Bondholders Sue Puerto Rico Over Law Allowing Debt Moratorium

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Juliegrace Brufke Capitol Hill Reporter
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General obligation bondholders filed a lawsuit against the Puerto Rico government Tuesday over a bill passed allowing the territory to delay its payments to its financial obligations to creditors.

The lawsuit – which lists Puerto Rico Gov. Alejandro Garcia Padilla, the island’s Secretary of Treasury Juan Zaragoza Gomez and Director of the Office of Management and Budget of the Commonwealth of Puerto Rico Luis Cruz Batistaas the defendants – alleged both the United States and Puerto Rico Constitutions render the Puerto Rico law invalid. 

The Emergency Moratorium and Financial Rehabilitation Act, enacted earlier this year, allows the governor to declare a state of emergency to halt payments.

By its terms, the act would subject bondholders to contempt of court — and possibly punitive damages —for initiating any legal proceeding that might result in a ‘judgment’ with respect to a covered debt obligation,” the lawsuit reads. “A statute, however, cannot preclude challenges to its constitutionality.”

The island currently faces roughly $72 billion of debt, defaulted on a massive payment in May and faces a $2 billion payment on July 1.

“Governor Alejandro Garcia Padilla has willfully violated the first priority guaranteed to general obligation bonds by Puerto Rico’s Constitution and has flouted centuries-old federal constitutional protections for contract and property rights,” Mark Stancil of Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, the plaintiffs’ counsel, said in a statement. “The Moratorium Act is transparently unlawful.”

The U.S. House of Representatives recently passed its own bill that would put a federally-appointed control board in place to oversee Puerto Rico’s finances.

The Senate is expected to take up the measure in coming weeks.

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