Case 3:16-cv-01893 Document 2 Filed 05/10/16 Page 1 of 17

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO
AMBAC ASSURANCE CORPORATION,
Plaintiff,
No. 16-cv-____
-againstPUERTO RICO HIGHWAYS AND TRANSPORTATION
AUTHORITY,
Defendant.

PLAINTIFFS MOTION FOR APPOINTMENT OF A RECEIVER

TO THE HONORABLE COURT:
COMES NOW Plaintiff Ambac Assurance Corporation (Ambac), by and through its
attorneys Ferraiuoli LLC, and , Tweed, Hadley & McCloy LLP, and moves this Honorable
Court, pursuant to Rule 66 of the Federal Rules of Civil Procedure, for the provisional remedy of
appointment of a receiver over Defendant Puerto Rico Highways and Transportation Authority
(PRHTA or the Authority). In support of its motion, Plaintiff respectfully states as follows:
I.
1.

INTRODUCTION

PRHTA is in severe financial distress and has been for years. PRHTAs

independent auditors have questioned its ability to continue as a going concern and have noted
that PRHTA could not meet its obligations as they came due. PRHTA has defaulted on over
$500 million in debt owed to the Government Development Bank for Puerto Rico (GDB) and
has admitted that additional defaults may be unavoidable. And PRHTAs financial woes have
been compounded by executive orders of the Governor of the Commonwealth of Puerto Rico
(the Commonwealth) clawing back funds previously pledged to secure the Authoritys
bonds.

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2.

Despite its precarious state, PRHTA recently agreed to sell assets worth over

$100 million (the Concession Extension),1 even though, under Puerto Rico law, it has no right
to retain or control the proceeds from that sale. PRHTAs sale of valuable assets knowing that
any proceeds could and likely would be siphoned off by the Commonwealth government
constitutes the latest in a series of breaches of fiduciary duties owed to Plaintiff under PRHTAs
enabling act, see 9 L.P.R.A. 2013(a)(2), as well as its contractual duties to Plaintiff under the
PRHTA resolution authorizing the issuance of certain PRHTA bonds.
3.

For over a year, the Authority has also breached its fiduciary and contractual

obligations to provide Plaintiff with information about its finances. PRHTAs refusal to provide
such information is unjustified and alarming given that PRHTA is required to account to Plaintiff
as if PRHTA is the trustee of an express trust. It is apparent to Plaintiff that PRHTA does not
want to produce such information because it will evidence PRHTAs malfeasance. The most
recent example occurred just days ago, when PRHTA refused to provide basic information about
the Concession Extensioneven refusing to confirm whether the proceeds of that transaction
would be retained for the benefit of the Authority and its bondholders.
4.

PRHTAs lack of transparency with respect to the Concession Extension is

consistent with its ongoing refusalfor well over a yearto comply with its contractual
obligations to provide basic financial information to bondholders and Plaintiff, or to provide trust
balances and an accounting of how much revenue has been clawed back from PRHTA
1

On June 27, 2011, PRHTA entered into a concession agreement (the Concession Agreement) with Autopistas
Metropolitanas de Puerto Rico, LLC (Metropistas), which granted a 40-year lease and assigned certain toll
revenues generated by the use of PR-22 and PR-5 to Metropistas in exchange for, in relevant part, an up-front
concession fee of approximately $1.1 billion. See Declaration in Support of Motion for Appointment of Receiver
(Receiver Decl.), Ex. 1 (Concession Agreement). These toll revenues were previously pledged to the repayment
of the PRHTA bonds. In connection with the Concession Agreement, PRHTA represented that approximately $850
million of the concession fee was used to defease the PRHTA bonds to which these toll revenues were pledged. Id.
9.1(d). If the $850 million was in fact so used, it would have the effect of releasing the liens on the applicable
PRHTA bonds. The Concession Agreement also provided for a 50-50 split of toll revenues between PRHTA and
Metropistas. Id. The Concession Extension is attached to the Receiver Decl. as Ex. 2.

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pursuant to the Governors executive orders. Plaintiff, as insurer of over $472 million of
PRHTA bonds (net of reinsurance), has significant information rights with respect to PRHTA
arising from agreements regarding bond insurance entered into between PRHTA and the fiscal
agent for the PRHTA bondholders (the Ambac Insurance Agreements) and/or the PRHTA
resolutions authorizing the issuance of such bonds. Plaintiffs repeated requests for information
from PRHTA have been almost entirely unavailing.
5.

