Lawsuit Challenges Part of Congressional Debt Relief Plan for Puerto Rico

A court case challenging the congressional plan to deal with the Puerto Rico debt crisis has been launched to ensure the territory pays its bills.

Creditors filed suit against the Commonwealth of Puerto Rico in San Juan’s United States District Court on Wednesday. This type of lawsuit is exactly what Congress had hoped to prevent by adding a stay on litigation to PROMESA, its act addressing Puerto Rico’s debt crisis.

The creditors are challenging the legality of the stay itself, echoing concerns that The Heritage Foundation raised during the bill’s consideration. At the time, we wrote that:

Enacting such a “stay” of litigation without supervision by the Oversight Board created in PROMESA would give Puerto Rico’s unpopular government an opportunity to shuffle money around, potentially without consequences, for months … As drafted, the bill creates an incentive for Obama to drag his feet and allow his allies to govern the island free of legal challenges and oversight.

In the lawsuit, which bond researcher Cate Long shared online, the creditors hope to win relief under a provision of PROMESA that was added in response to our and others’ concerns about the stay:

Recognizing that there would be some period of time after the stay took effect but before appointment of the Oversight Board and its chair, PROMESA severely restricts Puerto Rico’s ability to take certain action that would impair its creditors … This section addresses Congress’s concern that Puerto Rico might seek to exploit bondholders’ inability to sue for payment before the Oversight Board is operational to siphon money away from (among others) bondholders protected by the Puerto Rico Constitution.

The creditors make their case that they deserve payment under both PROMESA’s own provisions and the Puerto Rican constitution. Other groups of creditors are likely hoping that this group loses its case—they are all chasing the same shrinking purse.

For Congress, this will be a test of how its unwise rearrangement of legal claims works in practice. Regardless of how Judge Francisco Besosa rules, the lawsuit shows that PROMESA did not prevent the “rush to the courthouse” that its proponents claimed it would avert. Instead, competing claimants are right where they belong—in front of an appropriate court—but playing under slightly different rules than they originally agreed to. (For more from the author of “Lawsuit Challenges Part of Congressional Debt Relief Plan for Puerto Rico” please click HERE)

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