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Gov’t, Bondholders File Lawsuit Over Fund Distributions

By on December 21, 2018

Editor’s note: The following originally appeared in the Dec. 20, 2018 – Jan. 2, 2019, issue of Caribbean Business.

The government and bondholders of the Puerto Rico Sales Tax Financing Corp. (Cofina) have asked the court for an emergency scheduling to resolve a dispute contained in Cofina’s debt-adjustment plan, which is slated to be evaluated in January by the U.S. District Court.

Resolving the dispute is essential for moving forward with the Cofina deal, a source said. Judge Laura Taylor Swain heard the request for time to resolve the dispute at the omnibus hearing which took place Wednesday, Dec. 19.

The dispute is related to Section 19.5 of the plan, which discusses delivery of distributions. The section states that distribution and deliveries to bondholders will be made to their respective addresses. However, the initial distributions of cash by the disbursing agents will be made to the Bank of New York Mellon (BNYM) as trustee of the existing securities, which will then distribute the funds.

The section says that the distribution shall not be stopped on account of lawsuits filed by Whitebox and Ambac, a provision that is at the core of the dispute. Whitebox sued BNYM in New York state court in April 2017 alleging the bank breached its duty as trustee for Cofina debt to protect senior bondholders. Whitebox said BNYM should have accelerated or frozen payouts on Cofina debt after technical defaults by Puerto Rico that began in 2015, including the government’s plan to restructure its debt. The lawsuit was stayed. A similar lawsuit was filed by Ambac Assurance Corp., which was also stayed.

The government wants the court to agree to a schedule to resolve the dispute. BNYM wants the court to determine if it should withhold any amounts of money that it had incurred to defend itself from the lawsuits.

“The Cofina plan provides for the court to determine whether BNYM is entitled to any security from Whitebox or Ambac, in the form of a distribution holdback or a bond being posted for the benefit of BNYM in connection with fees and expenses which may be incurred by BNYM in the defense of the lawsuits, and if such security is warranted,” the government said in court documents.

As a result of discussions with mediators, the Financial Oversight & Management Board as well as the lawyers for BNYM, Whitebox and Ambac, developed procedures regarding consideration of the dispute contemplated in Section 19.5 of the Cofina debt plan, to which all parties had agreed to in September 2018.

The schedule is the following: Jan. 2, 2019, will be the deadline by which BNYM must file any briefs or declarations supporting the amount the bank contends should either be withheld from distributions to Whitebox and Ambac or posted by Whitebox and Ambac pursuant to Section 19.5 of the Cofina plan. It is also the deadline on which Whitebox and Ambac must file any brief or declarations supporting their position that no amounts are required either to be withheld from their distributions.

On Jan. 9, 2019, BNYM must file any responsive papers to the Whitebox and Ambac declarations. Whitebox and Ambac must also file their responses. From Jan. 10 through Jan. 15, 2019, each party can take depositions. Then, on Jan. 16, there will be a hear-ing on the dispute. A confirmation hearing on the Cofina debt agreement is also slated for Jan. 16.

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