PRHTA has shown itself to be unable or unwilling to fulfill its fiduciary and

contractual duties to PRHTAs bondholders. PRHTA is not acting in accordance with the law or
the governing agreements; it has no authority for the actions it is taking to the detriment of its
bondholders and Plaintiff. PRHTAs flagrant flouting of these obligations suggests that PRHTA
is hiding something.
6.

Indeed, PRHTAs failure to make proper disclosures and its continuing refusal to

comply with its legal obligations to allow inspection of its books and records, coupled with the
timing of its decision to enter into the Concession Extension, underscore the need for immediate
relief from this Court appointing a provisional receiver over PRHTA to avoid further irreparable
harm to itself, its bondholders, and Plaintiff. Plaintiff notes as well that it may seek preliminary
injunctive relief if the facts revealed in discovery or otherwise made known demonstrate an
imminent threat of irreparable injury.
II.
7.

FACTUAL BACKGROUND

PRHTA was created by Act 74-1965 (the PRHTA Enabling Act), which

empowers the Authority, among other things, to issue bonds. 9 L.P.R.A. 2004(g), (h), (l).
PRHTA has issued bonds under resolutions executed in 1968 (the 1968 Resolution) and 1998
(the 1998 Resolution and, together with the 1968 Resolution, the PRHTA Resolutions), with

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an outstanding principal amount of $4.6 billion. See Receiver Decl., Exs. 3 (1968 Resolution), 4
(1998 Resolution).
8.

The 1998 Resolution specifically contemplates the appointment of a receiver. See

Receiver Decl., Ex. 4, 902 (outlining order of payment priorities in the event of bankruptcy,
insolvency or receivership).
9.

Under the PRHTA Enabling Act, PRHTA is required to account as if it were the

trustee of an express trust. 9 L.P.R.A. 2013(a)(2). Accordingly, PRHTA owes its

bondholders fiduciary duties and must adhere to a high standard of loyalty and good faith.
Harvey Inv. Corp. v. City of Chicago, No. 72 C 1644, 1989 WL 103412, at *5 (N.D. Ill. Aug. 29,
1989), clarified on reconsideration (Nov. 6, 1989); accord 32 L.P.R.A. 3352t(a). As
demonstrated below, PRHTA has consistently violated these essential obligations.
10.

As an initial matter, PRHTAs Board of Directors is utterly conflicted and cannot

be relied on to promote the Authoritys best interests. Melba Acosta-Febo is the President of the
GDB and a member of the Board of Directors of PRHTA. Receiver Decl., Ex. 5 (GDB
Management Website); see Act 74-1965, as amended, 21. Juan Zaragoza Gmez is the
Secretary of the Treasury of the Commonwealth and a member of the Board of Directors of
PRHTA. Receiver Decl., Ex. 6 (FEC Combined Federal/State Disclosure Website); see Act 741965, as amended, 21. Luis Garca Pelatti is President of the Planning Board of the
Commonwealth and a member of the Board of Directors of PRHTA. Receiver Decl., Ex. 7
(Portal of the Planning Board Website); see Act 74-1965, as amended, 21.
11.

PRHTA has a $233 million bond payment due on July 1, 2016, and public

information suggests that PRHTA can make those payments only by drawing on a reserve
fund, though it is not clear whether sufficient monies remain in such reserve fund; accordingly,

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it is unknown whether PRHTA can make bond payments due after July 1. See Receiver Decl.,
Ex. 8, at 9 (Puerto Rico Credit & Market Update).
12.

In addition, Ernst & Young, LLP, PRHTAs independent auditors, expressed

substantial doubt about [PRHTAs] ability to continue as a going concern, with respect to its
audit of PRHTAs 2013-14 financials. See Receiver Decl., Ex. 9 (PRHTA 2013/14 Audit), at 2.
13.

PRHTA is in default on amounts owed to GDB. As of June 30, 2014, GDB had

extended over $1.8 billion in credit to PRHTA. See Receiver Decl., Ex. 9, at 64-68. Under the
PRHTA Resolutions, GDB loan debt must be treated as subordinate to the bond debt. See
Receiver Decl., Exs. 3, 4 at 602. As of June 30, 2014 PRHTA had defaulted on approximately
$590 million owed to GDB. See Receiver Decl., Ex. 9, at 16.
14.

