stay Relief Motion, as well as on two similar stay relief motions relating to bonds issued by the Puerto Rico Highways and Transportation Authority and the Puerto Rico Infrastructure Financing Authority,⁵ respectively, pursuant to subsection 362(e)(1) of the Bankruptcy Code, 11 U.S.C. § 362(e)(1), "to determine whether the movants have standing to sue and security or other property interests in the relevant revenues." (Final Case Management Order for Revenue Bonds , Docket Entry No. 12186, the "Revenue Bonds Order," ¶ 1.d.) In light of the limited scope of the Preliminary Stay Relief Hearing as established by the Revenue Bonds Order, the parties’ arguments with respect to the CCDA Stay Relief Motion have to date focused largely on the applicability of the automatic stay to the CCDA Enforcement Action and the nature and extent of the CCDA Movants’ alleged property interest in certain hotel tax revenues that had previously been used to make payments to holders of the CCDA Bonds.

The Court has considered carefully all of the arguments and submissions made in connection with the CCDA Stay Relief Motion.⁶ The Court has subject matter jurisdiction of this contested matter pursuant to 48 U.S.C. § 2166(a). For the following reasons, the Court concludes that (i) the CCDA Enforcement Action is subject to the automatic stay, (ii) the CCDA Movants have a colorable claim to a security interest in funds deposited in the Transfer Account (as defined herein), and (iii) the CCDA Movants have shown a reasonable likelihood that the Tourism Company bank account at Scotiabank Puerto Rico with an account number ending in "5142" ("Scotiabank -5142") is the Transfer Account and, thus, the CCDA Movants have a colorable claim to a security interest in the funds that have been deposited therein.

I. BACKGROUND

The following facts are undisputed, unless otherwise indicated. The Tourism Company is a public corporation and instrumentality of the Government of the Commonwealth of Puerto Rico that was created under the Puerto Rico Tourism Company Act on June 18, 1970. See 23 L.P.R.A. § 671a. On September 2, 2000, the Commonwealth created CCDA, through Act No. 351-2000 (the "CCDA Enabling Act"), for the primary purpose of financing, constructing, and operating a convention center located in San Juan, Puerto Rico (the "Convention Center"). See 23 L.P.R.A. §§ 6401, 6402, 6404. On September 9, 2003, the Commonwealth enacted Act No. 272 (the "Hotel Tax Act") to facilitate financing of the Convention Center. See 13 L.P.R.A. § 2271 et seq. CCDA subsequently issued bonds in the principal amount of approximately $469 million (the "CCDA Bonds") on March 24, 2006. (See Mot. ¶ 14.) According to the CCDA Stay Relief Motion, Ambac, FGIC, and Assured collectively insure 100% of the outstanding CCDA Bonds, totaling approximately $349 million in gross par value. (Mot. ¶ 62.)

A. The Hotel Tax Act

The Hotel Tax Act, inter alia, authorizes and directs the Tourism Company to impose and collect hotel occupancy taxes from hoteliers (the "Hotel Taxes") in the amounts specified therein. See 13 L.P.R.A. § 2271o(b) ; see also id. § 2271a(a) (vesting the Tourism Company with the power to "[d]etermine, assess, impose, collect, enforce, regulate, and distribute" the Hotel Taxes). Section 2271v of the Hotel Tax Act, entitled "Disposition of funds," dictates the manner of distribution of all Hotel Taxes upon their collection by the Tourism Company. Pursuant to that provision, prior to the start of each fiscal year, the Government Development Bank for Puerto Rico ("GDB") "shall determine and certify to the [Tourism] Company and to [CCDA], the amount necessary for [CCDA] to make, during such fiscal year and the first day of the following fiscal year ... [f]ull and timely payment" on bonds issued by CCDA "with the prior written authorization of the [Tourism] Company, to exclusively carry out the development and construction of a new convention center and its related infrastructure," among other related amounts. Id. § 2271v(a)(1)-(4). That amount "shall be deposited in a special account to be maintained by [GDB] in the name of [CCDA] for the benefit of the bondholders, noteholders or the holders of other obligations of [CCDA] ...." Id. § 2271v(a). GDB shall then "transfer the amounts deposited in such special account to the trustees of the bondholders, noteholders or the holders of other obligations of [CCDA] ... in accordance with the written instructions provided to [GDB] by [CCDA]." Id.

Subsection 2271v(a) of the Hotel Tax Act specifies that the Tourism Company "shall transfer to [GDB], for deposit in such special account," the required amounts "through monthly transfers ... of an amount equal to one tenth (1/10) of the amount determined and certified by [GDB] as necessary for the payments to which the first part of this subsection refers." Id. If the Hotel Taxes collected in any given month are insufficient to cover the required monthly payments by the Tourism Company to GDB, the Tourism Company shall transfer to GDB, "for deposit in such special account, the amount...