A federal judge ordered a freeze on Puerto Rico Sales Tax Financing Corp. (COFINA) debt payments Tuesday.
“We are pleased with today’s ruling and look forward to asserting our legal rights to the COFINA funds held by [trustee] Bank of New York Mellon,” said Daniel Fliman, counsel to Whitebox LLC at Kasowitz Benson Torres LLP. Whitebox LLC and some of its hedge funds are litigants in the case.
“Given the trustee’s long-ignored conflicts of interest and its reluctance to acknowledge seven clear events of default, we support interpleader of future payments until the court determines proper distribution and timing. This is a very positive outcome for COFINA’s senior creditors.”
With her order of interpleader, the judge authorized the trustee to hold onto the debt service funds until she decides what should be done with it.
Whitebox has a group of hedge funds that mainly hold COFINA cash-pay senior bonds. Whitebox argues that payment of these bonds should take precedent over the payment of COFINA subordinate bonds.
In the U.S. Federal District Court for the Southern District of New York, Judge Laura Taylor Swain made the ruling to freeze the $16 million due on Thursday. Swain is also the judge in the Title III bankruptcy cases for Puerto Rico and COFINA debt.
Some observers have said that Puerto Rico’s government and Oversight Board have been taking steps to restructure the sales and use tax flow of funds so that not all of COFINA’s bond debt would be paid on time. This would be part of a general restructuring of COFINA and all other commonwealth debt.
As of February there was $17.9 billion of COFINA debt outstanding.