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U.S. gov’t should not pay Puerto Rico debt, Justice Department says

By on May 23, 2019

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Argues case is not ‘ripe,’ Claims Court lacks jurisdiction

SAN JUAN – The U.S. Justice Department said the federal government is not responsible for the reimbursement of money lost by bondholders of Puerto Rico’s Employees Retirement System (ERS).

On Tuesday, the department sought the dismissal of a lawsuit filed in the U.S. Court of Claims by certain bondholders of the ERS in 2017. The department argues that the Claims Court lacks jurisdiction to see the case, that the dispute is not “ripe,” and that the island’s Financial Oversight and Management Board is not a federal entity.

In the case before the court, Altair Global Credit Opportunities v. United States, bondholders are seeking $3 billion in payments from the federal government for the taking of their “constitutionally-protected property” arguing it is responsible for the actions of the fiscal oversight board.

The hedge fund went to the Court of Claims because it is tasked primarily with dealing with financial claims under the U.S. Constitution, federal statutes, rules or contracts with the United States.

Altair contends that it purchased ERS bonds, which were secured by collateral consisting of employer contributions from Puerto Rico agencies. However, the fiscal board, which was conferred broad powers over Puerto Rico’s finances by Congress, mandated legislation that in 2017 transferred the investment firm’s collateral to the commonwealth. Altair requested payment of their investment and all legal fees.

In a ruling issued in July, Claims Court Senior Judge Susan Braden declined a U.S. petition to dismiss the case. She first ruled that the court had jurisdiction to see the case under the Tucker Act, the statute under which the U.S. government has waived its immunity with respect to certain lawsuits.

Braden’s ruling, which was issued long before the U.S. First Circuit Court of Appeals ruled that the fiscal board was unconstitutional because its members were not confirmed by the U.S. Senate, said the board was a federal entity and thus the court had jurisdiction to see the case.

In making such a determination, Braden noted that the Congressional Budget Office was told to treat the board as a federal entity; that its members were selected by the president from a list provided by Congress; that the governor is a non-voting member; and that it was established by a special federal law enacted by Congress.

The judge noted that the court of claims had standing to preside over the Altair case because Congress authorized the board “to design, approve, and direct the Legislature to enact the Resolution” that took away Altair’s property.

“A claim for just compensation under the Takings Clause of the Fifth Amendment of the United States Constitution must be brought in the [United States] Court of Federal Claims in the first instance, unless Congress has withdrawn the Tucker Act grant of jurisdiction in the relevant statutes,” she said.

In January, Braden was removed from the case, which was taken over by Chief Judge Margaret M. Sweeney, who found “the transfer of this case is necessary for the efficient administration of justice.”

Judge Sweeney then stayed the case pending the outcome of the U.S. First Circuit Court of Appeals decision on lawsuits that challenged the constitutionality of the board. The First Circuit Court afterward ruled the board was unconstitutional because its officers were federal officials that should have been appointed pursuant to the Appointments Clause.

The judge ordered both sides to submit documents stating how the First Circuit Court ruling impacts the case and the ruling issued by Judge Braden.

A supplemental brief signed by Thomas G. Ward, deputy assistant attorney general, and other officials, states that Judge Braden’s decision failed to recognize that the Tucker Act creates the Claims Court’s jurisdiction and that, the board is not the United States for Tucker Act purposes because Congress did not establish it as a federal entity in the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa).

“Put another way, even if the Board is considered the United States under the Appointments Clause (or for any other constitutional purposes), Congress may, as it did, define the Board differently for statutory (Tucker Act) purposes,” the Justice Department said.

On the other hand, Ward noted that Promesa grants the U.S. District Court and not the Federal Claims Court the jurisdiction to see all of Puerto Rico’s debt disputes.

The Justice Department also said the Altair dispute was not ripe for adjudication as there are other disputes before Judge Laura Taylor Swain regarding the legality of ERS bonds. In one of those disputes, a group of bondholders is contending that even before the board was appointed, the commonwealth had already decided to change the current ERS system into a the so-called PayGo (Pay As You Go) system, which means the board was not responsible for diminishing the ERS bondholders’ collateral and that therefore, the United States is not responsible for the board’s actions.

In another case, ERS bondholders filed a motion March 21 to compel discovery related to a petition for relief from Promesa’s automatic stay. In support of that motion, they submitted a declaration from two of their counsels who stated that on April 2016 an adviser to the commonwealth, Jim Millstein, warned them that the commonwealth could take measures to reform the pension system to circumvent the ERS’s obligations to bondholders by converting it into a PayGo system.

“Thus, plaintiffs argued in their motion that “[t]here is evidence that, even before PROMESA was passed, the Commonwealth was threatening to undermine the Bondholders’ security interests,” the Justice Department said.

The Department also said that since the Claims Court issued an order requesting supplemental briefing, new issues have arisen in district court that demonstrate that the matter in the Court of Claims is not ripe, including whether ERS bonds are legal.

“For instance, on March 12, 2019, the Official Committee of Unsecured Creditors filed an omnibus objection to all claims asserted against ERS on the basis of the bonds at issue here, asserting that the bonds were illegally made because they were issued ultra vires, and are therefore null and void,” the Justice Department said.

Then, on May 19, the fiscal board’s Special Claims Committee filed adversary proceedings against all purchasers of ERS bonds that had invested more than $2.5 million in the bonds, seeking a ruling that the ERS bonds were issued ultra vires and were therefore null and void, as well as a return of all principal and interest payments made to the defendants during the four years prior to ERS’s filing of its petition under Promesa’s bankruptcy-like Title III.

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