MBIA Inc. is seeking to have its $720 million suit against nine Puerto Rico bond underwriters returned to Puerto Rico’s local court system, where one observer said the bond insurer may expect a more receptive audience.
MBIA and its subsidiaries, National Public Finance Guarantee and MBIA Insurance Corp., filed a motion for remand and memorandum in support on Oct. 9, arguing that the case should be sent back to the Court of the First Instance, Superior Court of San Juan, the part of the commonwealth’s court system, where they originally filed suit in early August.
The insurer’s move came after the underwriters filed a notice of removal in the U.S. District Court for the District of Puerto Rico, which is part of the federal court system. U.S. law allowed the underwriters to move the case to the district court without a hearing.
The court assigned the case to Puerto Rico bankruptcy Judge Laura Taylor Swain, and she referred the case to Magistrate Judith Dein for pre-trial proceedings.
MBIA is claiming the financial firms provided incomplete and misleading information about the Puerto Rico issuers’ financial conditions prior to the insurers agreeing to insure the bonds.
The bond insurer may believe that the local court judge would feel more anger against the financial firms than the federal judge would feel, said Chapman Strategic Advisors Managing Director James Spiotto. He said this may be why National wants to have the case in the local court.
Spiotto said some of the MBIA suit’s issues are already being addressed in Puerto Rico’s Title III bankruptcy, citing securities fraud as one example. If Swain gave the case back to the local court, she’d have to be confident that the local court would be careful to only rule on certain matters and not on others. Otherwise, it might be “hard to unscramble the egg,” he said.
If the case remained in federal court, Swain could still consider Puerto Rico laws in her ruling, Spiotto said. He said he thought National had an “uphill battle” getting the case returned to local court.
Puerto Rico attorney John Mudd agreed that Swain would probably keep the case.
In the bond underwriters’ notice of removal, the underwriters, through their law firms McConnell Valdés and Wilmer Cutler Pickering Hale and Dorr, made two central arguments for putting the case in federal court.
The underwriters in the case are UBS Financial Services, UBS Securities, Citigroup Global Markets, Goldman Sachs, J.P. Morgan Securities, Morgan Stanley, Bank of America as successor to Merrill Lynch, RBC Capital Markets, and Santander Securities.
In September the underwriters’ first argument was that that the outcome of the bond insurer suit “could — indeed, almost surely will — affect the assets and liabilities of the estates being administered by the court under [the Puerto Rico Oversight, Management, and Economic Stability Act].” The underwriters say that the insurers filed claims against Puerto Rico issuers for 15 of the 16 bonds that are subject to the suit. “Because the bond insurers are not entitled to a double recovery, any favorable judgment in this action would directly affect the liabilities of, and potential distributions from, the debtors’ estates in the Title III cases.”
The underwriters also said, “this action is related to the Title III cases because at least one defendant here has asserted claims against the debtors’ estates for indemnification under the relevant underwriter agreements.”
Second, they argued that “where, as here, a complaint turns on a question of federal law, and where there is a substantial federal interest in the resolution of that question,” there is “original federal jurisdiction” according to U.S. law.
The underwriters argued that to prevail the insurers must show that the “issuers’ offering documents were false, and that the defendants failed to meet their due diligence obligations under the federal securities laws in underwriting the bonds.”
In their response, MBIA and National rejected the underwriters’ arguments and said that even if the judge found the case “related to” the Title III proceedings, the court should equitably remand or permissively abstain from the case. Law firms Selendy & Gay and Vicente & Cuebas are representing the bond insurers.
“National’s claims are not ‘related to’ the Title III proceedings,” the bond insurers said in their motion to remand. “Governing precedent requires a state or local claim to impact administration of a bankruptcy estate for ‘related to’ jurisdiction. Even in the unlikely event this case were to proceed quickly enough for National to recover on its local claims before approval of the [debt] confirmation plan, defendants would then be subrogated to National’s Title III claims against the debtors, and such substitution of parties cannot create ‘related to’ jurisdiction.”
The insurers also said that “the civil law origins of the doctrines, the fact that the code, case law, treatises, and other relevant materials will be in Spanish; and plaintiff’s choice of forum all point to remand.”
The “defendants seek to invoke the very narrow exception for non-federal cases where federal issues are necessarily raised, actually disputed, substantial, and capable of resolution in federal court without upsetting the federal-local balance,” the insurers said. “That exception does not apply here.”
“Defendants are plainly forum-shopping,” the insurers said.
In an email MBIA Inc. General Counsel Jonathan Harris told The Bond Buyer that his firm’s suit is a potential benefit for Puerto Rico.
“Credibility and transparency are essential for Puerto Rico to fully recover from its financial crisis. For Puerto Rico to successfully regain access to the capital markets, investors need to have confidence that the banks underwriting Puerto Rico debt will properly carry out their gatekeeper functions. Our litigation is seeking such accountability from the banks.”