Legal opinion raises prospect of federal payment of Puerto Rico bonds

A federal judge issued an opinion that took a step towards making the federal government liable for any Puerto Rico Oversight Board-mandated cuts to bond values.

The ruling from U.S. Court of Federal Claims Chief Judge Susan Braden on Friday is a potential wrench in the works of the Puerto Rico Oversight, Management, and Economic Stability Act. It came on the same day as Title III bankruptcy Judge Laura Taylor Swain seemed to have removed one of the biggest obstacles for the bond bankruptcies to go forward. She did this when she ruled against hedge fund Aurelius’ claim that PROMESA was inconsistent with the U.S. Constitution’s appointments clause.

The Braden ruling covers at least one similar topic — whether the Oversight Board should be considered a federal or territorial body — and came to the opposite conclusion.

swain-laura-NY

“It is contrary to Swain's (ruling), potentially putting two different circuits in conflict, perfect for Supreme Court of the United States cert petition," Puerto Rico attorney John Mudd wrote in an email. "Also, Congress is put in the position that PROMESA could make the U.S. liable for any restructuring and [Congress] could repeal the Title III. It opens up many, many possible scenarios.”

Mudd said he agreed with Braden’s opinion.

The Braden opinion and order denying the U.S. government’s motion to dismiss was in a suit filed by a group of investment funds led by Altair Global Credit Opportunities Fund in July 2017 against the U.S. government. They are seeking the payment of $3.1 billion in principal and interest in Puerto Rico Employment Retirement System bonds.

In their July 2017 complaint and their amended October 2017 complaint, Altair and co-plaintiffs said the Oversight Board was a 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 her opinion, Braden said that as a result of the court’s jurisdiction over matters stemming from the Tucker Act, her court had jurisdiction over the matter. This act allows the court to adjudicate monetary claims against the federal government.

While part of PROMESA says that any action against the Oversight Board or other action “arising out of this chapter” should be brought in the United States district court for Puerto Rico (i.e., Laura Swain’s proceedings), Braden said this didn’t explicitly address Tucker Act challenges. Without this explicit statement, the plaintiffs have standing to appeal to her court, she said.

Braden said the plaintiffs had alleged enough facts to make it likely that “their injury will be redressed by a favorable decision,” thereby giving them standing in the case.

She argued that PROMESA doesn’t preempt the Tucker Act.

Finally, she said that the Oversight Board is a federal government entity even though PROMESA explicitly states that the board should be considered part of the territory’s government and not part of the federal government. She focused primarily on the power of the U.S. Congress to appoint the board’s members and the U.S. President’s power to dismiss them.

Braden said her case wasn’t “ripe” for a decision because of the possible impact of decisions in the Aurelius adversary proceeding and a second Title III adversary proceeding, Union de Trabajadores de la Industria Electrica y Riego v. Puerto Rico Electric Power Authority.

If Swain rules in either of these cases that the U.S. government violated the U.S. Constitution’s appointments clause, “the ‘appropriate remedy’ may render the actions of the Oversight Board alleged in the October 31, 2017 [Altair] amended complaint unlawful and require restoration or restitution of pledged property that served as collateral for the ERS bonds owned by plaintiffs,” Braden wrote.

On Friday, the same day Braden released her opinion, Swain ruled in the Aurelius case that the U.S. government hadn’t violated the appointments clause. Swain hasn’t yet ruled in the Union de Trabajadores case, in which the union made a similar argument to Aurelius. If Swain were to rule in the same way in the latter case as she did in the former, Braden has carved a legal path for herself to rule in favor of holding the federal government liable for cuts to the ERS bonds. In principle, if this were to occur, any class of Puerto Rico bond currently in default could be open to appeal on the same grounds to her court.

U.S. municipal bankruptcy expert Jim Spiotto said a key distinction between the Aurelius case and the Altair case is that the former focused more on claims against Puerto Rico and the latter more on claims against the federal government.

With regards to the appointments clause, Spiotto said he found Swain’s view of the board as being a territorial entity to be more persuasive. However, he also said he found reasonable Swain’s opening towards the Tucker Act’s applicability to the case.

Braden rejected the U.S. government’s motion to dismiss.

For reprint and licensing requests for this article, click here.
PROMESA Puerto Rico Employees Retirement System Commonwealth of Puerto Rico Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico Electric Power Authority Puerto Rico Industrial Development Co Puerto Rico
MORE FROM BOND BUYER