Hedge funds argue courts back federal compensation for Puerto Rico bond losses

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Recent court decisions support hedge funds’ argument that the federal government owes Puerto Rico bondholders compensation for any Oversight Board-imposed losses, the hedge funds said in a brief filed Wednesday.

The filing was the latest episode in the hedge funds’ case in the U.S. Court of Federal Claims. Altair Global Credit Opportunities is leading a group of 11 investments funds suing the U.S. government.

While the case is about Employees Retirement System bonds, the arguments about federal responsibility could be applicable to any Puerto Rico bonds affected by the board’s bond restructurings.

In July 2017 the investment funds filed a complaint in the U.S. Court of Federal Claims saying the board was federal entity. They said that since the board had ordered the local legislature to enact legislation that effectively ended payment on the ERS bonds, the federal government was potentially liable for payment.

In July 2018 Court of Federal Claims Judge Susan Breeden released an opinion in which she said she believed that the court had jurisdiction over the matter. Breeden said the plaintiffs had alleged enough facts to make it likely that “their injuries will be redressed by a favorable decision.”

However, Braden declined to rule, saying the time wasn’t ripe because rulings in two suits challenging the constitutionality of the appointment of the Oversight Board hadn’t yet been decided.

In January Court of Federal Claims Chief Judge Margaret Sweeney said she was replacing Braden in the case.

Subsequently, Sweeney asked the plaintiffs and defendants to answer four questions. Among these, Sweeney asked about the impact of a February decision by the U.S. Court for the First Circuit that the appointment of the board following the procedures of the Puerto Rico Oversight, Management, and Economic Stability Act was unconstitutional. She asked if this decision, in a case led by the Aurelius hedge fund, had relevance for Altair’s federal claims case.

Sweeney also asked if a February First Circuit decision affirming that investment funds had a perfected security lien on in the Employees Retirement System’s property had significance for the Altair federal claims case.

On May 20 the U.S. government filed a brief restating its position that it wasn’t liable for paying for any board-mandated cuts to Puerto Rico bonds.

With regards to the Aurelius case question, the U.S. said the possibility that the U.S. Supreme Court might review it and render all of the board’s actions void back to its founding in August 2016 meant that time wasn’t yet ripe to consider the plaintiffs’ arguments in the federal claims case.

On Thursday the Supreme Court announced that it would review the decision.

On the February ruling affirming the security lien’s perfection, the U.S. acknowledged this weakened its position a bit but said that the time wasn’t ripe for the federal claims court to rule before the bankruptcy process was complete.

In its brief on Wednesday, the investment funds said the Aurelius decision confirms that the Oversight Board “is an agent of the federal government and that the bondholders have properly sued the United States before this court.” In the Aurelius decision the court found that the board’s members are “Officers of the United States” under the U.S. Constitution’s Appointments Clause, which the funds said reinforces that the board is a federal entity.

The First Circuit’s decision on the perfection of the bondholders’ ERS liens, “confirms that bondholders have valid, enforceable, and unavoidable property interests in the liens securing their bonds,” the Altair group wrote in Wednesday’s brief. “Altair therefore eliminates the government’s argument that the bondholders cannot prevail here because they lack a property interest.”

The plaintiffs used much of their brief to argue against the U.S. government’s statements.

Federal Claims Judge Sweeney has said that the U.S. government has until no later than July 3 to respond to the plaintiffs’ arguments.

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