Puerto Rico’s bankruptcy judge rejected the nearly $1 billion of claims Puerto Rico’s credit unions had against Puerto Rico’s central government and instrumentalities.
Judge Laura Taylor Swain handed down her decision in the final week of 2021 in an opinion granting the defendants’ motion to dismiss in an adversary proceeding. The court ended the adversary proceeding Tuesday.
Puerto Rico attorney John Mudd said Swain’s action was “to be expected given the lack of specificity of the allegations.”
The credit unions had bought $976 million of notes and bonds from the Commonwealth of Puerto Rico, Government Development Bank for Puerto Rico, Highways and Transportation Authority, Employees Retirement System, Puerto Rico Electric Power Authority, Public Building Authority, and Puerto Rico Sales Tax Financing Corp. (COFINA). These made up 65% of their total investment portfolio.
The GDG and COFINA bonds and notes have already been adjusted. The commonwealth, PBA, and ERS bonds are slated for adjustment under the central government Plan of Adjustment that Swain is considering. The Oversight Board has said it will submit HTA and PREPA Plans of Adjustment by the end of March.
The credit unions argued the commonwealth government and its credit union regulator COSSEC had pressured them to buy the bonds and it issued “misleading directives.” The credit unions filed seven counts against the defendants. Counts one through five relied on claims the government had engaged in fraud.
The credit unions argued that in GDB and COSSEC meetings with the credit union leaders the former had engaged in fraud but Swain said the credit unions failed to provide enough content about the meetings to support those charges.
While the credit unions said the GDB and Puerto Rico’s Treasury should have known about the government’s inability to pay the bonds in full even as they urged the credit unions to buy them, Swain said the credit union’s claim of government knowledge was too “speculative.”
While the credit unions sought exemption from the proposed Plan of Adjustment cuts by claiming the government was dishonest to them 2008-2015, Swain said there is nothing in the Puerto Rico Oversight, Management, and Economic Stability Act that allows an exemption because of dishonesty.
Swain said counts four and five, based on local laws, were time-barred by statutes of limitation.
The Takings Clause of the fifth amendment of the U.S. Bill of Rights and by Puerto Rico’s Constitution bar the adjustment of the credit unions’ claims, they said. However, Swain said the credit unions did not allege enough facts to show they were required or “coerced” to purchase the bonds, which was necessary for their argument to succeed.
The credit unions have a right to appeal Swain’s decision to the federal Appeals Court for the First District. Their lawyers did not immediately respond to a Bond Buyer inquiry about their plans.
