Sales tax creditors kick off likely wave of lawsuits against Puerto Rico

Katie RamirezMay 06, 2017

Puerto Rico's federal oversight board filed with USA court to use bankruptcy-like proceedings to slash the island's $70 billion debt after failing to strike an agreement with bondholders, pushing the territory toward the biggest restructuring ever by a US state or local government.

SAN JUAN, Puerto Rico - Bondholders sued Puerto Rico on Tuesday in the first legal challenges to hit the USA territory after the expiration of a freeze on litigation that protected it from lawsuits amid a deep economic crisis.

"A Title III filing at this point in time enables Puerto Rico to freeze numerous lawsuits, maintain essential services for its residents, and rely on a court-driven restructuring process to objectively determine respective creditors' rights", said Susheel Kirpalani of law firm Quinn Emanuel Urquhart & Sullivan in the statement. Puerto Rico is preparing to cut public employee benefits, increase tax revenue, hike water rates and privatize government operations, among other things. The chief justice of the U.S. Supreme Court is expected to appoint a judge to oversee Puerto Rico's case, the largest of its kind in U.S. history. But the action - once inconceivable for a territory that didn't have authority to file for bankruptcy - sets a precedent that could resonate with struggling states in the decades ahead.

The largest municipal bankruptcy was roughly $18 billion owed by the city of Detroit in 2013.

The legal proceeding does not mean negotiations toward a compromise must stop, Governor Rossello said in a statement on Wednesday.

Puerto Rico's stay on litigation that protected it from lawsuits expired at midnight this past Monday after the Puerto Rican administration failed to reach a deal with bondholders. Some creditors fear Puerto Rico will seek to have the case handled in the Southern District of NY. That's more than four times the debt Detroit collapsed under.

"It's going to be uncomfortable for some", Barbarosh said.

While many of Puerto Rico's circumstances are unique, its case is also a warning sign for many American states and municipalities - such as IL and Philadelphia - that are facing some of the same strains, including rising pension costs, crumbling infrastructure, departing taxpayers and credit downgrades that make it more expensive to raise money.

If that's the case, Puerto Rico's bankruptcy would be almost five times bigger than Detroit's, which set a record in 2013.

Many economists anticipated the island's move Wednesday to seek a bankruptcy-like process amid a 10-year recession, but no one can predict what lies ahead.

Rosselló said through the twitter account of the governor's office that the Puerto Rico Oversight Board would apply for Title III in the near future. Puerto Rico's case could show public workers and retirees that seemingly inviolate pension systems can be changed, too.

Instead, Puerto Rico will petition a judge for relief under a new federal law for insolvent territorial governments, called Promesa. This is a debt restructuring plan that is carried out under the auspices of the court.

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