COFINA lawsuit may have meaning for PREPA bondholders

A suit by subordinate Puerto Rico Sales Tax Finance Corp. (COFINA) bondholders may have implications for Puerto Rico Electric Power Authority and other Puerto Rico bonds, a Puerto Rico analyst not involved in the case said.

Marzulla Law, which specializes in claims in the U.S. Court of Federal Claims, is representing the COFINA bondholders.

The bondholders are suing the U.S. government in the U.S. Court of Federal Claims seeking compensation for their losses (principal, interest payments and legal fees) from the February 2019 restructuring. They say the Constitution prohibits taking their property without just compensation.

“This is shaping up as a real heavyweight fight,” said Lewis Wiener, partner at law firm Eversheds Sutherland. ”Marzulla Law is the best when it comes to Fifth Amendment takings law,” and their success “is unparalleled” before the Court of Federal Claims.

The judge who will hear the case, Senior Judge Eric G. Bruggink, is highly experienced “when it comes to understanding and adjudicating takings claims,” he said.

While it seems the government’s case is the better argument, Wiener said, “Marzulla law would not bring a facially jurisdictionally deficient case.”

The government has tried “for a procedural way out, like challenging the court’s jurisdiction or a plaintiff’s (lack of) standing to assert a claim prior to having to litigate the merits,” he said, “This is a case to watch.”

Indeed, the U.S. government has challenged the U.S. Court of Federal Claims’ jurisdiction and argued the plaintiffs failed to show a proper takings claim because the bondholders have not “plausibly alleged” a property interest at the time of the taking.

The U.S. says the litigants do not reveal whether they held COFINA bonds when PROMESA was enacted, which put a stay on the payment of the bonds. The government also points to a U.S. Supreme Court precedent indicating PROMESA did not take plaintiffs’ contract rights.

Yale Law School Professor David Schleicher said, based on an argument summary The Bond Buyer provided to him, “it seems … like the bondholders do not have a very strong argument.”

Still, “this is an important case also for Puerto Rico Electric Power Authority bondholders (who are secured as COFINA was)” said Puerto Rico Clearinghouse Principal Cate Long.

The bondholders say that under the federal Tucker Act the court has jurisdiction over the bondholders’ takings claim and they owned the bonds at the time of the taking. By enacting PROMESA, Congress usurped the COFINA bondholders’ rights, they claim.

In PROMESA, Congress deliberately allowed bondholder rights (like to appoint a receiver or to enforce payment on default) to be curbed and abridged, Long said.

After Congress passed PROMESA in 2016, several investment funds unsuccessfully sued the U.S. government in the Court of Federal Claims, seeking compensation for their losses on their Employees Retirement System bonds.

The funds appealed but withdrew their case as part of the global settlement connected with the central Puerto Rico government restructuring that took place last spring.

The COFINA litigants say circumstances around their bonds are different than in the earlier case.

The COFINA case is Johnathan Dinh et al. v. The United States.

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