In response to the Commonwealths fiscal crisis, the Governor, among other

actions, issued Administrative Bulletin No. OE-2015-046 (the First Executive Order) on
November 30, 2015, which implemented the clawback of funds from certain public
corporations. See Receiver Decl., Ex. 10 (Executive Order). The First Executive Order directs
the Secretary of Treasury to withhold funds from PRHTA intended for application to the PRHTA
bonds. Id. The clawback substantially undermines PRHTAs ability to fund its operations, as
it is obligated to do under the 1998 Resolution, and eliminates a key source of operational
funding for PRHTA and exacerbates PRHTAs operating losses. See Complaint 31-32.
15.

The Concession Extensioncoming on the heels of the clawbackwrongfully

enables the potential diversion of PRHTA assets to the benefit of the Commonwealth or GDB,
harming PRHTAs ability to comply with its operational covenants under the 1998 Resolution
and to fulfill its mandate as set forth in PRHTAs Enabling Act. While Metropistas made an
upfront $100 million payment with the possibility of an additional $15 million in exchange for

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extending the Concession Agreement by 10 years and reducing PRHTAs portion of the
dynamic-pricing toll system installed on PR-22 from 50% to 25%, PRHTA does not have the
right to retain, or even to direct the use of, any portion of the $115 million. Instead, under
Section 17 of Act 29, the Governor of Puerto Rico will decide (in consultation with GDB and the
Office of Management and Budget) how to use the funds received as a result of the Concession
Extension. See 27 L.P.R.A. 2616. And while those proceeds could in theory be allocated to
PRHTA, Section 17 expressly permits the Governor to direct the proceeds of a privatization
transaction like this one to a host of purposes of the Commonwealth and to recipients other than
PRHTAincluding to pay down Commonwealth or GDB debt. See id. Indeed, in response to
press speculation, the Authority has provided no assurances to the contrary, admitting openly
that the proceeds of the Concession Extension could be used to pay down PRHTAs debt to GDB
and stating only that the Authority had yet to determine how to use the money. Receiver
Decl., Ex. 11 (REORG RESEARCH, Apr. 22, 2016).
16.

After learning of the Concession Extension and its potential to divert resources

from PRHTA, Ambac requested that PRHTAs counsel confirm that PRHTA had maintained,
and would continue to maintain, the proceeds of the Concession Extension for the benefit of
PRHTA and its bondholders. Receiver Decl., Ex. 12 (Letter from Milbank to Nixon Peabody
dated April 29, 2016). PRHTAs counsel responded that the proceeds of the Concession
Extension were being held by EDB in the name of the Authority, but declined to offer any
assurance those proceeds would be held for the benefit of PRHTA and its bondholders. Receiver
Decl., Ex. 13 (Letter from Nixon Peabody to Milbank dated May 2, 2016).

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17.

Beyond the Concession Extension, PRHTA has a long history of financial

mismanagement and alleged corruption that demonstrates the need to appoint a receiver over
PRHTA:
a. The Authoritys Treasurer, Silvino Cepeda-Ortiz, pleaded guilty to federal
bribery charges in 2015 concerning kickback payments he solicited
from contractors hired to perform work on federally funded projects.
Receiver Decl., Ex. 14 (PRIMERA HORA, Feb. 22, 2016).
b. PRHTAs auditors have expressed concern over its financial condition and
its mismanagement of assets, including by noting in the 2013/14 Audit
five control failures which amount to material weaknesses in PRHTAs
operational procedures. Receiver Decl., Ex. 9, at 92-95.
c. PRHTA was significantly delayed in releasing its required financial
disclosures, including its audited financial statement for the year ending
June 30, 3014, which was over seven months past due, which caused a
delay in the release of the Commonwealths 2014 Comprehensive Annual
Financial Report, which was eleven months overdue. Receiver Decl., Ex.
32 (REORG RESEARCH, December 24, 2015).
d. PRHTA failed to take advantage of available federal assistance, including
$750 million in federal toll credits. Receiver Decl., Ex. 9, at 82.
18.

