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Analysis: Puerto Rico Sales Tax Creditors Circle Wagons in Fight with GO Bondholders

Creditors of Puerto Rico's sales tax authority have asked a federal court to prevent the U.S. territory from diverting the revenue that guarantees its debt to repay other investors, Reuters reported yesterday. Crippled by high poverty and nearly insolvent public health and pension systems, Puerto Rico is trying to restructure $70 billion in debt to fend off economic catastrophe. Its two largest debt classes are $18 billion in general obligation, or GO, bonds guaranteed by the island's constitution, and some $17 billion in so-called COFINA debt backed by sales tax revenue. Funds holding more than $2 billion in senior COFINA debt yesterday sought to intervene in a lawsuit filed by GO bondholders against Puerto Rico's government. That lawsuit, led by Lex Claims LLC, says COFINA funds should be redirected to GO holders under payment priority rules. In its statement, the COFINA group, which includes funds like Goldentree and Canyon Capital, called the GO bondholders' claims "meritless" and "self-serving." Read more

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage

Judge Bars Investors from Collecting on $300 Million Clerical Error

A judge has dashed the hopes of a group of investors in Ultra Petroleum Inc., a bankrupt natural gas company, who had sought to collect a $300 million windfall because a clerk entered a court order on the wrong date, Reuters reported yesterday. Bankruptcy Judge Marvin Isgur approved on Feb. 13 the disclosures for Ultra's plan to emerge from chapter 11, although his order was not put on the docket until the morning of Feb. 14. Some holders of Ultra's notes then argued that the delay changed the plan's economics in their favor, until Judge Isgur ruled against them on Tuesday. Judge Isgur said that all the parties expected his order to be entered on the court's docket the same day he approved it, not the next morning. The mix-up prompted some holders of Ultra's notes to file court papers on Monday arguing that the day difference would mean the company's rights offering should be delayed to Wednesday from Tuesday, as originally planned. The delayed rights offering in turn would affect the formula for natural gas prices used to establish Ultra's value in its chapter 11 plan, reducing it to $5.5 billion from $6 billion. That in turn would impact how noteholders would split the equity in the reorganized company with its shareholders. At the lower valuation the noteholders estimated they would get an additional $303 million, according to court filings.

Consumer Activists Decry Bill to Limit Class-Action Lawsuits

Plaintiffs’ lawyers and consumer-rights advocates are trying to derail a Republican bill to rein in class action lawsuits that is headed toward a floor vote in the House, the Wall Street Journal reported today. Opponents are urging lawmakers to halt the bill, which they say would severely limit the ability of citizens to join in lawsuits to fight grievances in court. Republican backers, meanwhile, say that the legislation is long overdue and would curtail lawyer-driven litigation that does little for consumers but benefits attorneys financially. The bill, titled the “Fairness in Class Action Litigation Act of 2017,” is the second attempt by Congress in recent years to restrict class-action lawsuits, which are used to challenge alleged securities fraud, employment discrimination, misleading advertising and other issues. Consumer advocates say such lawsuits have forced companies to pull unsafe drugs and faulty products from shelves, and compensate buyers for goods sold under misleading claims, such as Volkswagen AG’s diesel-engine vehicles. The legislation has moved swiftly since being introduced by Rep. Bob Goodlatte (R-Va.) less than two weeks ago. Last week, it passed out of the House Judiciary Committee untouched and with no hearings held, despite attempts by Democrats to limit its scope. The measure proposes to make alterations to the class action system, including requiring more similarity in the alleged harms of those joining together to sue, and prohibiting anyone from serving as a named plaintiff more than once with the same law firm. Consumer advocates say that these changes would make filing class actions more difficult.

To read the full bill text of H.R. 985, please click here. Browse bankruptcy, debt and insolvency legislation introduced to date in the 115th Congress by clicking here.

Prudential May Press Wells Fargo as Account Fallout Spreads

Prudential Financial Inc., facing regulatory scrutiny and a lawsuit over a sales relationship with Wells Fargo & Co., said it may press its partner to cover costs after halting the offering — another sign the bank has yet to contain the full fallout of its bogus-account scandal, Bloomberg News reported yesterday. Prudential “has provided notice to Wells Fargo that it may seek indemnification,” the Newark, New Jersey-based insurer said in a Feb. 17 regulatory filing, referring to their agreement to sell MyTerm life coverage to Wells Fargo customers. Prudential didn’t quantify the sum that it might pursue. Wells Fargo’s sales practices are being scrutinized on multiple fronts after authorities fined the bank $185 million in September for signing customers up for bank accounts and credit cards without permission. ProPublica said yesterday that the firm placed the head of a mortgage-lending unit in Los Angeles, Tom Swanson, on leave while examining allegations some customers were charged to lock in low interest rates when the bank delayed applications. Prudential suspended MyTerm sales through Wells Fargo in December. 

Mnuchin Zeal for Fannie-Freddie Overhaul Faces Test After Ruling

U.S. Treasury Secretary Steven Mnuchin’s seriousness about overhauling the nation’s $10 trillion mortgage market will soon be tested, Bloomberg News reported today. A federal appeals court on Tuesday dealt a major blow to hedge funds that own Fannie Mae and Freddie Mac shares, ruling that investors weren’t entitled to billions of dollars of profits. The decision clears an obstacle to addressing an issue that has vexed policy makers for almost a decade: What to do with the government-controlled companies that guarantee 43 percent of U.S. mortgages. Yet some housing industry groups and analysts say that they’re skeptical anything will happen quickly because Republican lawmakers have bigger priorities, such as repealing Obamacare and overhauling the tax code. And while most everyone agrees something must be done about Fannie and Freddie, there isn’t much consensus over how to proceed. Read more

In related news, Treasury Secretary Steven Mnuchin laid out ambitious goals to secure a U.S. tax-code overhaul by August and to deliver economic growth at rates not seen in more than a decade, the Wall Street Journal reported today. Mnuchin said that slower economic growth since the financial crisis had primarily been an anomaly and a result of Obama administration policies that can be reversed. He said the Trump administration is aiming for a sustained 3 percent or higher annual growth rate, a projection not widely shared by other forecasters. Sustained growth at rates above 3 percent could be difficult to achieve. The Federal Reserve projects a long-run annual growth rate of 1.8 percent and the Congressional Budget Office has a similar view. The U.S. faces slower economic growth in part because the labor force is expanding less briskly than in the past as baby boomers retire. Slow worker productivity growth has also held back the economy. Output has grown about 2 percent on average annually over the past decade, and other wealthy economies facing similar demographic challenges have seen slower growth rates. Read more. (Subscription required.) 

“Dance Moms” Star's Bankruptcy Fraud Sentencing to Be Rescheduled

The finale to Abby Lee Miller's bankruptcy fraud case again has been postponed, the reported today. The star of the reality series “Dance Moms” was scheduled to learn her fate on Friday in U.S. District Court in Pittsburgh. However, Judge Joy Flowers Conti on Wednesday canceled the sentencing hearing at the request of federal prosecutors. A new date has not yet been scheduled. Miller is seeking probation. Federal prosecutors contend Conti should give Miller 24 to 30 months in prison. A Pittsburgh native, Miller, 50, in June pleaded guilty to concealing assets during her 2010 Chapter 11 bankruptcy hearing and failing to report bringing more than $10,000 into the country from Australia in 2014. She remains free on a $10,000 unsecured bond.