Ruling may lead to holding U.S. responsible for Puerto Rico bonds

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A court ruling against a Puerto Rico Electric Power Authority union may open the door for second judge to rule in favor of federal payments on the territory's impaired bonds.

Judge Laura Taylor Swain on Wednesday ruled against the Uníon de Trabajadores de la Industria Eléctrica y Riego’s Title III bankruptcy adversary proceeding against PREPA and the Puerto Rico Oversight Board. The union had made an argument similar to that made by hedge fund Aurelius in a different Title III adversary proceeding.

Both the union and hedge fund had argued that the means by which the members of the Oversight Board had been appointed had violated the Appointments Clause of the U.S. Constitution. Swain ruled against this argument and dismissed the union’s case on Wednesday. Swain’s ruling was based on same logic she had used in dismissing the Aurelius case, saying that the Oversight Board was part of Puerto Rico’s government and that the U.S. Congress had considerable power to control that government under the Territories Clause of the U.S. Constitution.

In a mid-July opinion U.S. Court of Federal Claims Chief Judge Susan Braden said she was inclined to rule that the federal government was responsible for unpaid Puerto Rico Employees Retirement System bonds. However, she said that she would reserve actually ruling that way because time wasn’t “ripe” for the ruling, because she first wanted to see how Swain ruled on the Aurelius and UTIER challenges to PROMESA on U.S. Constitutional grounds.

Braden indicated that there might be no point to her ruling for the plaintiff in her case, Altair Global Credit Opportunities Fund, if Swain sided with Aurelius or UTIER.

Swain happened to reject the Aurelius challenge on the same day Braden released her opinion.

Now that Swain has rejected the UTIER challenge, the door may be open for Braden to rule in favor of Altair in its quest to hold the United States government responsible for making whole investors who have lost money from defaulted Employee Retirement System bonds. If she were to rule this way, there could be challenges to other defaulted Puerto Rico bonds using similar arguments.

Altair’s counsel of record, Jones Day Associate Christopher DiPompeo, declined to comment on the significance of Swain’s ruling in the UTIER case,

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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