PRHTA has also consistently refused to provide Plaintiff and its other creditors

with basic financial information, in violation of its contractual and fiduciary obligations. The
PRHTA Resolutions provide inspection rights to all interested persons. See Receiver Decl.,
Exs. 3, 4 607. Section 1004 of the 1968 Resolution and Section 1103 of the 1998 Resolution

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provide that all documents received by the Fiscal Agent (i.e., the bank or trust company
appointed by PRHTA in connection with the PRHTA Resolutions) shall be subject at all
reasonable times to the inspection of the Authority, any bondholder and the agents and
representatives thereof. Receiver Decl., Exs. 3, 4. Further, under certain bond insurance
agreements, the Authority is required to furnish to Ambac, upon request, copies of financial
statements, copies of materials produced in accordance with PRHTAs continuing disclosure
requirements, and such additional information [Ambac] may reasonably request. See, e.g.,
Receiver Decl., Ex. 15 (Series AA Ambac Insurance Agreement 4(4)); Receiver Decl., Ex. 16
(Series H Ambac Insurance Agreement 4(4)).
19.

But PRHTA has failed to provide information about its finances to Plaintiff and

other monoline insurers, despite repeated requests, thus breaching the inspection rights covenant
under the PRHTA Resolutions and its fiduciary duties to the PRHTA bondholders. Indeed,
Ambac and other monline insurers have sent PRHTA multiple letters since October 2014
requesting financial information, and information regarding the Concession Extension. See
Receiver Decl., Exs. 17- 27 (Letters Between, inter alia, Counsel to PRHTA, Plaintiff, and/or
other insurers). Time and time again, PRHTA has failed to produce the requested documents,
stating that it would complete its review of the request and the Authoritys obligations pursuant
to the PRHTA Resolutions and the bond insurance agreements and make available to [the
Insurers] any appropriate information;2 that it was still gathering additional information in
order to be able to respond to [the Insurers] requests, and that the information would be

Receiver Decl., Ex. 28 (Letter from Nixon Peabody to Milbank and Weil, dated March 22, 2016).

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promptly reviewed by counsel, before being made available to the Insurers;3 and that it was
still working on gathering the requested information.4
20.

Because of PRHTAs failure to provide contractually required financial

information and its failure to disclose information relating to the decision to enter into the
Concession Extension, Plaintiff cannot verify whether PRHTA has complied with its contractual
and fiduciary obligations to allocate funds in accordance with the PRHTA Resolutions and to
otherwise act as a trustee protecting the interests of the bondholders.
21.

PRHTAs indifference to the interests of its bondholders, repeated failure to

disclose financial information, failure to manage its own resources in the face of operational
funding deficits, and fiscal mismanagement threaten to irreparably harm Plaintiff. Accordingly,
the information requested in a contemporaneously filed Motion for Expedited Discovery will
provide additional evidence that the Court should appoint a provisional receiver to run PRHTA.
III.
22.

APPLICABLE LAW

This Court has the inherent equitable power to appoint a receiver. See, e.g.,

Canada Life Assur. Co. v. LaPeter, 563 F.3d 837, 843 (9th Cir. 2009). Ultimately, [t]he
decision to appoint a receiver clearly lies within the discretion of the court. Consol. Rail Corp.
v. Fore River Ry. Co., 861 F.2d 322, 326 (1st Cir. 1988). Under Federal Rule of Civil Procedure
66, the practice in administering an estate by a receiver or a similar court-appointed officer must
accord with the historical practice in federal courts or with a local rule.
23.

In exercising their discretion to appoint a receiver, federal courts consider many

factors, including: fraudulent conduct on the part of the defendant; imminent danger that
property will be lost or squandered; the inadequacy of available legal remedies; the

3
4

Receiver Decl., Ex. 29 (Letter from Nixon Peabody to Milbank and Weil dated March 29, 2016).
Receiver Decl., Ex. 30 (Email from Nixon Peabody to Weil dated April 22, 2016).

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probability that harm to the plaintiff by denial of the appointment would be greater than the
injury to the parties opposing appointment; the plaintiffs probable success in the action and
the possibility of irreparable injury to his interests in the property; and whether the interests of
the plaintiff and others sought to be protected will in fact be well served by the receivership.
Consol. Rail Corp., 861 F.2d at 326-27 (citations omitted); see also Santibaez v. Wier
McMahon & Co., 105 F. 3d 234, 241-42 (5th Cir. 1997) (similar).
24.

