Ambac Assurance argues for repeal of PROMESA

By The Star Staff

Ambac Assurance Corp., a monoline insurance company that insures billions in bonded debt, argued earlier this week in U.S. District Court in favor of repealing the federal law regulating Puerto Rico’s bankruptcy process, saying the law created a tailor-made process to restructure island debts outside of the permitted legal framework that other entities must use to manage their fiscal problems.

The bond insurer sued in May 2020 arguing that the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) of 2016, enacted to help the commonwealth restructure some $70 billion in debt, violates the “uniformity requirement” in the U.S. Constitution’s Bankruptcy Clause that says a law must apply uniformly to a defined class of debtors.

PROMESA’s enactment had two immediate effects for Puerto Rico. First, the statute initiated a temporary stay on creditor action against the U.S. territory. Second, the territory’s ability to manage its own financial affairs was taken away by the creation of an oversight panel.

Elizabeth B. Prelogar, of Cooley LLP, said during a court hearing on behalf of Ambac that PROMESA’s creation of a unique regime for Puerto Rico’s bankruptcy has resulted in unequal treatment for the commonwealth’s creditors because it has created a different set of restructuring laws that cannot be used by other U.S. territories.

Supporters of PROMESA argued that the law draws from the ample congressional power to make laws governing U.S. territories found in Article IV of the Constitution, rather than the Bankruptcy Clause.

Prelogar said PROMESA is a federal law with significant implications for the national municipal debt market and not just Puerto Rico.

Jenner & Block LLP’s Ian Heath Gershengorn, appearing on behalf of the Official Committee of Retired Employees of Puerto Rico, said Ambac’s uniformity requirement claim rehashes arguments that were already rejected by the United States Supreme Court last year in a constitutional challenge led by Aurelius Investments to the appointments made to the oversight board.

The Supreme Court ruled in May of last year that members of the oversight board created by PROMESA were local officials and therefore are not subject to the appointments process for federal officers established by the U.S. Constitution, which states the president appoints members with the consent of the U.S. Senate.

That decision, Gershengorn argued, makes clear that PROMESA is essentially a local Puerto Rico law, passed under Congress’ Article IV powers.

The Supreme Court says Congress exercised its power under Article IV to “’make local debt-related law,’ and that PROMESA creates a process for determining, quote: ‘several local policies related to local fiscal responsibility in respect to local matters,’” Gershengorn said.

Gershengorn refuted Prelogar’s claim that PROMESA’s impact on national commerce makes it a federal rather than local law. Bradley P. Humphreys, appearing for the U.S. government as an official from the U.S. Department of Justice, said Ambac’s uniformity requirement claims would render differences in federal income tax administration and naturalization requirements in territories unconstitutional.

Peter Friedman, a lawyer with the firm O’Melveny & Myers LLP, which represented the commonwealth’s Fiscal Agency and Financial Advisory Authority, said Ambac brought its arguments four years late.

“Ambac has relentlessly pursued lawsuits arguing the constitutionality of various behaviors by the commonwealth,” Friedman said. “So, it’s just simply not credible to argue that they were sitting and trying to resolve things consensually while at the same time pursuing suits arguing a whole variety of constitutional infirmities in the Title III cases and fiscal plans.”

Prelogar said that the harm Ambac has suffered from PROMESA, including a proposed plan of adjustment that provides retirees and general obligation debtholders stronger recoveries than other creditors, did not happen immediately but appeared over time.

The attorney said the invocation of latches, which prevents plaintiffs from bringing claims after an unnecessarily long time, is not applicable in this case because the harm caused by PROMESA is ongoing.

“It didn’t just happen at one discrete time when Congress passed the statute,” Prelogar said.

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