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Cofina trustee blames Puerto Rico for claims against it

By on May 15, 2017

The trustee of Puerto RicoSales Tax Financing Corp. (Cofina by its Spanish acronym) bonds told the court addressing the bankruptcy process filed by the island’s government that, because the commonwealth has taken actions that call into question its commitment to pay the bonds, it faces claims in the New York state court that it breached its duties.

Bank of New York Mellon (BNYM), through its lawyers, said that because of the commonwealth, which recently put Cofina bonds through a Title III bankruptcy process, BNYM has been subjected to competing demands by bondholders with respect to the existence of an event of default, whether or not to accelerate the Bonds, and whether or not to make payments on the Bonds.

The claim was made in a motion where it seeks to be heard by Judge Laura Taylor Swain on May 17.

“Additionally, BNYM has been sued in New York state court, where it faces allegations that it breached its duties to certain Beneficial Holders by failing to declare defaults and events of default. Whether or not Events of Default exist is an issue of great importance to all beneficial holders because it affects the payment priority among various types and series of Bonds,” the financial institution said.

To date, however, the principal and interest on the bonds has been paid when due.  The next payment on the bonds in the amount of $16,2 billion is due on June 1.

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In addition to disputes among Cofina bondholders, certain holders of the Commonwealth’s general obligation bonds have filed a claim against the funds held by BNYM in trust.

In Lex Claims, LLC v. Padilla, No. 16-cv-02374, which is in the local U.S. District Court, general obligation bondholders sued BNYM, among others, alleging generally that the transfer of the pledged taxes from the Commonwealth to Cofina and Cofina’s pledge of the same to BNYM as security for payment of Cofina bonds were unconstitutional. The GO bondholders contend that Cofina bonds should be used to pay them.

“Whether BNYM should make the June 1 Payment at all and, if made, to whom, are the subject of disputes among various groups of Beneficial Holders and Cofina,” said the bank.

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