The form and quantum of evidence required on a motion requesting the

appointment of a receiver is a matter of judicial discretion. Santibanez, 105 F.3d at 241.

IV.
25.

ARGUMENT

All of factors bearing on this Courts discretion weigh decisively in favor of

appointing a receiver over PRHTA.

A.

Plaintiff Has a Strong Likelihood of Success in the Action.

26.

Plaintiff has stated valid claims against PRHTA for breach of fiduciary duty and

breach of contract. See Consol. Rail Corp., 861 F.2d at 327 (noting the plaintiffs probability of
success as a consideration in appointing a receiver). PRHTA is in financial distress, unable to
pay its debts at they come due, subject to clawback of much needed tax revenues, and has
warned of future defaults. See supra 11- 15. Given this context, PRHTA breached its
fiduciary duties to bondholders by entering into the Concession Extension knowing that it would
not control the proceeds, and by failing to take advantage of hundreds of millions in federal tax
credits. The same actions amounted to a breach of PRHTAs contractual obligations not to enter
into any agreements or take any actions by which the rights of . . . the bondholders might be
impaired or diminished. Receiver Decl., Ex. 4, 611.
27.

Likewise, Plaintiff is highly likely to succeed on its claim seeking specific

performance of PRHTAs obligation to provide financial information under the PRHTA

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resolutions. Plaintiff (like other insurers of PRHTA bonds) has for over a year been requesting
financial information that PRHTA contractually obligated itself to provide. See supra 19. The
Authority has responded with a campaign of delay tactics and stonewallingunquestionably
breaching its obligations under Section 607 of the PRHTA Resolutions and the Ambac Insurance
Agreements. See Receiver Decl., Exs. 3, 4, 15, 16.
28.

Thus, even without much-needed discovery, Plaintiffs demonstrated likelihood of

success on the merits weighs in favor of appointing a receiver.

B.

PRHTA Assets Risk Being Squandered (and Have Been Already)in Which
Event Plaintiff Will Suffer Irreparable Harm and Will Have No Adequate
Remedy at Law.

29.

Additional considerations relevant to the appointment of a receiver are imminent

danger that property will be lost or squandered, the chance of irreparable injury to a plaintiffs
property interests, and the adequacy of any potential remedy at law. See Consol. Rail Corp., 861
F.2d at 326-27. All of these interrelated factors support the need to appoint a receiver over
PRHTA.
30.

First, absent a receiver there is an imminent danger that additional PRHTA

revenues will be lost or squandered through future transactions like the Concession Extension.
PRHTA has entered into the Concession Extension in return for $115 million, but PRHTA does
not have the right to retain or direct the use of those funds. Instead, under Section 17 of Act 29,
the Governor of Puerto Rico will decide how to use the funds received through the Concession
Extension, and the Governor is expressly authorized to direct the funds to other purposes of the
Commonwealth or even GDB. What is more, PRHTA has refused to provide any assurance that
the funds raised through the Concession Extension will be retained for the benefit of the
Authority. See supra 15, 16. The risk that additional PRHTA assets will be diverted and
squandered in this manner warrants receivership. See Consol. Rail Corp., 861 F.2d at 327
11

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(affirming appointment of receiver when there was sufficient evidence to indicate a danger that
the property would be imminently squandered); In re Nat'l Credit Mgmt. Grp., L.L.C., 21 F.
Supp. 2d 424, 463 (D.N.J. 1998) (finding the appointment of a temporary receiver is
appropriate and necessary based on, inter alia, the threat of the dissipation of assets). In
addition to discovery sought with respect to the Concession Extension, Plaintiff has also
requested discovery related to any additional assets that PRHTA has or may consider selling.
31.

Second, Plaintiff is at risk of irreparable harm with no adequate legal remedy due

to the financial distress of PRHTA, the Commonwealth, and other Commonwealth governmental
entities. See Consol. Rail Corp., 861 F.2d at 327. PRHTAs current distress, and the likelihood
that the Concession Extension funds will be diverted at the Governors behest to another
distressed government entity, raise serious concerns regarding Plaintiffs ability to fully recover
damages for PRHTAs breaches of its contractual and fiduciary duties nor obtain the return of
the Concession Extension proceeds. See, e.g., Wal-Mart Puerto Rico, Inc. v. Juan C. ZaragozaGomez, No. 3:15-CV-03018 (JAF), 2016 WL 1183091, at *3 (D.P.R. Mar. 28, 2016) (describing
the payment of an unconstitutional tax to an insolvent government, without any hope that the
victimized taxpayers will be reimbursed in the foreseeable future as the very definition of an
inadequate remedy).
32.

