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Puerto Rico GOs denied intervention in Cofina dispute

By on July 6, 2017

SAN JUAN — Federal Judge Laura Taylor Swain denied Thursday intervention to a group of Puerto Rico’s general obligation (GO) creditors in the interpleader action filed by Bank of New York Mellon (BNYM)—trustee of the Sales Tax Financing Corp. (Cofina)—with respect to pledged sales tax funds that guarantee payment of Cofina bonds.

On May 16, BNYM filed action that seeks to have the court determine how the trustee should proceed with sales tax funds under its possession amid conflicting instructions over said monies.

Meanwhile, a group of GO bondholders sought to intervene in the action, arguing that pledged sales tax funds belong to the commonwealth and thus should be used to cover GO debt obligations pursuant to the island’s Constitution.

“The members of the GO group are not Cofina creditors, and have no direct claim to the Interpleaded Funds,” the court order reads, as Judge Swain found that the GO group lacked standing to assert its claims under BNYM’s action.

The court had already ordered BNYM to hold the funds in escrow until the interpleader was resolved.

“This is a setback not only for GOs, but also for the commonwealth and its legal strategy,” one source said, in reference to the government’s plan to tap into Cofina funds and redirect them to the island’s coffers.

The court recognizes that the intent of both the government and the board is to pool Cofina funds into available resources for an eventual debt-restructuring plan, and that the board seeks to solve the dispute with respect to Cofina.

“The claim that the commonwealth is entitled or required to apply the Cofina trust funds to payment of the commonwealth’s obligations to GO bondholders is one of which the commonwealth, as a debtor in a related Promesa Title III proceeding, has control. The commonwealth is not a party to the instant adversary proceeding,” the order adds.

The document also establishes that “the GO group’s asserted interest in the interpleaded funds would exist only if the commonwealth’s yet-unasserted claim on those funds were successful.”

In March, the Ricardo Rosselló administration and the GO bondholder group issued a joint statement in which they announced that the government—even if it was not taking a “definitive position” on the matter—would seek “prompt and expeditious resolution of the claims asserted by the GO bondholders regarding the constitutionality of Cofina,” under the Lex Claims case filed by GO creditors. In a nutshell, Lex Claims intends to have a court declare Cofina funds belong to the commonwealth.

On May 5, Puerto Rico’s financial control board filed for bankruptcy protection under Title III of Promesa on behalf of Cofina, as it did with the commonwealth. A mediation process has been set to address, among other issues, the commonwealth’s dispute with Cofina bondholders.

Discovery rules set

After holding a hearing in Boston on July 5, U.S. Magistrate Judge Judith Dein—who was appointed to assist Judge Swain with Puerto Rico’s Title III cases—set the rules for discovery on the commonwealth government over the Cofina dispute.

The commonwealth had opposed the Cofina creditors’ discovery petition, as it believed it was too broad and would not help solve the merits of the controversy.

By July 7, government officials and Cofina senior creditors will have to agree on search terms “aimed at identifying documents in the possession of [the government] that concern proposed changes to the use of the dedicated sales tax revenues,” Judge Dein’s order reads.

If disputes over the discovery process remain by July 12, parties will notify the court so it can promptly solve these issues.

As for the discovery time period, it will span from Feb. 15 to present. Documents to be produced include “public statements to third parties,” as well as electronically stored information in computers and cellphones.

If the commonwealth government refuses to produce documents citing such privileges as deliberative process and attorney-client, it must explain the court why it is withholding them.

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