Swain’s World: April 25 Critical Date for Cofina-GO Dispute
One of the most important disputes within the Title III bankruptcy process examines whether the Puerto Rico Sales Tax Financing Corp. (Cofina) is legal and whether its creation violates debt limits contained in the Commonwealth Constitution.
A ruling against Cofina will make the $16 billion in Cofina bonds worthless.
At the April 25 omnibus hearing, U.S. District Court Judge Laura Taylor Swain will hear arguments on whether the federal court should ask the island’s commonwealth Supreme Court to decide on the legality of the Cofina structure.
Following the government’s default on payment of the General Obligation (GO) bonds in 2016, GO Bondholders went to court to claim their credit is guaranteed by the full faith and credit of the Commonwealth Constitution. The GO Bondholders contend the dedicated sales tax that goes to Cofina is part of the “available resources” in the Constitution that must be used to pay them.
Dating back to 2006, Cofina has served as yet another vehicle for the Puerto Rico government to issue debt. Every time someone pays the 11.5 percent sales tax, about one-fourth goes to a fund to pay Cofina bondholders. Bond-offering documents state these revenues do not belong to the commonwealth.
Cofina supporters say the Cofina Enabling Act made the sales & use tax (known as IVU by its Spanish acronym) a property of Cofina.
Neither the government nor the Puerto Rico Oversight, Management & Economic Stability Act’s (Promesa) fiscal control board want to participate in the dispute. Cofina agent Bettina Whyte, however, went against the board’s wishes and asked the court to refer the matter on Cofina’s legality to the commonwealth Supreme Court.