BOSTON (CN) – Bondholders who lost more than $190 million in the Puerto Rico financial crisis lost again in the First Circuit late Thursday when the court rejected their attempt to recoup the money from the Puerto Rico government.
“The bondholders are flatly wrong,” U.S. Circuit Judge Sandra Lynch, a Bill Clinton appointee, wrote for a unanimous three-judge panel in an expedited proceeding.
The bonds had been issued by the Puerto Rico public employee pension system in 2008. Six years later, the Puerto Rico government spiraled into crisis when the three major credit agencies all downgraded some of the island’s bonds to junk status.
To deal with the crisis, Congress passed a law in 2016 called Promesa that allowed Puerto Rico to unwind its debts in a bankruptcy process. The Puerto Rico government then largely abolished the pension system, ordering it to turn its assets over to the government and assuming its obligation to pay pensions.
In the process, the bondholders’ interests were wiped out.
The bondholders pressured the system itself to bring a lawsuit against the government to reclaim their $190 million in assets, but the system refused. They then asked the federal court handling the bankruptcy to allow them to bring such a claim themselves under a statute that says a federal court “may” allow a creditor to do so. But the federal court refused as well.
The First Circuit said the federal court was well within its rights to say no.
The bondholders’ main argument on appeal was that the federal court didn’t apply standard commercial bankruptcy principles. But the circuit said the federal judge could consider that this was a governmental bankruptcy and different interests were involved.
“The bankruptcy of a public entity … is very different from that of a private person or concern,” Lynch wrote.
A commercial bankruptcy is designed to “balance the rights of creditors and debtors,” whereas governmental bankruptcies are intended to allow governments “the opportunity to continue operations while adjusting or refinancing their creditor obligations.”
The federal court could take into account the effect of paying off the bondholders on the government’s ability to continue its operations, which was the whole point of Promesa, Lynch said.
In addition, the court could consider the fact that undoing the transfer of the pension system’s assets would directly contradict the Puerto Rico statute that ordered the assets transferred to the government.
The First Circuit decision doesn’t completely end the matter. The bondholders still have a separate case pending in the U.S. Court of Federal Claims in which they are arguing, among other things, that wiping out their security interest amounted to a “taking” in violation of the Fifth Amendment.
But even this fact weighed against the bondholders. Lynch said it was permissible for the federal court in this case to consider another case was pending elsewhere and to “avoid a proliferation of actions seeking essentially the same remedy. Each such proceeding potentially drains assets which could be put to other uses.”
Lynch was joined in the opinion by Chief U.S. Circuit Judge Jeffrey Howard, a George W. Bush appointee, and U.S. Circuit Judge William Kayatta Jr., a Barack Obama appointee.