By Nick Brown
NEW YORK, April 12 (Reuters) - A holder of sales tax-backed Puerto Rican debt, known as COFINA debt, sued Bank of New York Mellon Corp on Wednesday, alleging the bank breached its duty as trustee for COFINA debt to protect senior bondholders.
Whitebox Advisers sued the bank in a New York state court, saying it should have either accelerated or frozen payouts on COFINA debt after technical defaults by the Puerto Rican government, which is facing an economic crisis marked by $70 billion in debt and a 45 percent poverty rate.
Whitebox alleges that several events since 2015 constitute technical defaults, including plans by the government to restructure its debt and potentially cut recoveries to senior COFINA holders.
The island's current fiscal turnaround plan, approved by its federal financial oversight board in March, is one such event, Whitebox alleges, because it forecasts major cuts to all creditors, including COFINA.
The complaint alleges the Bank of New York should have sought assurances that the government was committed to protecting COFINA debt and, in an event of default, should have frozen disbursements.
Instead, it did not seek such assurances, and continued making disbursements to more junior COFINA holders, potentially risking payment cuts for more senior ones, the complaint alleges.
Whitebox is seeking monetary damages from the bank of New York. A representative of the bank could not immediately be reached on Wednesday.
The lawsuit is the latest indication of growing concern among creditors about potential cuts to recoveries.
Senior COFINA holders already are facing efforts to slash their recoveries on two fronts - from the island's oversight board, which is pushing cuts for all creditors, and from Puerto Rico's general obligation (GO) bondholders, who have alleged in a separate lawsuit that sales tax revenue should be redirected to pay GO debt instead.
Wednesday's lawsuit essentially pits certain senior COFINA holders against junior ones, accusing the Bank of New York of failing to enforce priority rules for different classes of COFINA holders. (Reporting by Nick Brown; Editing by Bill Trott)