Spring 2003-09 Municipal loan guaranty declared valid by circuit court

Number 51
Spring 2003

. . . from our archives

Municipal loan guaranty declared valid by circuit court

A loan guaranty signed by the Municipality of Ponce is valid, and the municipality is bound to honor it, the United States Court of Appeals for the First Circuit has decided in the case of FDIC v. Municipality of Ponce, 904 F.2d 740 (1990).

In 1983 Girod Trust Company granted loans totaling $1,200,000 to a company called “Codfish Corporation,” plus another for $300,000 to “Rosado and Sons.” The loans were guaranteed by the Municipality of Ponce under a 1982 program that created the Ponce Capital Development Fund. Prior to the completion of the transaction, the municipality requested and obtained an opinion from the Secretary of Justice of Puerto Rico attesting to the validity of the guaranties.

Later the credit turned sour: Codfish filed for bankruptcy; Rosado and Sons did not pay the loan; and Girod Trust Company was declared insolvent and liquidated. The Federal Deposit Insurance Corporation, who was appointed trustee of Girod Trust, filed suit to collect from the Ponce municipal government.

Ponce requested the federal court to annul the guaranties, claiming that they were illegal because neither the mayor nor the municipal assembly had the power to issue them. Municipalities, Ponce said, do not have such authority because the legislature has never granted it to them.

The circuit court disagreed. “The Puerto Rican legislature,” the court explained, “has made it clear that municipalities are entitled to ‘full legislative and administrative powers in any matter of municipal nature,’ 21 P.R. Laws Ann. § 2051, including . . . all powers ‘to develop general welfare programs’. . . and ‘to exercise the legislative and administrative power in any matter of a municipal nature which is for the benefit of the population and its development and progress.'” n

© 2003 Goldman Antonetti