Cofina creditors file motion for judgment in Lex Claims suit
SAN JUAN – The Cofina Seniors Coalition has filed a motion for judgment in the Lex Claims LLC et al. v. García Padilla case in U.S. District Court that contends general obligation (GO) bonds issued after 2011 are illegal because the government reached its constitutional debt limit that year.
The allegation is the latest in the Lex Claims lawsuit, in which GO bondholders seek to invalidate the structure of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), contending that they have a priority in debt payments.
In addition to asking the Supreme Court of Puerto Rico to provide complete validation of Cofina, the Cofina Seniors Coalition says it intends to demonstrate that the GOs’ case is fundamentally flawed and there are “fatal legal issues” that prevent the Lex claimants from pursuing litigation. “This includes showing that their debt may be completely void and was unconstitutionally issued in violation of the Puerto Rico Constitution’s debt limit,” the group said in a statement.
“We will demonstrate that Puerto Rico’s Constitution grants Cofina its property rights, which must be respected in the face of baseless challenges from a litigious group of unsecured creditors with no property rights,” the Cofina bondholders said.
Since its creation through bipartisan legislation in 2006, Cofina’s property has been held separately from the commonwealth’s “available resources”—the revenue stream used to pay the government’s general expenses and the GO bonds held by the plaintiffs.
The Cofina bondholders also said that the GO Ad Hoc Group’s bonds may be completely void and were unconstitutionally issued in violation of the Puerto Rico Constitution’s debt limit.
“We also assert the claims of many of the plaintiffs should be dismissed immediately because their 2014 GO bonds were issued in excess of the Puerto Rico Constitution’s debt limit and thus they are not valid or entitled to constitutional priority. Under the Puerto Rico Constitution, the Government can only provide full faith and credit to bonds issued in conformity with the constitutional debt limit. That limit was clearly reached in 2011, meaning that bonds issued thereafter that purport to be backed by full faith and credit are void and effectively worthless,” the Cofina bondholders said.
While the Cofina Seniors Coalition says it has been a longstanding proponent of respecting Promesa’s stay on litigation and attempting to work toward consensual deals, the government of Puerto Rico has yet to engage it in “any meaningful discussion,” it said.
“But in the week since the fiscal plan was approved, in a very surprising move against the best interests of local bondholders, the Government appears to have aligned with the most litigious and aggressive creditor group, Lex Claimants, whose debt may not even be valid. This is the same creditor group currently running attack ads against Cofina every week in Puerto Rico, much like they did in Washington, D.C. when vilifying members of Congress in their districts when they supported Promesa,” the Cofina group wrote.
“Our group has been willing to help the Government in its liquidity crisis and has offered to enter into meaningful negotiations as early as February 2016, which was reiterated to Gov. [Ricardo] Rosselló several times, including in the only official meeting held with Cofina’s senior creditors on January 18, 2017 at a meeting with AAFAF [Spanish initials for Puerto Rico Fiscal Agency and Financial Advisory Authority].
“As a result, we find it curious that the newly appointed officials at AAFAF have chosen to begin negotiations with this small group of stateside hedge funds over the citizens of Puerto Rico, especially when Cofina bonds are the most widely held locally by a 7-to-1 margin compared to GO bonds,” the Cofina group charged.
This has placed AAFAF in the “unenviable position of placing the government in a position of not fulfilling the Puerto Rico Justice Department’s legal obligation of always defending” the constitutionality of Puerto Rico statues and the contractual obligations of Cofina, the Government Development Bank and AAFAF of “defending the constitutionality and legality of every Cofina issuance,” the group said.