Schedule proposed for resolution of Cofina/commonwealth dispute
SAN JUAN — On Tuesday, agents representing the commonwealth and Puerto Rico Sales Tax Financing Corp. (Cofina) bondholders presented in federal court an expedited schedule to solve a key dispute over who owns certain sales tax revenues.
The proposed agenda calls for federal Judge Laura Taylor Swain—who is in charge of the commonwealth’s bankruptcy cases under Title III of the federal Promesa law—to hold a decisive hearing over the matter by Dec. 4-8.
At the heart of the dispute is whether sales tax revenues pledged to Cofina debt service should be deemed part of the commonwealth’s available resources or must continue to be used to pay Cofina bondholders.
General obligation (GO) bondholders contend that sales tax revenues, which in fiscal year 2017 totaled $1.7 billion, should be all part of the government’s available resources and be used to pay constitutionally guaranteed debt, such as GOs, as well as essential services. The GO bondholder group also says the Cofina structure is illegal.
As for Cofina creditors, they disagree, noting that legal opinions have validated the structure, whereby pledged sales tax revenue doesn’t constitute available resources of the commonwealth.
Judge Swain has previously said solving the Cofina/commonwealth dispute is critical to pave the way for the restructuring of the island’s debt load which tops $73 billion, without including roughly $40 billion of unfunded pension liabilities.
Earlier this year, the commonwealth’s Financial Oversight & Management Board asked the court for the appointment of two independent agents that would help litigate the Cofina/commonwealth dispute. The official unsecured creditors committee—which represents these creditors in Title III cases—is the commonwealth’s agent, while Bettina Whyte, a restructuring expert, represents Cofina.
The oversight board has declined to take sides in the dispute, although at a recent hearing, magistrate Judge Judith Dein, who assists Judge Swain with Title III cases, said she believed Cofina bondholders were entitled to a statement from the board to that end.
Among the most significant aspects of the jointly proposed schedule is that by Sept. 8, the commonwealth must file its complaint over the Cofina matter. Meanwhile, the Cofina agent must file its answer to the commonwealth’s complaint by Sept. 15.
Any party that wishes to intervene in the Cofina/commonwealth dispute has until Sept. 22 to notify the court of its intent to do so.
As for discovery, the commonwealth and instrumentalities must commence the production of documents on Sept. 8, a process that should finish by Sept. 22. Fact discovery must be completed by Oct. 27, while expert discovery must end by Nov. 3. Pre-trial briefs shall be submitted by Nov. 27, about a week before the hearing takes place.