And third, there is no adequate remedy at law for PRHTAs ongoing breach of its

contractual obligation to provide financial information under the Authorizing Resolutions. See
supra 19, 20. Without that basic information, Plaintiff cannot fully evaluate PRHTAs
compliance with all of its obligations under the Authorizing Resolutions (including, for example,
provisions governing allocation of revenues and priority of payment). PRHTAs stonewalling
also has impeded Plaintiffs ability to analyze the Authoritys financial condition and the

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likelihood of default on the PRHTA bonds. See Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez,
No. 3:15-CV-03018 (JAF), 2016 WL 259704, at *3-4 (D.P.R. Jan. 21, 2016) (granting a motion
to compel and finding the public's interest in effective government would be furthered by
disclosure about the Commonwealth's ultimate ability to repay a tax refund of millions of
dollars and that Government transparency is critical to maintaining a functional democratic
polity, where the people have the information needed to check public corruption, hold
government leaders accountable, and elect leaders who will carry out their preferred policies.);
see id. at *51 (The Commonwealth is in dire need of more transparency.).
33.

In sum, no legal remedy can adequately compensate the bondholders or the

Plaintiff for the ongoing losses and harm caused by PRHTA. PRHTA requires a neutral and
competent managerone not beholden to the competing priorities of GDB and the
Commonwealthto oversee and allocate PRHTAs remaining revenues if PRHTA is to survive
as a going concern. The Court should exercise its discretion to appoint a receiver. See, e.g.,
Stonebridge Bank v. Nita Props., LLC, No. 09-5145 (RBK/JS), 2011 WL 2173771, at *2 (D.N.J.
June 1, 2011) (finding there is no adequate legal remedy available to plaintiff when potential
foreclosure action would not compensate [plaintiff] for all of the potential income, profits, and
revenues already squandered by [defendants] failure to administer and maintain the property).
C.

Receivership is PRHTAs Only Foreseeable Path to Fiscal Restoration.

34.

Next, the Court may consider the probability that harm to the plaintiff by denial

of the appointment would be greater than the injury to the parties opposing appointment and
whether the interests of the plaintiff and others sought to be protected will in fact be well served
by the receivership. Consol. Rail Corp., 861 F.2d at 326-27. These considerations further
confirm the appropriateness of a receivership.

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35.

Importantly, appointment of a receiver will cause NO harm whatsoever to

PRHTA. To the contrary: a receiver is the only hope that PRHTA will act for the benefit of all
of its creditors and constituents, not just the Commonwealth government and GDB. PRHTAs
track record provides no reason to believe that the Authority will return to fiscal health on its
own. And in contrast to PRHTAs hopelessly conflicted Board of Directors, receivership will
provide PRHTA with responsible, non-conflicted leadershipunder the ongoing supervision of
this Courtthat can ensure transparency, the maintenance of public services, and respect for
bondholders rights.
36.

In contrast, if a receiver is not appointed by the Court, Plaintiff will potentially

suffer irreparable injury through PRHTAs permanent loss of substantial revenues, which will
further deepen PRHTAs financial distress. PRHTAs non-toll revenues are being clawed back
to pay Commonwealth debts and expenses, and PRHTAs toll revenues are also being diverted
away from PRHTA, yet PRHTA has taken no position as to whether the Commonwealth is
properly exercising its clawback rights.5 The appointment of a provisional receiver will
prevent harm not only to Plaintiff, but to all senior PRHTA bondholders, and will prevent
PRHTA from giving a windfall to preferred, third-party junior creditors by disposing of assets in
a manner inconsistent with PRHTAs contractual and fiduciary obligations.
37.

