Court: government not responsible for Puerto Rico bond losses

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The United States Court of Appeals for the Federal Circuit ruled against a group of Puerto Rico Sales Tax Financing Corp. (COFINA) subordinate bondholders' challenge to the settlement.

The Puerto Rico Oversight Board was not an "agency" of the federal government and the federal government didn't "coerce" the board into cutting the bond payments, the court said Thursday. As such, bondholders didn't have a claim against the federal government for the restructuring of their bonds. 

The appeals court affirmed the U.S. Court of Federal Claim's decision in the case. 

Subordinate COFINA holders experienced a haircut of about 44% in the COFINA restructuring enacted in February 2019, which was negotiated between the board and law firms representing holders of COFINA bonds. The United States District Court for the Puerto Rico District approved the restructuring.

Bondholders were seeking reimbursement for their losses under the Tucker Act, which allows claims against the federal government for its actions and laws.

"There is no per se rule either precluding or imposing liability when the government instigates action by a third party," the court said. The board was a third party and not part of the federal government, the court said.

For plaintiffs to use the Tucker Act, the effects on the plaintiffs couldn't have been merely unintended or collateral, the appeals court said. Since the Puerto Rico Oversight, Management, and Economic Stability Act never mentioned COFINA, it is questionable if the impacts meet this condition.

Since the federal government created a board with "sole discretion" to take a broad range of actions, according to PROMESA, the government lacks the ability to exercise general control over the board's actions or compel specific action, which typifies coercion, the appeals court said.

"While PROMESA undisputedly empowers the Oversight Board to initiate restructuring proceedings, the Oversight Board is not required to do so," the appeals court said.

"We thus agree with the claims court that the United States lacks the requisite amount of coercive control over the Oversight Board's actions to create liability under the Fifth Amendment [of the Bill of Rights]," the appeals court said.

The U.S. Department of Justice had argued neither the U.S. Court of Federal Claims nor the appeals court had jurisdiction in the case because under PROMESA all cases arising from the law must be pursued in the District Court for Puerto Rico.

The Court of Appeals rejected this, saying for it and the lower court to be barred from hearing Tucker Act claims, there must be an "unambiguous" statement in a law withdrawing the Tucker Act remedy.