Bond insurers: PR gov’t violated US Constitution by diverting revenues from taxes to banks instead

By The Star Staff

The Financial Oversight and Management Board for Puerto Rico got into a heated exchange with bond insurers earlier this week at a court hearing over whether the island government violated a clause in the U.S. Constitution when it diverted revenues from taxes to bank accounts instead of using them to pay bonds issued by various entities.

U.S. District Court Judge Laura Taylor Swain has yet to rule on the matter. The oversight board wants a summary judgment against the bond insurers’ claims. At stake are billions of dollars the bond insurers want the government to pay back.

At a hearing Wednesday, the oversight board told bond insurers that the commonwealth’s obligation to transfer funds to the Highways and Transportation Authority, Convention Center and District Authority and Puerto Rico Infrastructure Financing Authority, was pre-empted by the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), which provides a bankruptcy process for Puerto Rico.

However, the bond insurers said the contracts clause of the Constitution prohibits states and territories from passing laws that interfere with contractual obligations. They said the island government broke the contract clause when it diverted revenues from tolls, hotel room taxes and even rum taxes to government accounts instead of using them to pay debt.

Oversight board attorney Martin J. Bienenstock of Proskauer Rose LLP said the transfers were a matter of federal law because the oversight board, acting under PROMESA recommendations, oversaw and approved the budgets that withheld the funds for other government obligations.

The oversight board also disputed claims by Ambac Assurance Corp., Assured Guaranty, Financial Guaranty Insurance Corp. and bond trustee U.S. Bank National Association that they have secured claims.

Milbank LLP’s Atara Miller, a lawyer for Ambac, accused the oversight board of using pre-emption as a tool to solidify its discretion regarding the Puerto Rico government’s practice of transferring funds to bank accounts or for other uses instead of paying bondholders.

Weil, Gotshal & Manges LLP attorney Robert Berezin, who was representing bond insurer National Public Finance, said the text of PROMESA clearly avoids any pre-emption of laws directing the implementation of excise taxes to secure the bonds. He said fiscal plans and budgets must respect excise tax statutes.

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