Lastly, the interest which Plaintiff seeks to protect here will be well served by

appointment of a receiver. Indeed, Plaintiff aims to prevent PRHTAs continued breaches of its
fiduciary and contractual duties and to put an end to PRHTAs gross financial mismanagement.
A receiver can begin to repair the damage at PRHTA by making sound, un-conflicted financial
decisions to put PRHTA in a secure financial position, able to negotiate with creditors and
5

See Assured Guaranty Corp. v. Garca Padilla, No. 16-cv-1037 (D.P.R. filed Jan. 7, 2016). As Plaintiff argues in
the cited litigation, the Governors executive orders implementing the clawback of PRHTAs pledged tax
revenues violate PRHTA bondholders rights under the Contracts and Takings Clauses of the U.S. Constitution.

14

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properly address its financial condition. See Chase Manhattan Bank, N. A. v. Turabo Shopping
Ctr., Inc., 683 F.2d 25, 26 (1st Cir. 1982) (affirming appointment of a receiver to manage,
operate, and control [debtor] . . . during the pendency of a mortgage foreclosure action when,
inter alia, debt exceeded value of mortgaged property); see also Garden Homes, Inc. v. United
States, 200 F.2d 299, 301 (1st Cir. 1952) (receivership is appropriate when there is good cause
to believe that [property] will be wasted or deteriorated in the hands of the [debtor]).
D.

Additional Considerations.

38.

Any fraudulent conduct on the part of the defendant can also be considered in

deciding whether to appoint a receiver. Consol. Rail Corp., 861 F.2d at 326. In December 2014,
Silvino Cepeda-Ortiz, the PRHTA Treasurer, was arrested in connection with bribery charges.
Ex. 31 (REORG RESEARCH, Dec. 3, 2014). The charges stemmed from kickback payments
Cepeda-Ortiz solicited and received from contractors hired to perform work on projects funded
by federal programs. Id. Cepeda-Ortiz pleaded guilty in October 2015 and, in February 2016,
was sentenced to one year in prison. Receiver Decl., Ex. 14. Expedited discovery may shed
additional information related to the propriety of PRHTAs conduct.
39.

Finally, as stated above, the 1998 Resolution specifically contemplates the

appointment of a provisional receiver. Receiver Decl., Ex. 4, 902 (outlining order of payment
priorities in the event of bankruptcy, insolvency or receivership). This further reinforces the
propriety of appointing a receiver here. See generally Garden Homes, Inc. v. United States, 207
F.2d 459, 459-60 (1st Cir. 1953) (affirming order appointing receiver pursuant to contractual
provision); Wells Fargo Bank, N.A. v. Walnut Equity Partners, LLC, 2010 WL 1065004, No. 1010287-PBS, at *2 (D. Mass. Mar. 17, 2010) (similar).
V.
40.

CONCLUSION

For the reasons demonstrated herein, the Court should exercise its discretion and,
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following expedited discovery, appoint a provisional receiver to manage PRHTA. In the absence
of a receiver, PRHTA will be permitted to continue its ongoing pattern of financial negligence
and misconduct, and complete disregard for its fiduciary and contractual obligations to its
bondholders, causing irreparable harm to Plaintiff and other creditors.
VI.
41.

PRAYER

Wherefore, Plaintiff respectfully requests this Honorable Court to take notice of

the aforementioned, allow the instant motion and, consequently GRANT the provisional remedy
requested herein by ORDERING that a provisional receiver be appointed over PRHTA.
RESPECTFULLY SUBMITTED,
In San Juan, Puerto Rico, this 10th day of May, 2016.

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FERRAIUOLI LLC
By:
/s/ Roberto A. Cmara-Fuertes
Roberto A. Cmara-Fuertes
USDC P.R. No. 219002
221 Ponce de Len Avenue, 5th Floor
San Juan, PR 00917
Telephone: (787) 766-7000
Facsimile: (787) 766-7001
Email: rcamara@ferraiuoli.com

MILBANK, TWEED, HADLEY & MCCLOY LLP

By:
/s/ Daniel M. Perry
Dennis Dunne (pro hac vice forthcoming)
Michael L. Hirschfeld (pro hac vice forthcoming)
Daniel M. Perry (pro hac vice forthcoming)
Atara Miller (pro hac vice forthcoming)
Grant R. Mainland (pro hac vice forthcoming)
28 Liberty Street
New York, NY 10281
Telephone: (212) 530-5770
Facsimile: (212) 530-5770
Email: ddunne@.com
mhirschfeld@.com
dperry@.com
amiller@.com
gmainland@.com
Attorneys for Ambac Assurance Corporation

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