By Nick Brown
NEW YORK (Reuters) - A U.S. federal judge on Tuesday dismissed a lawsuit by some of Puerto Rico's bondholders, who had argued that the U.S. territory broke the law by defaulting on constitutionally-guaranteed debt despite having the money to make payments.
Judge Laura Taylor Swain, who is overseeing Puerto Rico's bankruptcy, did not address the merits of the bondholders' claims, concluding that she lacked jurisdiction over some of them, and that others were not fit to be ruled on.
The dismissal is a setback to owners of roughly $18 billion in general obligation (GO) bonds guaranteed by Puerto Rico's constitution and taxing power.
A win would have helped establish the top priority of GO debt relative to other credits in Puerto Rico, a central question as warring creditor classes litigate competing claims to the island's limited funding streams.
Puerto Rico has $120 billion in combined bond and pension debt, and its finances are under the oversight of a federally-appointed board.
Last May, the island filed the largest bankruptcy in U.S. government history.
With creditors already expecting drastic cuts to repayments, Hurricane Maria hit Puerto Rico in September, killing dozens, decimating local infrastructure, and sending bond prices plummeting as low as 20 cents on the dollar.
GO bondholders have accused the oversight board and the Puerto Rican government of unlawfully steering revenues away from them.
In the lawsuit, which was filed in June, a group of these bondholders, led by Aurelius Capital Management, alleged the island's government had violated Puerto Rican law and the U.S. constitution by paying for government services with revenues it diverted from other reserves.
They argued that, under Puerto Rican law, these so-called revenue "clawbacks" could only be used to pay GO debt. Puerto Rico used some $940 million in clawbacks and other restricted cash to fund government services in fiscal year 2017, they alleged.
Judge Swain, in a 19-page ruling on Tuesday, said she lacked jurisdiction over some claims. Others, she said, failed to state a claim upon which relief could be granted, amounting "to abstract declarations of the parties' respective relationships" without application to a "current concrete dispute."