Scotiabank Puerto Rico on Wednesday filed a complaint against the government of Puerto Rico to prevent the diversion and expropriation of certain tax revenue pledged as collateral to secure a loan the bank extended to the Metropolitan Bus Authority.
In the suit filed at the U.S. District Court for Puerto Rico, the plaintiff asked for a judgment declaring that the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act and certain executive actions taken under it are illegal for several reasons: they violate the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA,) are preempted by federal law, and violate the U.S. and Commonwealth constitutions.
In March 2012, Scotiabank approved a $37.5 million loan to the Metropolitan Bus Authority, receiving in exchange various property and contractual rights, including a lien on certain tax revenue allocated to the authority and pledged as security for repayment of the loan. The credit line is secured by an assignment of up to $10 million per fiscal year of the proceeds of the cigarette tax, to be disbursed in units of not more than $800,000 per month.
The pledged revenue were to be directly deposited by the Treasury Department into an account at Scotiabank, against which the bank could debit all payments of principal and interest due. The loan is secured by taxes collected on cigarette sales, but the Metropolitan Bus Authority has been in default since December 2015.
“While Scotiabank is entitled to exercise its remedies under the Loan Agreement, including by debiting funds from the [Metropolitan Bus Authortity] account, defendants have stopped transferring proceeds from the Cigarette Tax to the account, and have instead diverted the cigarette tax revenues to purposes other than the repayment of the constitutional public debt,” the bank said in its lawsuit, referring to a June 2016 executive order Puerto Rico Gov. Alejandro García-Padilla issued to suspend payment on all Metropolitan Bus Authority outstanding debt and halt the Commonwealth’s obligation to transfer funds pledged as collateral to the loan.
That order, Scotiabank said, violates PROMESA, which bans the Commonwealth from taking certain actions after its enactment, including enacting “new laws that either permit the transfer of any funds or assets outside the ordinary course of business or that are inconsistent with the constitution or laws.”
The bank also claims the Moratorium Act is preempted by federal law, specifically the Bankruptcy Clause of the U.S. Constitution and the Bankruptcy code.
As relief, Scotiabank asked the court for a number of interim and permanent relief measures, including: exemption from PROMESA’s stay for cause to allow the Court to consider and grant the relief sought; a preliminary injunction compelling the government to deposit the cigarette tax revenue in court-supervised account pending final judgment on the case; a judgment declaring the Moratorium Act and executive orders issued under it, unlawful because they violate PROMESA; and a permanent injunction banning the government from implementing the Moratorium Act or enforcing executive orders under it with respect to Scotiabank, and directing the government to continue to deposit the cigarette tax revenues.