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Puerto Rico bondholder group sue U.S. government

By on July 21, 2017

SAN JUAN — A group of Puerto Rico bondholders sued this week the U.S. government in a bid to receive “just compensation” from the federal government over the sale of assets of the island’s Employees Retirement System (ERS).

In a nutshell, the argument is as follows: the commonwealth’s financial control board established by the Promesa law requested and authorized the sale of these assets; the fiscal entity is federal for constitutional purposes; and, therefore, the U.S. government must compensate these bondholders for the board’s adverse actions.

In this April 3, 2017, file photo, the Senate side of the Capitol is seen in Washington. (J. Scott Applewhite, File/AP)

The group argues that the sale of ERS assets—through Joint Resolution 188 recently approved by the local Legislature—constitutes a taking by the State. Therefore, ERS bondholders must receive “just compensation,” as established under the U.S. Constitution.

Plaintiffs comprise several funds that own ERS bonds, namely Altair, Andalusian, Glendon, Mason Capital, Nokota, Oaktree, Ocher Rose and SV Credit.

According to the complaint filed July 19 in the U.S. Federal Court of Claims, the ERS creditors seek payment equal to the principal outstanding, along with accrued interest and legal expenses. The ERS has roughly $3.156 billion in debt.

ERS’ assets and employer contributions made by the commonwealth government to the system secure payment of ERS bonds.

“Specifically, working with and through the Commonwealth, the Oversight Board designed legislation transferring plaintiffs’ collateral to the Commonwealth without compensation of any kind,” the complaint adds.

As part of the approved legislation related to the island’s fiscal year 2018 budget, Joint Resolution 188 authorizes, among other aspects, the sale of ERS assets. That money—roughly $390 million according to estimates—would go to the general fund in a bid to help the central government in covering payments of pension benefits during this fiscal year, which amount to nearly $2 billion.

Payment of these benefits directly from the general fund responds to the commonwealth’s decision to move to a pay-as-you-go system amid ERS’ lack of cash to cover these obligations.

What’s more, federal Judge Laura Taylor Swain—who leads the commonwealth’s bankruptcy proceedings under Title III of Promesa—approved a temporary settlement between ERS and the bondholder group, through which the commonwealth government accepted to reserve more than $90 million for the next three months. It will also pay roughly $56 million in interests until next October.

According to the complaint, the stipulation called for the action filed by the group of ERS bondholders against the U.S. government. The agreement also establishes that during a hearing on Oct. 31, Judge Swain will make a decision on the dispute between the commonwealth and the ERS creditors.

A territorial board?

The ERS bondholder group’s complaint primarily centers on the argument that the island’s financial board is a federal entity.

“The Oversight Board is a federal entity: the federal government created it and controls it,” they argue.

Although the federal Promesa law clearly establishes that the board is an entity within Puerto Rico’s territorial Government—and will not be considered to be part of the U.S. government—the ERS bondholders argue that, for constitutional purposes, this is not the case.

“Notwithstanding this language [in Promesa], the [U.S.] Supreme Court’s decision in Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374 (1995), holds that such statutory disclaimers do not speak to whether an entity is the federal government for constitutional purposes. Instead, such disclaimers only define the entity for other statutory purposes. Under the test set forth in Lebron, the Oversight Board is a part of the federal government for constitutional purposes,” reads the complaint. 

The fiscal control board—which represents the commonwealth and its entities—filed on May 21 the bankruptcy case under Title III on behalf of ERS, joining at the time the central government, the Sales Tax Financing Corp. (Cofina by its Spanish acronym) and Highways & Transportation Authority in bankruptcy proceedings. More recently, the board also filed a Title III case for the Puerto Rico Electric Power Authority (Prepa).

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