Objection to GO Priority 

On February 3, 2020, as part of its mission to obtain the best recovery possible for all unsecured creditors, the Committee filed an objection (available here) to the asserted priority status of nearly $18 billion of bonds issued or guaranteed by the Commonwealth of Puerto Rico (the “GO bonds”).  

Numerous GO bondholders claim that the GO bonds are entitled to priority of payment over other claims under the Commonwealth Constitution and that, therefore, they must be paid in full before any other general unsecured claims.  In other words, these bondholders assert that their claims are first in line for payment—ahead of all the Commonwealth’s other creditors, including claims of suppliers of goods or services, employees, and anyone else.

The Committee believes that the GO bondholders are not entitled to priority.  As explained in the Committee’s objection, the alleged Commonwealth law priority claimed by the GO bondholders is not valid in a PROMESA Title III case, where the requirements of federal bankruptcy law, not state law priorities, govern.  And federal bankruptcy law mandates, in almost all circumstances, equal treatment of unsecured creditors.  The GO bondholders have no valid claim to priority over the Commonwealth’s other general unsecured creditors.

The Objection to the 2012 and 2014 Commonwealth GO Bonds

On January 14, 2019, the Oversight Board and the Committee filed their omnibus objection to claims filed or asserted by holders of certain Commonwealth general obligation (“Commonwealth GO”) bonds issued in 2012 and 2014 (the “2012-2014 GO Objection”). Commonwealth GO bonds are municipal bonds that are backed by the Commonwealth’s full faith and credit, which includes its taxing power. Since 1961, when the debt service limit was enacted and incorporated into the Constitution, the Commonwealth has issued billions of dollars of Commonwealth GO bonds, and approximately $13 billion of Commonwealth GO bonds remain outstanding.

As explained in more detail in the 2012-2014 GO Objection, the Oversight Board and the Committee believe more than $6 billion of those Commonwealth GO bonds, issued in 2012 and 2014, are invalid, because they were issued by the Commonwealth in violation of the debt service limit of the Commonwealth’s Constitution, which provides, in essence, that the Commonwealth cannot issue new debt if debt service on all of the Commonwealth’s obligations will exceed 15% of internal revenues (based on a two year average). Click here to see a list of the 2012 and 2014 GO bond series subject to the 2012-2014 GO Objection.

In addition, the Committee (but not the Oversight Board) argues that the issuance of these 2012 and 2014 Commonwealth GO bonds also violated the balanced budget requirement of the Commonwealth’s Constitution, which provides that appropriations for any fiscal year may not exceed total “revenues” estimated for the fiscal year. The Committee believes that “revenues” as used in this section of the Constitution does not include income from bonds, as they are a form of expense when repaid. Accordingly, the issuance of the Commonwealth GO bonds for the purpose of financing or refinancing deficit spending was a violation of the balanced budget requirement of the Constitution.

The Committee is challenging the invalid Commonwealth GO bonds because it is the duty of the Committee to maximize the recovery of unsecured creditors. Thus, one aspect of the Committee’s work is to challenge claims asserted against the Commonwealth that are inaccurate or based on impermissible legal grounds. By eliminating claims that are not appropriately asserted against the Commonwealth, the Committee ensures the Commonwealth has more funds available to meet its obligations.

It is important to note that it is the Committee’s duty to serve the interests of the unsecured creditors as a whole. On occasion, the relief sought by a Committee may have an adverse impact on claims held by an individual unsecured creditor. The Committee, however, does not represent any one individual. Rather, the Committee is obligated to pursue those courses of action that will be in the interests of the collective body of unsecured creditors.

The Objection to Certain 2011 Commonwealth GO Bonds

On May 21, 2019, the Committee filed its omnibus objection to claims filed or asserted by holders of certain Commonwealth general obligation (“Commonwealth GO”) bonds issued in 2011 (the “2011 GO Objection”).  As explained in more detail in the 2011 GO Objection, the Committee believes that approximately $1 billion of Commonwealth GO bonds issued in 2011 were also issued in violation of the constitutional debt limit and balanced budget requirement.  Click here to see list of the 2011 GO bond series subject to the 2011 GO Objection.

The Objection to Certain PBA Bonds

On July 18, 2019, the Committee filed its omnibus objection to claims filed or asserted by holders of certain Commonwealth-guaranteed Public Building Authority (“PBA”) bonds (the “PBA Bond Objection”). As explained in more detail in the PBA Bond Objection, the Committee believes that approximately $1.75 billion of PBA bonds issued in 2011 and 2012 were also issued in violation of the constitutional debt limit and balanced budget requirement. Click here to see list of the PBA bond series subject to the PBA Bond Objection.