Editor’s Note: This story has been updated as reactions to the lawsuit have become available.
Certain entities owning Puerto Rico’s General Obligation bonds filed a suit in the U.S. District Court for the Southern District of New York today, seeking to invalidate the Emergency Moratorium and Financial Rehabilitation Act enacted by the Commonwealth to delay the repayment of debts.
This is the second lawsuit filed against the government for the same reason, following the complaint submitted by bond insurer National Public Finance Guarantee Corp. last week.
“Governor Alejandro García-Padilla has willfully violated the first priority guaranteed to GO bonds by Puerto Rico’s Constitution and has flouted centuries-old federal constitutional protections for contract and property rights. The Moratorium Act is transparently unlawful,” said Mark Stancil of Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, counsel for the plaintiffs Jacana Holdings I LLC, Jacana Holdings II LLC, Jacana Holdings III LLC, Jacana Holdings IV LLC, Lex Claims, LLC, MPR Investors LLC, and RRW I LLC.
The Debt Moratorium Act authorizes the governor to declare a moratorium on the payment of principal and interest on the 2014 GO Bond issue of $3.5billion, along with other debt instruments.
“Plaintiffs, holders of a substantial amount of 2014 GO Bonds, are accordingly entitled to a declaration confirming that the Act cannot be enforced with respect to the 2014 GO Bonds. Even if the Act were not categorically inapplicable to the 2014 GO Bonds, both the United States and Puerto Rico Constitutions would render the Act invalid as applied to the 2014 GO Bonds,” the lawsuit states.
The plaintiffs are asking the court to declare that the Commonwealth is obliged to pay its public debt before all other expenditures and that the Debt Moratorium Act cannot be be applied and is unenforceable with respect to that bond issue, because it violates both the U.S. and Puerto Rico constitutions.
Puerto Rico has a debt service payment of some $1.9 billion coming due on July 1, which the administration has already said it cannot pay in full. Secretary of State Grace Santana said the government was still reviewing the lawsuit filed.
“The decision by these hedge funds to litigate, rather than continue negotiations in good faith, demonstrates their continued refusal to recognize the reality of the Commonwealth’s fiscal crisis” she said.
“Puerto Rico cannot pay. This attempt by a group of vulture funds seeking to disrupt the Commonwealth’s ability to maintain operations and provide essential services to the 3.5 million residents of Puerto Rico makes it clear that the United States Senate must act on the Puerto Rico Oversight, , Management and Economic Stability Act (PROMESA) before July 1,” Santana added.
Weighing in on the events of the day was Moody’s Investors Service, which issued a statement attributed to Ted Hampton, vice president and lead analyst for Puerto Rico.
“The lawsuit highlights the growing likelihood of potentially chaotic litigation if the federal government plays no role in resolving Puerto Rico’s fiscal crisis,” said Hampton.
“With no clear legal mechanism currently in place to address the commonwealth’s [$70] billion debt, additional lawsuits are likely to delay resolution of cumulative credit claims while further delaying Puerto Rico’s economic recovery,” he added.
Access the lawsuit HERE.