A federal appeals court upheld a stay on debt-related lawsuits in a key Puerto Rico case, reversing a lower court decision.

A federal appeals court panel federal judge Francisco Besosa erred allowing a case by general obligation holders to go ahead. Adobe Stock

The United States Court of Appeals for the First Circuit issued the ruling on Tuesday in Lex Claims, LLC, et al v. Alejandro García Padilla, et al.

The litigants, who held Puerto Rico general obligation bonds, were trying to get a hearing on their claims to the sales and use tax revenues currently supporting Puerto Rico Sales Tax Finance Corp. (COFINA) bonds.

In February Judge Francisco Besosa of the U.S. District Court for Puerto Rico said four of the litigants' claims could go forward despite a stay on debt-related litigation found in the Puerto Rico Oversight, Management and Economic Stability Act.

On March 20 the judges in the court of appeals stayed the district court case on a temporary basis.

On Tuesday the appeals court judges continued that stay until the end specified by PROMESA and the Puerto Rico Oversight Board, May 1.

The appeals court's three judges – Jay Garcia-Gregory, Sandra Lynch, and David Barron – said that the plaintiffs were seeking "sweeping" relief and listed seven different things the plaintiffs sought.

If the plaintiffs got what they sought, sales and use tax revenues would have been diverted from COFINA bonds to GO bonds, the judges write. "An 'act' of litigation that leads the commonwealth to default on such a large tranche of its debt, while preserving the corresponding funds for a rival class of bonds, exercises 'control' over the commonwealth's property in any reasonable sense of that term," the appeals court judges wrote. "To rule otherwise, as the district court did, was an error of law."

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