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

• Citation: 635 B.R. 201
• Decision Date: 29 October 2021
• Docket Number: No. 17 BK 3283-LTS (Jointly Administered),17 BK 3283-LTS (Jointly Administered)
• 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

635 B.R. 201

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 October 29, 2021

MCCONNELL VALDÉS LLC, By: Arturo J. García-Solá, Nayuan Zouairabani, 270 Muñoz Rivera Avenue, Suite 7, Hato Rey, Puerto Rico 00918, PO Box 364225, San Juan, Puerto Rico 00936-4225, Attorneys for AmeriNational Community Services, LLC as servicer for the GDB Debt Recovery Authority.

C. CONDE & ASSOC. LAW OFFICES, By: Carmen D. Conde Torres, Luisa S. Valle Castro, 254 San José Street, Suite 5, San Juan, PR 00901-1523, SCHULTE ROTH & ZABEL LLP, By: Douglas S. Mintz, Noah N. Gillespie, 901 Fifteenth Street, NW, Suite 800, Washington, DC 20005 and Douglas Koff, Abbey Walsh, Peter J. Amend, 919 Third Avenue, New York, NY 10022, Attorneys for Cantor-Katz Collateral Monitor LLC, as Collateral Monitor for GDB Debt Recovery Authority.

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, Ehud Barak, Jeffrey W. Levitan, Joshua A. Esses, Eleven Times Square, New York, NY 10036, Attorneys for the Financial Oversight and Management Board for Puerto Rico, as representative of the Commonwealth of Puerto Rico.

PROMESA

Title III

OPINION AND ORDER DENYING THE DRA PARTIES’ MOTION FOR ALLOWANCE OF AN ADMINISTRATIVE EXPENSE CLAIM

LAURA TAYLOR SWAIN, United States District Judge

Pending before the Court is The DRA Parties’ Motion for Allowance of an Administrative Expense Claim (Docket Entry No. 17009 in Case No. 17-03283-LTS,² the "Motion") filed by AmeriNational Community Services, LLC (the "Servicer"), as servicer for the GDB Debt Recovery Authority (the "DRA"), and Cantor-Katz Collateral Monitor LLC, a Delaware limited liability company (the "Collateral Monitor," and together with the Servicer, the "DRA Parties"). The Motion requests allowance of an administrative expense claim in the Commonwealth Title III Case pursuant to section 503(b)(1)(A) of the Bankruptcy Code, 11 U.S.C. § 503(b)(1)(A),³ and the "fundamental fairness" doctrine derived from Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968).

The Financial Oversight and Management Board for Puerto Rico (the "Oversight Board"), acting as the statutory representative of the Commonwealth of Puerto Rico under Title III of PROMESA, filed an objection to the Motion (Docket Entry No. 18065, the "Objection"), and the DRA Parties filed a reply in support of the Motion. (Docket Entry No. 18888-1, the "Reply").

The Court, which has subject matter jurisdiction of this action pursuant to section 306(a) of PROMESA, 48 U.S.C. § 2166(a), has carefully reviewed the papers submitted in connection with the Motion.⁴ For the following reasons, the Motion is denied.

I. BACKGROUND

Except as otherwise indicated, the following are undisputed facts alleged in the Motion or drawn from the documents cited or annexed therein.

A. The HTA Enabling Act and the GDB/HTA Loans

HTA was established as a public corporation by Act No. 74-1965 to facilitate the construction and maintenance of roads and other transportation infrastructure. See 9 L.P.R.A. § 2002. Pursuant to its enabling act (the "HTA Enabling Act"), HTA is statutorily authorized to borrow money and issue bonds. 9 L.P.R.A. § 2004(l).

Between March 2008 and January 2014, HTA executed fifteen loan agreements (the "GDB/HTA Loans") with the Government Development Bank of Puerto Rico (the "GDB"), and HTA issued twenty-three promissory notes evidencing the indebtedness. (Mot. ¶ 5; Obj. ¶ 13.)

On June 25, 2013, the Commonwealth enacted Act No. 30-2013 ("Act 30") and Act No. 31-2013 ("Act 31" and, together with Act 30, the "Excise Tax Statutes"). The Excise Tax Statutes’ Statements of Motives declare that, due to the "precarious situation caused by a decrease in its revenues, aggravated by additional burdens that have increased its operating costs," HTA lacked "the capacity to cover the needs of its future capital improvement plan" and the Commonwealth therefore needed "to identify other sources of income that allow [HTA] to continue operating and repay [the GDB/HTA Loans] to" the GDB. (Docket Entry No. 16276-29 at 1-2; Docket Entry No. 16276-30 at 1-2.) While there is some variance between the language of Act 30 and that of Act 31, each authorizes HTA to pledge certain excise tax revenues collected by the Commonwealth (the "Act 30-31 Revenues") and states that those revenues "shall be covered" into a "Special Deposit" for HTA's benefit. In relevant part, Act 30 provides that

Except as otherwise provided in this chapter the amount of the fees collected in accordance with §§ 5681 ... of this title shall be covered in its entirety into a Special Deposit in the name and for the benefit of the Highways and Transportation Authority.

