Uncle Sam says no to compensating Puerto Rico bondholders

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The federal government said it isn’t liable for reimbursing investors for losses on Puerto Rico bonds, citing a series of court decisions in the past 10 months.

U.S. Justice Department attorneys filed the “supplemental brief” Monday in response to hedge funds’ claim that the federal government was responsible for making whole investors in Puerto Rico Employees Retirement System bonds that the Puerto Rico Oversight Board cuts in bankruptcy.

While the case is about ERS bonds, the argument about federal responsibility could be applicable for any Puerto Rico bonds as the biggest municipal bankruptcy in U.S. history proceeds.

In July 2017 Altair Global Credit Opportunities Fund and several investment funds filed a complaint in the U.S. Court of Federal Claims saying 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 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. The Puerto Rico Oversight, Management, and Economic Stability Act said that such cases should be brought only in the U.S. District Court for Puerto Rico and then appealed to the circuit court. Breeden said this didn’t apply to Tucker Act challenges since PROMESA didn’t explicitly address them. The Tucker Act allows the court to adjudicate monetary claims against the federal government.

PROMESA provides that the Oversight Board is to be considered part of the territorial government. Breeden argued that it should be considered part of the federal government because members were appointed by Congress and the president has the power to fire them.

Braden said the plaintiffs had alleged enough facts to make it likely that “their injury will be redressed by a favorable decision.” However, Braden declined to rule, saying the time wasn’t ripe because the rulings in two suits challenging the constitutionality of the appointment of the Oversight Board hadn’t yet been decided. She said the outcomes of those cases could affect what had been done with the ERS bondholders’ pledged property.

After Braden’s July 2018 opinion, there was little activity in the case. In January Court of Federal Claims Chief Judge Margaret Sweeney said she was replacing Braden in the case. Subsequently, she asked the plaintiffs and the defendants to answer four questions.

In Monday's brief, U.S. government, through attorneys at the U.S. Department of Justice, said are sticking to the positions that the U.S. government is not liable for paying any board-mandated impairments to Puerto Rico bonds. They said any such claim against the U.S. must be brought in the U.S. District Court for Puerto Rico, and that the time wasn’t ripe for reviewing any ERS bond claims.

Sweeney asked what impact the February U.S. District Court for the First Circuit’s Aurelius decision would have on the arguments bade by the two sides or on Braden’s ruling. The Aurelius decision stated that PROMESA’s mode of appointment of the board had been unconstitutional.

The U.S. attorneys said that even if the board is considered part of the U.S. for the appointments clause of the Constitution, it could be considered separate from the U.S. for consideration under the Tucker Act.

They pointed out the Aurelius plaintiffs may seek Supreme Court review of the Aurelius case so as to get the high court to declare all of the board’s actions void going back to its founding in September 2016. They said President Trump has yet to nominate the board to serve until September so the time was not yet “ripe” to rule on the Altair plaintiffs’ takings claims.

As a second question, Sweeney asked what impact the district court’s January decision on the ERS bonds should be on the two sides’ earlier arguments or Braden’s opinion. This decision stated that the bondholders had a perfected security interest in the system’s property. The circuit court sent the case back to the district court for further hearings and the lower court has yet to make a decision.

The U.S. attorneys responded that if this ruling were to be upheld “it may cut back” on its arguments that the bondholders had no clear property interest to legally defend. Even if it were clear Altair and the other ERS bondholders have a secured interest after the circuit court’s decision, “this case is not ripe until the end of the Title III restructuring because we do not know the remaining value of the property right asserted.”

As a third question, Sweeney asked if there were any other cases that might affect the two sides’ earlier arguments or Braden’s opinion.

The U.S. attorneys responded by pointing to a 2019 first circuit opinion that the court couldn’t yet rule on a claim by general obligation bondholders that there had been a legal taking. The circuit court ruled that the matter wasn’t yet “ripe.” The U.S. attorneys said this line of argument is the same as they made in this case with Altair.

Finally, as a forth question Sweeney asked if the sides wanted to bring up any arguments they hadn’t previously raised.

To this the U.S. attorneys asked Sweeney to reconsider Braden’s reasoning, which they said were “incorrect.”

They added that the eventual outcome of the ERS Title III bankruptcy and other Title III legal actions connected to the ERS bonds will determine whether a legal “taking” has occurred and how much “compensation the plaintiffs would be entitled to recover if it did.” Thus the case isn’t ripe for Sweeney’s consideration.

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PROMESA Puerto Rico Employees Retirement System Commonwealth of Puerto Rico Puerto Rico Electric Power Authority Puerto Rico Aqueduct & Sewer Authority Puerto Rico Highway & Transportation Authority Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico