Puerto Rico judge refuses to extend May 2 deadline for bond clawbacks
Puerto Rico bankruptcy Judge Laura Taylor Swain refused Wednesday to extend a May 2 deadline for the clawback of Puerto Rico central government bond payments.
The ruling complicates the Puerto Rico Oversight Board's effort to recover payments made on $6 billion of bonds that the board deems to have been illegally sold. The board now must act within eight days, meaning it will probably be working with an incomplete list of bondholders from whom to claw back the money.
On April 2 the Oversight Board, through its law firm Brown Rudnick, filed a motion to “toll” or delay the statute of limitations deadline for filing the board’s clawback actions.
Since then several parties have filed their positions on the proposal. At Wednesday’s omnibus hearing in the Title III bankruptcy, Edward Weisfelner, Brown Rudnick Chair of the Bankruptcy and Corporate Restructuring Group, said the Oversight Board was focusing on the clawback of payments made for the 2012 and 2014 general obligation bonds.
Since being hired as claims counsel for the board, Brown Rudnick has been working “diligently” to collect information about the bondholders, Weisfelner said. However, the 2012 and 2014 bond had no paying agent and the process of getting the names of the beneficial owners has been “laborious.”
Weisfelner said that the board’s efforts, while ongoing, were also incomplete. It is now only working to get information on those who have received at least $1 million in interest so far. He said this group was associated with 360,000 payments. The board may choose to file cases only against those who received some figure more than $1 million but hasn’t yet settled on a figure.
Other groups are considering seeking the clawback of Employees Retirement System bonds, Public Building Authority bonds, and possibly earlier GO bonds, Weisfelner told Swain. The deadline for any court filing for the GO bonds is May 2. For the ERS bonds it would be May 20. The deadline for filing clawback motions for the PBA is unclear.
In its April 2 filing, Weisfelner and Brown Rudnick indicated it was seeking the clawback of ERS and PBA bond payments as well as GO bond payments.
Weisfelner told Swain that if she were to grant a sustained tolling ( or delay in the statute of limitations) the board might ultimately choose not to file the cases. He said one factor that might lead to this would be a plan of adjustment that provided for less payment for these bonds.
Because the board, if tolling were to be granted, might ultimately chose to not file cases against the bondholders, it was in the financial interests of Puerto Rico, which is paying the board’s legal fees, to approve of tolling, Weisfelner said.
Swain told Weisfelner that tolling is usually done because of circumstances connected with the defendants. She asked how the defendants’ behavior contributed to the board’s request for tolling.
After two lawyers spoke against the tolling request and Weisfelner responded to them, Swain issued a ruling from the bench in the U.S. District Court for Puerto Rico in San Juan.
She said she didn’t have “subject matter jurisdiction” in the case. She said that the board hadn’t adequately identified the parties who would be affected by the ruling. She denied the motion without prejudice.
By denying the motion without prejudice Swain left open the door for the Oversight Board to reintroduce the motion to her in modified form.
As things stand, if the board goes forward with its attempted clawbacks, it has until the close of business on Thursday May 2 to file suits to do so with regards to the GO bonds.
The board and its lawyers have been sending letters to bondholders telling them they should either agree to a tolling of the date for the board to sue them or face a suit by May 2, according to Unsecured Creditors Committee attorney Luc Despins and Puerto Rico-based attorney John Mudd. Individual bondholder permissions to toll the deadline for actions against them are not affected by Swain’s ruling.
Seperately, the board said that it had filed a motion with the First Circuit U.S. Court of Appeals for a stay on its Feb. 15 decision which gave the current board until May 16 to continue operating without the approval of the U.S. Senate and President Trump. The appeals court had said that the process that the U.S. government had used to appoint the current board, following the Puerto Rico Oversight, Management, and Economic Stability Act, had been unconstitutional.
On Tuesday the board filed a petition for a writ of certiorari from the U.S. Supreme Court of the appeals court decision. This means that the board wants the Supreme Court to review the ruling. Trump hasn’t yet submitted names for the consideration of the Senate for the board and Senate Majority Leader Mitch McConnell has said that appointing a board would not be expedited.
The board released a statement on Wednesday: “Absent a further stay, the Oversight Board would be forced to cease operations on May 16. Disrupting the Oversight Board’s operations midstream would have immediate and devastating consequences for the Puerto Rican economy and the debt restructuring process that Congress determined was a critical necessity when it enacted PROMESA and created the Oversight Board.
“In addition, the Oversight Board would be unable to carry out its responsibility of certifying the fiscal year 2020 budgets for the commonwealth and instrumentalities to ensure that they are compliant with the fiscal plans.”