Puerto Rico fiscal board sues retirement system bondholders to recover $392 million
Says 2008 issuance wasn’t approved by legislature; also files claims against pension system, Highway Authority vendors to recoup $190 million
SAN JUAN — The Financial Oversight and Management Board for Puerto Rico filed Sunday claims against holders of Employees Retirement System (ERS) bonds to recover some $392 million in aggregate payments, but said it would pursue those claims only if the bonds were declared illegal.
The actions intend to recover interest and principal from bondholders who own at least $2.5 million worth of bonds that the board said the ERS was “never authorized” to issue to the public in 2008 because the issuance was not submitted to the island’s legislature. The panel said in a statement it does not intend to pursue litigation until the court determines the bonds are invalid.
“The people of Puerto Rico should not have to pay for bonds that were issued illegally,” said David Skeel, a member of the board’s Special Claims Committee. “Nevertheless, no holders of smaller amounts of bonds will have to pay back any principal or interest.”
The board also filed complaints against vendors to recover payments by ERS and the Highway & Transportation Authority (HTA) that were “in conflict with the United States Bankruptcy Code and Puerto Rico law,” according the board’s announcing release.
The complaints allow the board “to ensure that about $190 million in payments to vendors were made appropriately” but that it will try to settle disputes out of court. The identified vendors received payments of more than $2.5 million “without a valid contract, or the payments didn’t match the respective contract” during the four years before May 2017, when the board filed for bankruptcy on behalf of the commonwealth, HTA and ERS.
“In going to court with these claims, we follow Puerto Rico law and U.S. bankruptcy law,” Skeel said. “We owe it to the people of Puerto Rico to make sure the payments were proper, but we do understand the concerns of the vendors who are subject to these actions. We have decided to exclude small contracts from the proceeding because pursuing smaller claims would be too heavy a burden, particularly compared to the amount we might recover.”
The board member explained that the panel is “also in the process of setting up an informal process of resolving these issues with vendors out of court, if possible, and to help vendors clarify the payments they received.”
The legal actions do not necessarily imply that the entities committed any wrongdoing, the board said. If a vendor “demonstrates a proper basis for the payments,” the board would dismiss the claim, the federally created entity said.
The board was also required to file the suits before the statute of limitations neared May 20 for avoidance actions for ERS and HTA. Last week, Judge Laura Taylor Swain gave the board’s Special Claims Committee and the Unsecured Creditors Committee standing to pursue claims on its behalf, saying the panel’s future was uncertain as President Trump has yet to send its members’ nominations to the Senate, despite the White House announcing they would, after a court declared their appointments unconstitutional for lacking the Senate’s consent.
The board had already filed suits May 2 related to about 250 vendor and contractor payments made by the commonwealth. It is analyzing payments made by Puerto Rico Electric Power Authority (Prepa) and may recover those payments.