The Puerto Rico Oversight Board filed a lawsuit to claw back $392 million in Employees Retirement System bond payments.
The suit, filed as an adversary complaint in Puerto Rico’s Title III bankruptcy, was filed Sunday. The suit seeks to recover interest and principal from bondholders who own at least $2.5 million of the bonds.
“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, which is overseeing the board’s clawback actions. “Nevertheless, no holders of smaller amounts of bonds will have to pay back any principal or interest.”
The board, through its attorneys, claims that the 2008 bonds were never submitted for approval from Puerto Rico’s legislature and thus are illegal. A total of $3 billion of these bonds were issued, according to the adversary complaint. According to Puerto Rico’s approved fiscal plan in August 2017, there were $3.16 billion of these bonds outstanding as of February 2017.
The board’s actions on the bonds comes nearly three years after the federal government passed the Puerto Rico Oversight, Management, and Economic Stability Act to handle the island’s fiscal, economic, and debt crisis. The island’s commonwealth and municipal governments and public corporations entered the crisis with $74 billion of debt and $49 billion of unfunded pension liabilities.
The board had until the close of business on Monday to file the action because the board put the ERS into bankruptcy two years earlier. By law the board only had two years to file this sort of action.
The board said it wouldn’t pursue the clawback until the bankruptcy court determines that the bonds subject to challenge are invalid.
The suit follows similar board suits filed on May 2 seeking to clawback bond payments made on general obligation bonds issued as early as March 17, 2011, and Public Building Authority bonds issued as early as Aug. 24, 2011. In these cases the board also chose to only sue those who held $2.5 million of the bonds.
In late January the U.S. Court of Appeals for the First Circuit ruled in favor of ERS bondholders, saying that they had a perfected security interest in the system’s property.
“Because the bondholders’ security interest was perfected, this interest cannot be avoided under the Puerto Rico Oversight, Management, and Economic Stability Act’s incorporation of parts of the bankruptcy code,” Judge Sandra Lynch wrote in a decision written on behalf of the case’s judges.
In response Altair Global Credit Opportunities Fund and Puerto Rico AAA Portfolio Bond Fund plus about 30 investment and mutual funds restarted their case for relief from the automatic stay in the Title III bankruptcy. In other words, they restarted a case seeking an order from the Title III court for the resumption of bond payments.
The last significant action in for the bondholders’ motion came on May 13, when bankruptcy judge Laura Taylor Swain approved a motion to change the briefing schedule and discovery dates. Swain now is scheduled to consider the matter in a hearing on July 2.
On Sunday, the board also filed suits against suppliers of the ERS and the Puerto Rico Highways and Transportation Authority. The suits were for payments the public entities made to the suppliers in the years leading up to their bankruptcy filings two years ago. The board is seeking $190 million in payments.
The vendors were given payments of more than $2.5 million without a valid contract or the payments didn’t match the contract, according to the board. The payments were made in the four-years prior to May 2017. This round of actions echoes the board’s similar filings against suppliers to the central Puerto Rico government on May 2.
The board announced that it may file a similar challenge to suppliers of the Puerto Rico Electric Power Authority.
