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Judge denies U.S. gov’t request to dismiss creditor suit over Puerto Rico debt

By on July 16, 2018

SAN JUAN – The U.S. Federal Claims Court has denied a U.S. government request to dismiss a lawsuit filed by a group of bondholders that wants the United States to be held accountable for Puerto Rico’s $70 billion debt.

In the ruling, federal Judge Susan Braden reasserted the court’s jurisdiction on bondholders’ claims despite the federal Puerto Rico Oversight, Management, and Economic Stability Act (Promesa) and its bankruptcy-like process, arguing that Congress did not repeal the Tucker Act, which gives that court jurisdiction to hear claims against the government.

Judge Braden also established that the island’s financial oversight board is a federal entity, but stayed the case to wait for Judge Laura Taylor Swain’s opinion on the constitutionality of the fiscal board. Last week, Judge Swain said the board is a territorial entity, thus its members did not need to meet the requirements of the Appointments Clause that they be confirmed by the U.S. Senate because they are territorial officers.

The lawsuit was filed in July 2017 by a group of bondholders headed by Altair Global, which has billions of dollars at stake. The bondholders are owners of secured bonds issued by the island’s public Employees Retirement System (ERS) in 2008. The proceeds of those bonds were used to pay benefits to retirees and to reduce the ERS’s underfunded liabilities.

Using its statutory powers, “the Oversight Board planned and directed the taking of plaintiffs’ constitutionally-protected property. Specifically, working with and through the Commonwealth, the Oversight Board designed legislation transferring plaintiffs’ collateral to the Commonwealth without compensation of any kind. The Puerto Rico  legislature passed this legislation on June 25, 2017, and the Oversight Board adopted it on behalf of the Puerto Rico Governor on June 30, 2017. Under the Takings Clause of the Fifth Amendment to the United States Constitution, plaintiffs are entitled to just compensation. Because the ERS Bonds were oversecured at all relevant times, just compensation is payment of the principal amount of the ERS Bonds together with all interest accrued to the date of payment,” the bondholders said.

Besides saying the fiscal board is an entity of the federal government and not a territorial one, as ruled by Judge Swain, Judge Braden said Promesa did not affect or preempt the Tucker Act.

While Promesa provides that the fiscal board it established for the island is an entity of the commonwealth, Judge Braden said legislative history shows that members of Congress considered it a federal entity and the Congressional Budget Office was directed to treat it as a federal entity. The board was “organized and established under federal law,” she said.

Judge Swain, however, said the board was territorial because it was created by Congress by virtue of the Territorial Clause and thus its officers were “territorial.”

Judge says Puerto Rico fiscal board is territorial entity and not subject to Appointments Clause

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