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  • Writer's pictureThe San Juan Daily Star

Banks, fiscal advisers seek dismissal of bankruptcy damages lawsuit

U.S. District Court Judge Laura Taylor Swain

By The Star Staff

Banks and financial advisers that participated in Puerto Rico’s bond deals want U.S. District Court Judge Laura Taylor Swain to dismiss a lawsuit seeking to make them pay for their role in contributing to Puerto Rico’s bankruptcy.

The adversary proceeding The Special Claims Committee et al v. Barclays Capital, seeks to claw back underwriting fees and swap payments made to the aforementioned professionals and institutions.

Acting as avoidance actions trust trustee, Drivetrain sued in May 2019 but filed a second amended complaint in September alleging that the financial institutions, underwriters and other financial service professionals illegally make hundreds of millions of dollars in fees and swap termination payments by helping Puerto Rico issue debt that it could not pay back.

The defendants are denying the allegations, which were first brought up in a report written by Kobre & Kim LLP, a firm that investigated the causes of the island’s massive $70 billion debt several years ago.

For decades, successive governments of the commonwealth of Puerto Rico and its instrumentalities turned to the defendants and other financial institutions to help them raise funds in municipal debt markets to manage their finances. According to the Second Amended Complaint (SAC), those funds allowed Puerto Rico to pay off maturing bonds and extend the timetable for retiring municipal borrowings, while it searched for other ways to address its budgetary deficits. To hedge the interest rate risk of its debt, Puerto Rico also entered into swap agreements with certain defendants.

“All of the challenged transfers were ordinary course transactions made under valid and enforceable agreements,” the financial institutions argued in a petition to dismiss last week. “Accordingly, as detailed further herein, each of the claims is barred as a matter of law, even had each been sufficiently [pleaded].”

The financial institutions argued that the challenged transfers — payments made in connection with securities and swap transactions — are protected under the safe harbors of the Bankruptcy Code. In addition, the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA, expressly incorporates such safe harbors and provides that its provisions will prevail over any general or specific Puerto Rico laws.

“The remedies that the trustee seeks under Puerto Rico law are irreconcilable with the protections provided for securities and swap transactions (under federal bankruptcy laws) and allowing the trustee to recharacterize its claims under state law would defeat the safe harbors’ purpose of preserving certainty in securities markets,” the financial institutions and banks argued.

Many of the claims have surpassed the statute of limitations, the financial institutions said. The trustee’s fraudulent transfer claims should be dismissed because the second amended complaint does not allege any transfers within the two-year statutory lookback period, the banks said.

There is no precedent for holding that these debtors — part of democratically elected governments — intended to defraud creditors when they made the challenged transfers in connection with managing their budgets, the financial institutions argued.

The banks also argued that the plain text of Puerto Rico’s Constitution and laws establish that the challenged bonds were lawful. For instance, the trustee claims that bonds issued by the Public Buildings Authority should have been included in the calculation of the direct obligation constitutional debt limit, but Puerto Rico’s Constitution states that the relevant debt limit only includes debts directly incurred by the commonwealth and actual payments on the commonwealth’s guarantees of agency debts.

The SAC lists as defendants UBS Financial Services Inc. of Puerto Rico; Santander Securities LLC; BofA Securities Inc., a/k/a Bank of America Securities LLC, a/k/a BofA Merrill Lynch; Merrill, Lynch, Pierce, Fenner, & Smith Inc.; Barclays; Samuel A. Ramirez & Co. Inc.; RBC Capital Markets LLC; BMO Capital Markets Corp.; Goldman Sachs & Co. LLC; Morgan Stanley; J.P. Morgan Securities LLC; Citigroup Global Markets; and Jefferies Group LLC.

The swap defendants are: Morgan Stanley Capital Services LLC f/k/a Morgan Stanley Capital Services Inc., Citibank N.A., UBS AG, Goldman Sachs Bank USA f/k/a Goldman Sachs Capital Markets L.P., Goldman Sachs Mitsui Marine Derivative Products, RBC Capital, and Merrill Lynch Capital Services Inc.

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