Hedge fund Whitebox Advisors has filed a lawsuit against Bank of New York Mellon (BNY Mellon) over revenues from Puerto Rico’s sales tax bonds, which are commonly called COFINAs, that support $17 Billion of the island’s debt. Currently, the US territory is continuing to struggle to pay back the $70 Billion of debt it owes to creditors and BNY Mellon is a trustee for the island. (A number of hedge funds aside from the plaintiff, hold about $2.5 Billion in senior COFINA bonds, but they are not part of this case.)
In its lawsuit, brought in state court in New York, Whitebox Advisors accused BNY Mellon of breaching its duties to senior COFINA bondholders by continuing to make payments to junior creditors even after the US territory indicated that it wants to make concessions related to different kinds of debts. The hedge fund wants a court order stopping further payments to junior creditors, as well as a statement declaring that BNY Mellon has a conflict of interest. The plaintiff is also seeking monetary damages.
This week, the island is set to begin confidential talks with COFINA creditors as well as holders of competing general obligation debt. Creditors have until May 1 to arrive at mutually agreed upon settlements. The deadline was put into place, temporarily halting creditor lawsuits, to give the federally appointed oversight board a chance to work out a debt restructuring deal outside of court. At this moment, an extension to the freeze is unlikely. After that, the board is allowed to try to place Puerto Rico into quasi-bankruptcy proceedings.
Because Puerto Rico is a territory and not a municipality, it cannot file for Chapter 9 bankruptcy protection. However, there would be a court-sanctioned restructuring process under the Puerto Rico Oversight, Management, and Economic Stability Act, also known as PROMESA, which the US Congress passed into law last year.
To date, the territory’s governor, Ricardo Rossello, has arrived at only one consensual settlement with creditors, which was the $9 Billion debt restructuring agreement it recently struck with the Power Utility Company of Puerto Rico, also known as PREPA.
Retirees, Public Sector Employees, Sue Puerto Rico
In other Puerto Rico debt restructuring news, retirees and public sector employees are suing the territory to stop Governor Rosello and the oversight board from finalizing their fiscal plan, which would include a 10% reduction in benefits that the Puerto Rico Government Employees’ Retirement System would have to pay starting in 2020. The plaintiffs include: municipal employees,Servidores Publicos Unidos, three pension plan participants and the Council 95 of the American Federation of State, County, and Municipal Employees.
They believe that the approved fiscal plan violates the intent and procedures of PROMESA, and not only are they claiming that the proposed reductions are unconstitutional, but also they impair the pension rights of workers. In their complaint, they noted that the US Congress had mandated that any fiscal plan would have to “adequately fund” the territory’s pension system. At the moment, the federal oversight board is expected to finalize the plan by the end of June.
The plan, submitted by Governor Rosello, seeks to bring bank fiscal solvency over the next decade. The board preliminarily approved the plan, which imposes employee furloughs and lowers pension spending further. The board and Governor Rosello have said that everyone would have to make “sacrifices” in order for the plan to work, including bond holders, the government, certain government departments, and public employees.
Puerto Rico Bond Fraud Cases
Meantime, investors are continuing to try to recover their losses that they sustained from investing in Puerto Rico bonds and bond funds, in particular from when the territory’s bond prices plunged in 2013.
At Shepherd Smith Edwards and Kantas, LLP our Puerto Rico bond fraud lawyers have been working with investors on the mainland and the island to recoup their losses. If you are an investor who was recommended these securities by a broker from UBS Puerto Rico (UBS-PR), Santander Securities (SAN), Banco Popular, Morgan Stanley (MS), Merrill Lynch, or another broker-dealer and you sustained substantial investment losses, contact us today.
Puerto Rico Creditor Sues BNY Mellon Over Sales Tax Bonds, The Wall Street Journal, April 12, 2017
Puerto Rico seen sliding toward bankruptcy as deadline nears, Yahoo/Reuters, April 12, 2017
Puerto Rico pension participants sue to stop cuts, Pension and Investments, April 12, 2017
PREPA and Its Bondholders Arrive at Deal to Restructure Almost $9 Billion in Puerto Rico Debt, Stockbroker Fraud Blog, April 7, 2017