The Authority is hereby authorized to pledge or encumber the proceeds of the taxes collected for the payment of the principal of and interest on any bonds or other obligation or for any other lawful purpose of the Authority. Such pledge or encumbrance shall be subject to the provisions of Section 8 of Article VI of the Constitution of Puerto Rico. The proceeds of the taxes collected shall be used solely for the payment of the interest on and amortization of the public debt, as provided in Section 8 of Article VI of the Constitution of Puerto Rico, insofar as the other available resources referred to in said Section does not suffice to attain such purposes. Otherwise, the proceeds of said tax, in the necessary amount, shall be used solely for the payment of principal of and interest on the bonds and other obligations of the Authority and to meet any stipulation agreed upon by the Authority to the holders of its bonds and other obligations.

9 L.P.R.A. § 5681. Section 3060.11(a) of Act 31 provides, in relevant part, that

(1) The sum of the tax collected on gasoline and four cents (4¢) of the gas oil or diesel oil tax established by Section 3020.06 of this Subtitle, and the total amount per fiscal year of the excise tax collected for crude oil, partially finished and finished oil by-products, and any other hydrocarbon mixtures established in Section 3020.07 of this Subtitle, shall be covered into a special deposit in favor of the Highways and Transportation Authority for its corporate purposes.

(A) The Secretary shall transfer every month, or as agreed on with the Highways and Transportation Authority, the amounts covered into said special deposit, deducting from these the amounts reimbursed according to the provisions of Section 3030.19 and 3030.20 of this Subtitle.

...

(C) The Highways and Transportation Authority is hereby authorized to commit or pledge the proceeds of the collection thus received on gasoline and the tax of four cents (4¢) on gas oil or diesel oil fixed in Section 3020.06 and the amount appropriated by virtue of this Subtitle of the excise tax on crude oil, partially finished and finished oil by-products, and any other mixture of hydrocarbons fixed in Section 3020.07, for the payment of the principal and the interest on bonds or other obligations or for any other legal purpose of the Authority. Said commitment or pledge shall be subject to the provisions of Section 8 of Item VI of the Constitution of the Commonwealth of Puerto Rico. The proceeds of said collection shall be solely used for the payment of interest and amortization of the public debt, as provided in said Section 8 of Item VI of the Constitution, until the other resources available to which reference is made in said section are insufficient for such purposes. Otherwise, the proceeds of said collection, in the amount that may be necessary, shall be used solely for the payment of the principal and interest on bonds and other obligations of the Authority and to comply with any stipulations agreed to by the latter with the holders of said bonds or other obligations.

...

(3) The revenues collected from the tax on cigarettes established in Section 3020.05 of this Subtitle up to twenty million dollars ($20,000,000) per fiscal year shall be covered into a special deposit account in favor of the Highways and Transportation Authority for its corporate powers and purposes.

(A) The Secretary shall transfer every month or as agreed on with the Highways and Transportation Authority, the amounts covered into such special deposit account, deducting therefrom any amounts reimbursed in accordance with the provisions of Section 3030.18 of this Subtitle.

...

(C) The Highways and Transportation Authority is hereby authorized to pledge or encumber the proceeds from the excise tax on cigarettes established in Section 3020.05 for the payment of the principal of and interest on any bonds or other obligation or for any other lawful purpose of the Authority. Such pledge or encumbrance shall be subject to the provisions of Section 8 of Article VI of the Constitution of Puerto Rico. The proceeds from such taxes shall be used solely for the payment of the interest on and amortization of the public debt, as provided in Section 8 of Article VI of the Constitution of the Government of Puerto Rico, insofar as the other available resources referred to in said Section do not suffice to attain such purposes. Otherwise, the proceeds from said tax, in the necessary amount, shall be used solely for the payment of principal of and interest on the bonds and other obligations of the Authority and to meet any stipulation agreed on by the Authority to the holders of its bonds and other obligations.

13 L.P.R.A. § 31751(a).

On August 28, 2013, HTA and GDB executed an Assignment and Security Agreement (Docket Entry No. 16276-23, the "Security Agreement"). (Mot. ¶ 7; Obj. ¶ 14.) Pursuant to the Security Agreement, HTA assigned to GDB, as "security for the prompt and complete payment and performance when due of all of its Obligations," its ...