National Public Finance Guarantee and its parent company MBIA Insurance Corp. have turned to the Puerto Rico Supreme Court in their fight against underwriters of Puerto Rico bonds they insured after the Court of Appeals ruled against them.
The petition for certiorari is awaiting review and has not been accepted, with numerous factors determining how long it will take the court to decide whether or not it will accept it for review, a spokesperson said.
The suit has had an extended history, with time spent in both the federal and local court systems, where it now awaits next steps.
Most recently the insurers filed a petition for certiorari with the Puerto Rico Supreme Court in March and the defending underwriting firms filed a defense on April 3.
In the case, National and MBIA are arguing the underwriters deceived them years ago in bond offering documents about the creditworthiness of the Puerto Rico issuers. The Puerto Rico issuers have since defaulted and as a result National has had to compensate bondholders, “paying more than $720 million to date, while the underwriter banks reaped hundreds of millions of dollars by selling the bonds,” the insurers said in March.
National is seeking monetary damages from the underwriters in an amount to be determined at a potential trial.
UBS Financial Services; UBS Securities; Citigroup Global Markets; Goldman Sachs & Co., J.P. Morgan Securities; Morgan Stanley & Co.; Merrill Lynch, Pierce, Fenner & Smith; RBC Capital Markets; and Santander Securities are the defendants. Bank of America is a defendant as the successor to Merrill Lynch.
“It is not likely that the Puerto Rico Supreme Court will issue the certiorari since it operates in similar fashion to the U.S. Supreme Court, issuing few certs,” Puerto Rico Attorney John Mudd said. “Even if issued, it may do so to affirm the holding since this is a conservative court, not one to expand causes of action. But as with the Supreme Court of the United States, you never know what they are going to do.”
The insurers, NPFG and MBIA, "face an uphill battle,” said Scott Silver, managing partner at Silver Law. “Ultimately, on appeal they bear the burden of proof that the lower court got it wrong, which gave Morgan Stanley and the underwriters multiple outs from this case.
“The insurers are pleading with the court that it would be unfair or inequitable to let Morgan Stanley [and the other underwriters] out of this case because they made fortunes form Puerto Rico's financial troubles,” Silver said. “While this is true, the insurers and Puerto Rico are sophisticated players who chose to issue and insure the debt.
“While the desire to hold Wall Street accountable for these losses is strong, the insurers are not sympathetic plaintiffs, which is why they try to allege the victims are the people of Puerto Rico,” Silver said. “Wall Street certainly got fat off of underwriting Puerto Rico debt and left others holding the bag, but the insurers seek to hold them liable on a nuanced argument rather than alleging they engaged in fraud or even negligence. This is a problem for the insurers.”
In June, in the Court of First Instance in San Juan, Puerto Rico Senior Judge Ladi Buono de Jesús rejected the underwriters’ motion to dismiss the suit. As part of the decision, she rejected the underwriters’ assertion that Article 1802.7 of the Puerto Rico Civil Code applied. This article deals with civil law torts or injuries.
Since then, the underwriters appealed the decision to a Puerto Rico Court of Appeals. In December a three-judge panel with the Appeals Court overruled the lower court’s ruling.
“A cursory examination of the [insurers’] claim allegations clearly reveal the classic elements of an action for damages,” the judges wrote. “According to its own allegations, the [insurers] sought to hold the banks responsible for the damages caused by them not being diligent in complying with their obligations, particularly with regard to the investigation and verification of the representations of the issuers of the bonds. That is to say, it is an allegation of paradigmatic negligence of Article 1802.”
The Appeals Court reversed the lower court decision and dismissed the insurers’ lawsuit.
The insurers then asked the Appeals Court in January to reconsider its decision but the court declined.
On March 23, the insurers filed a “petition for certiorari,” or request for review, with Puerto Rico’s Supreme Court.
The insurers argued the Supreme Court review of the case would be appropriate because: “hearing this case would serve the public interest, … the Court of Appeals decision is contrary to law, … there is a conflict between lower court decisions regarding the issues in this case, … National’s complaint presents a novel question of the law, … and the issues in this case require more consideration than they received in the Appeals Court."
The insurers argued that, as the lower court “correctly ruled, National’s claims do not arise under Article 1802 because they arise from a preexisting relationship between the banks and National, and this high court’s precedent provides that there can be no Article 1802 action when a prior legal relationship exists between the plaintiff and the defendant.”
According to the insurers, the Puerto Rico Supreme Court has said “liability for fault or negligence under Article 1802 requires a pre-existing general duty to act and wrongful conduct that violates that duty. The banks’ equitable obligation towards National does not arise from the general and independent duty imposed on society by Article 1802 but was specifically and voluntarily assumed by the banks towards National, through the insurance application process.”
The Appeals Court’s “decision concluding that Article 1802 applies is also wrong because the complaint does not contain allegations of illicit or malicious acts, fraud, or negligent acts or omissions,” the insurers said.
The insurers requested the Supreme Court issue the review, reverse the Appeals Court’s judgement, reinstate the lower court’s decision denying the motion to dismiss, and allow the case to be heard on its merits.
In their defense filed April 3, the underwriters say MBIA’s and FGIC’s arguments are all wrong.
Bond insurers Ambac Assurance and Financial Guarantee Insurance Corp. filed similar legal challenges to the underwriters in separate lawsuits heard in Puerto Rico courts, the underwriters note. In both cases the judges ruled Article 1802 is the controlling law for the suits. According to the underwriters, claims under Article 1802 are “time-barred.” That is, the law prevents filing of suits so long after the alleged illegal acts were committed.
Puerto Rico law only allows the use of the Doctrine of Proper Acts and Unilateral Declaration of Will if there isn’t a part of the legal code that more specifically applies to the suit, the underwriters said. In this case Article 1802 does specifically address financial torts.
Even if Article 1802 did not apply, the Puerto Rico Uniform Securities Act would apply, the underwriters said. And this has a two-year statute of limitations.
The insurers asked the Puerto Rico Supreme Court to deny the petition for certiorari.
JPMorgan, UBS, and Morgan Stanley declined to comment for this story. Most of the attorneys for the underwriters in this case were contacted but chose not to comment. When asked for a comment, an MBIA spokesman pointed to the court documents and to a statement from its quarterly statement.
