Puerto Rico Judge Imposes 120-Day Pause on Bankruptcy Suits

(Bloomberg) -- As political chaos swirled outside, a federal court judge overseeing Puerto Rico’s bankruptcy in San Juan sought to impose order on dozens of legal fights that are adding to the island’s financial turmoil.

U.S. District Court Judge Laura Taylor Swain told bondholders, government officials and a federal oversight board at a Wednesday hearing to hold off on pressing their claims for four months, and instead attend mediation sessions.

The goal, Swain said, is to set up a process that would resolve the array of lawsuits, which are hobbling efforts to unwind billions of dollars of debt that taxpayers can’t afford anymore.

Under Swain’s order, the court fights will be suspended for 120 days. That includes attacks by creditors on government proposals that could reduce their payouts, and attempts by federal overseers to claw back interest that bondholders already received.

Still Squabbling

The litigation could cause “chaos that I’m trying to tamp down,” Swain told lawyers in San Juan federal court.

Swain’s order doesn’t halt court contests between the oversight board and Rossello’s administration over the scope of the board’s authority. In two suits, one in an appeals court and another before Swain, judges are being asked to set the limits on the oversight board’s power.

In October, the mediator, U.S. Bankruptcy Judge Barbara J. Houser, will report back on the effort to set up a process to either litigate, delay or settle the various cases. As those talks go forward, Swain said she’d also consider requiring more substantive talks about how to settle the billions of dollars of pending claims.

Lawyers representing key players in the case told Swain they welcomed the halt.

Debt Load

By stopping so many lawsuits, Swain has likely slowed the rush by the oversight board to win approval for the most far-reaching of the debt-cutting plans it is preparing. That proposal, which would rework general obligation bonds and other debts owed by the commonwealth, will be filed “as soon as reasonably possible,” board lawyer Martin Bienenstock said in court.

Bienenstock said the board will miss a self-imposed deadline for filing a restructuring plan for debt tied to the central government. He said that “recent events” on the island haven’t changed the board’s legal positions in the case.

Swain’s move to impose order on the bankruptcy process comes as Puerto Rico’s government faces a once-in-a-generation crisis brought on by federal corruption charges shadowing the governorship of Ricardo Rossello and a stream of vulgar text messages among his inner circle.

The administration had already lost its investment officer, press secretary and two fiscal agency heads -- one of whom lasted just five days. The governor’s chief of staff quit Tuesday night. The treasurer left last month amid a federal corruption investigation.

Local newspapers reported that Rossello was preparing to resign as well, and lawmakers with the island’s opposition political party called for impeachment proceedings to begin.

Power Shift

The political problems could create an opening for the federal oversight board to consolidate power and impose deeper budget-cutting measures as part of the more than two-year-old bankruptcy.

The crisis may undermine opposition to unpopular cuts demanded by the board, by strengthening the view that the government is inefficiently run and rife with overspending, potentially freeing up more money for creditors.

“Judges are human,” said retired federal judge Richard Schmidt, who has followed the case closely. “They are supposed to rule based only on the law. But as a judge, it is hard to not know what’s going on.”

The case is The Commonwealth of Puerto Rico et al, 17-3283, U.S. Bankruptcy Court, District of Puerto Rico (San Juan)

--With assistance from Michelle Kaske, Ezra Fieser and Michael Deibert.

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net

©2019 Bloomberg L.P.