| NEW YORK
NEW YORK May 2 Holders of Puerto Rican sales
tax-backed debt sued the U.S. territory in the wee hours of
Tuesday morning, alleging its debt-cutting plans violate the
U.S. Constitution and kicking off a likely deluge of lawsuits
against the ailing island.
The complaint, filed in federal court in San Juan, accuses
Puerto Rico's leadership of impairing contractual rights of
so-called COFINA bondholders, whose debt is backed by sales tax
revenue, and trying to take their property in what they say are
violations of the due process clause of the U.S. Constitution.
With $70 billion in debt, a 45 percent poverty rate and
near-insolvent public health and pension systems, a torrent of
litigation could force Puerto Rico into a so-called Title III
proceeding - an in-court debt-cutting process similar to U.S.
Midnight Tuesday morning marked the end of a freeze on
creditor litigation under last year's federal rescue law known
as PROMESA, designed to encourage Puerto Rico and its federal
financial oversight board to negotiate debt-cutting agreements
With no deals reached, the expiration of the freeze opened
the floodgates for stakeholders to take Puerto Rico to court, in
hopes of blocking Governor Ricardo Rossello's plan to impose
drastic repayment cuts.
The COFINA plaintiffs - which include local COFINA holder
Jose Rodriguez Perello, as well as hedge funds like Cyrus
Capital Partners LP and Tilden Park Capital Management - accuse
Puerto Rico, Rossello and other officials of angling to
repurpose the tax revenue earmarked to pay COFINA debt.
The plaintiffs accuse Puerto Rico of taking their property
"without just compensation or due process in violation of rights
protected under the United States and Puerto Rico
They cite as evidence a law signed by Rossello on Saturday
that would give the government authority to redirect sales tax
revenue into Puerto Rico's general fund as part of a debt
Puerto Rico "must not be allowed to continue to breach its
constitutional and contractual obligations at will," the lawsuit
The complaint asks the court to block Rossello from
implementing a fiscal turnaround blueprint, approved by the
oversight board in March, which has been the bane of island
The blueprint forecasts that Puerto Rico will have only $800
million a year to pay its debt, less than a quarter of what it
owes, auguring big haircuts for all bondholders.
Litigation could spur the oversight board to push Puerto
Rico into Title III, created as part of PROMESA. That would
protect the island from lawsuits and give it more legal sway to
impose the kinds of contractual alterations the COFINA group is
accusing it of undertaking illegally out of court.
Many experts and people involved in talks see Title III as
an eventual certainty, though timing is uncertain.
Tuesday's lawsuit comes on the heels of a restructuring
offer from Rossello's administration on Saturday that would have
favored Puerto Rico's general obligation bondholders, whose debt
is guaranteed by the island's constitution.
The plan would have seen GO holders recover as much as 77
cents on the dollar, while COFINA holders would have recouped
just 58 cents.
Other defendants in the lawsuit include Elias Sanchez,
Rossello's liaison to the oversight board; Gerardo Portela,
director of Puerto Rico's fiscal agent, known as AAFAF; and
(Reporting by Nick Brown; Editing by Leslie Adler)