(Corrects date of Franklin Templeton and OppenheimerFunds
lawsuit to June 29 from June 20 in final paragraph)
NEW YORK, July 23 A hedge fund with over $400
million in Puerto Rico bonds has joined a legal challenge
against a law that allows the U.S. Commonwealth to restructure
some of its debt, hiring one of the most prominent lawyers in
the United States to argue its case.
New York-based BlueMountain Capital Management filed a
lawsuit in the district court of Puerto Rico on Tuesday,
claiming that the new law, known as the Recovery Act, runs
counter to both the Puerto Rican and U.S. constitutions.
BlueMountain argues that the "United States Constitution and
federal law preclude the Commonwealth from enacting a bankruptcy
law that adjusts the debts of its instrumentalities and public
entities and binds non-consenting creditors."
"The problems raised by Puerto Rico's massive debt burden
are undoubtedly very serious, but tearing up contracts,
disregarding federal law, and abusing power to arbitrarily pick
winners and losers is not the answer," said BlueMountain's lead
counsel Theodore Olson.
Olson, of law firm Gibson, Dunn & Crutcher, is one of the
highest profile lawyers in the country. He was solicitor general
from 2001 to 2004 under U.S. President George W. Bush after
helping Bush win legal arguments over the contested 2000
Olson's involvement is a sign of the high stakes nature of
Puerto Rico has around $73 billion in debt and is struggling
to kick-start a moribund economy and reverse its shrinking
population trends. The Commonwealth insists it needs the law to
make its public corporations economically viable.
The Recovery Act, passed in late June, allows some of the
Commonwealth's public corporations to restructure around $20
billion in debt. The electric authority PREPA is considered to
be a likely candidate to use the law. BlueMountain said it holds
over $400 million of PREPA's $9.3 billion of debt.
"Rather than walking away from contracts, the Commonwealth
and PREPA should collaborate with its investors to develop real
solutions that put PREPA, the Commonwealth and its institutions
on a path to financial stability," BlueMountain said in a
BlueMountain's suit follows a similar action by mutual fund
companies Franklin Templeton and OppenheimerFunds who filed a
lawsuit on June 29. Municipal bond funds run by those firms say
they hold $1.7 billion in Puerto Rico debt. Puerto Rico says it
will vigorously defend the law.
(Reporting by Edward Krudy; Editing by Chizu Nomiyama)