Moratorium on debt in Puerto Rico sparks lawsuit

Associated Press

SAN JUAN, Puerto Rico

Holders of bonds from Puerto Rico’s Government Development Bank are suing to challenge aspects of a debt-moratorium law that island officials say is crucial to maintaining essential services as the U.S. territory struggles under a nearly $70 billion debt load.

The amended federal lawsuit filed late Friday in the U.S. District Court in San Juan names Puerto Rico’s governor and treasury secretary as well as an unidentified bank receiver. It argues that amendments to the law prioritize the rights of certain creditors at the expense of others in violation of U.S. and Puerto Rican law.

Gov. Alejandro Garcia Padilla said the lawsuit’s challenge of the Debt Moratorium and Financial Recovery Act could affect the commonwealth’s ability to have police in the streets, teachers in the classrooms and nurses in hospitals. He said because Congress excluded Puerto Rico from the bankruptcy code in 1984 without any explanation, and the federal courts have impeded past attempts to create a local bankruptcy law, the act is the commonwealth’s only option to restructure its debt.

“If the commonwealth cannot proceed with its intention to restructure the debt in an organized manner, chaotic litigation will ensue and the courts can take control of the limited resources of the government and make them available to the interests of the Wall street funds,” the governor said in a written statement Saturday evening. “We are not going to close the government to pay a considerable profit to the hedge funds, who bought the bonds at a big discount after the crisis began.”