Hedge funds holding Puerto Rican general obligation bonds sued the commonwealth Tuesday after debt restructuring talks broke down.
Jacana Holdings, Lex Claims, MPR Investors, and
The plaintiffs are seeking to have the judge prohibit Puerto Rico from using its April-adopted Puerto Rico Emergency Moratorium and Financial Rehabilitation Act for its GO bonds. They also want the judge to order Puerto Rico to prioritize the payment of the GO bonds.
"Governor Alejandro García Padilla has willfully violated the first priority guaranteed to general obligation bonds by Puerto Rico's constitution and has flouted centuries-old federal constitutional protections for contract and property rights," said Mark Stancil, plaintiff's counsel with Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP. "The Moratorium Act is transparently unlawful."
Puerto Rico sees the suit differently. "While we are reviewing the suit filed today, the hedge funds' decision to litigate instead of continue good faith negotiations further demonstrates their continued refusal to acknowledge the reality of the commonwealth's fiscal crisis," said Puerto Rico chief of staff Grace Santana.
"Puerto Rico has debts it cannot pay," she continued. "This attempt by hedge funds to disrupt the commonwealth's ability to keep the lights on and provide essential services for the 3.5 million Americans on the island makes clear that the Senate must act and pass PROMESA before July 1."
The U.S. Senate is considering passing the Puerto Rico Oversight, Management, and Economic Stability Act, which would set up a control board to oversee governance of the island and allow the board to petition a court for the restructuring of the island's public sector debt.
The plaintiffs specify several bases for their suit.
"The Puerto Rico legislature lacks the legislative authority to modify New York's law of contracts," they stated. They note that a section of Puerto Rico's constitution says, "In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid." Puerto Rico's Moratorium Act also breaks the contract and due process clauses of the U.S. constitution, they say.
Puerto Rico this month has engaged in confidential debt negotiations with some of those in the suit and other holders and insurers of GO and Puerto Rico Sales Tax Finance Corp. (COFINA) debt. On Tuesday the Government Development Bank for Puerto Rico said the talks had broken down. The GDB also
The GDB said Puerto Rico had increased the percentage of accrued claim offered to GO holders to 83.5%, from 78%, in an exchange of current bonds for new bonds. It raised the percentage of accrued claim offered for COFINA bonds to 80% from 61%, while withdrawing an earlier offer of a capital appreciation bond.
Some of the plaintiffs in Tuesday's case were among those in the debt discussions held in June.
The hedge fund suit on Tuesday follows two other suits against Puerto Rico in the last month. On May 20 hedge funds holding more than $750 million of the debt of the GDB revived a lawsuit, accusing the government of 'changing the rules of the game' by amending the Moratorium Act. They revived the suit by filing an amended complaint to a suit they had filed on April 4 in the U.S. District Court in Puerto Rico. They are seeking to overturn the Moratorium Act and Law 40, with which Puerto Rico amended the act on May 5.
On June 15 bond insurer National Public Finance Guarantee sued Puerto Rico in the United States District Court for the District of Puerto Rico seeking to overturn the Moratorium Act.
