Puerto Rico hedge fund case moved to 2020

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A Puerto Rico bondholders lawsuit filed by 11 hedge funds seeking federal compensation for losses suffered through the commonwealth’s debt restructuring will move forward in mid-January even if the U.S. Supreme Court and an appellate court haven’t ruled by then in related cases.

U.S. Court of Claims Judge Richard Hertling said Tuesday he would issue the stay because he expects rulings by the high court and First Circuit Court of Appeals by mid-January in those related cases.

The hedge funds, led by Altair Global Credit Opportunities Fund, requested the stay.

The U.S. Justice Department has requested an immediate dismissal of the claims, but Hertling said he saw no damage to the United States if the case is delayed until January.

The hedge funds contend the Puerto Rico Financial Oversight and Management Board acted as an agent of the federal government when it ordered Puerto Rico’s legislature to effectively end payment of bonds issued for the commonwealth’s Employee Retirement System.

The hedge funds say their claim is based on an August 2017 law enacted by the commonwealth’s legislature.

“The minute the legislation goes into effect there is a taking,” the attorney representing the hedge funds, Sparkle Sooknanan of Jones Day, told the judge at Tuesday’s status conference.

The Justice Department’s senior litigation counsel in the case, Christopher Carney, responded that the legislation in question was not enacted by Congress and the pension fund contributions involved in the claim had not yet been made.

Hertling, for his part, said he was comfortable issuing a stay for now because he thinks the United States won’t be harmed by a temporary delay.

Hertling was assigned to the case the day after he was sworn in as a Court of Claims judge on June 20.

Hertling, who worked on Capitol Hill for years as legal counsel or chief of staff for four different Republican senators, was confirmed by the U.S. Senate on June 10.

The prior judge who handled the case, Court of Claims Chief Judge Susan Braden, ended her 15-year term in July 2018 and took senior status. Senior status allows a retired judge to continue working, often part-time, if he or she chooses.

The same day that Braden took senior status, she released an opinion saying she believed the court had jurisdiction over the Altair claim and the plaintiffs had established enough facts to make it likely “their injuries will be redressed by a favorable decision.”

Braden, however, declined to issue a final ruling before her retirement, because of the two other pending lawsuits challenging the constitutionality and appointment of the Oversight Board.

The U.S. Supreme Court has scheduled oral arguments for Oct. 15 in Aurelius Investment, LLC v. Puerto Rico involving a group of consolidated cases challenging the constitutionality of President Barack Obama’s appointments to the Puerto Rico Oversight Board.

Aurelius maintains that members of the Oversight Board should have been confirmed by the U.S. Senate and that bypassing the Appointments Clause of the Constitution invalidates the actions taken by the board.

The U.S. Court of Appeals for the 1st Circuit agreed the appointments were unconstitutional but declined to invalidate the actions taken by the board to restructure Puerto Rico’s debt.

Hertling said he expects the Supreme Court to issue a ruling by mid-January as long as it’s a majority in the order of 7-2. If it’s a close 5-4 ruling, that might be delayed until the end of the term in late June, the judge said.

The other case involves the U.S. Court of Appeals for the 1st Circuit hearing an appeal of a June 27 district court ruling that Section 5552 of the federal Bankruptcy Code prevented the hedge funds liens from attaching to Puerto Rico’s post-petition revenue.

Sooknanan said she expected the appellate court to hear oral arguments in the appeal by the hedge funds sometime in October or November and her “best guess” is that they will issue a ruling before the end of the year.

“They have been getting opinions out pretty quickly,” Sooknanan said.

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PROMESA Hedge funds Debt holders US District Court SCOTUS Washington DC Puerto Rico