Bond insurers may sue gov’t debt underwriters in local court
By The Star Staff
In what has been viewed as a major victory by bondholders, U.S. District Court Judge Laura Taylor Swain ruled this week that Puerto Rico’s bond insurers may sue underwriters of government debt in commonwealth court, overruling the underwriters, who were battling to keep the proceedings in the island’s bankruptcy process.
Swain, who is overseeing Puerto Rico’s bankruptcies under the federal Puerto Rico Oversight, Management and Economic Stability Act (widely known as PROMESA), reverted back to the local courts two suits -- one brought by National Public Finance Guarantee Corp. and MBIA, the other by Ambac Assurance -- alleging underwriters of Puerto Rico bonds failed to investigate whether the commonwealth was telling the truth in its financial disclosures containing information on the bond issuances.
The cases were filed in the commonwealth court but were remanded to the U.S. District Court at the request of the underwriters.
The bond insurers said they wanted their cases to be sent back to the local courts because they were using remedies or arguments that are not available in the federal system. Their arguments are based on the doctrine of actos propios and the unilateral declaration of will, two legal concepts that don’t exist in U.S. common law, or in the federal system. The concepts are based on civil law like that used in Puerto Rico and apply when there is no direct law that applies to a situation. The civil laws require courts to decide “with equity, which means natural justice,” whether an offense has been committed. In federal laws, actions are either legal or illegal.
The bond underwriters, for their part, told Swain that the federal court could also rule on the matter because the bond insurers ultimately want a ruling on whether the underwriters complied with their due diligence under federal securities law. They said the case also asks whether Puerto Rico withheld information in its disclosure statements that could impact the bankruptcy cases.
Peter Neiman, attorney for the underwriters, argued that if underwriters have to pay the defaulted debt, then Puerto Rico does not, reducing its liabilities. If underwriters win, it may show that Puerto Rico could legally divert money away from the debt. Those issues are best handled by the Title III court, he said.
The bond insurers are seeking payments on the money they had to put forward because of Puerto Rico’s default. National’s case could cost underwriters $720 million in damages while Ambac is suing for $234 million.
Judge Swain found that while the ruling in the case could have an impact on the amount owed, it would not impact other aspects of the administration of the case. She found that the case was based on Puerto Rico law, and on balance it would be better if the commonwealth court heard the case.
The insurers sued bond underwriters including UBS Financial, Citigroup Global Markets, Goldman Sachs & Co., Morgan Stanley & Co., Merrill Lynch, Pierce Fenner & Smith, RBC Capital Markets and Santander Securities.