Bonds

Federal government says it isn’t responsible for COFINA losses

The federal government told a federal judge it isn’t responsible for making Puerto Rico Sales Tax Financing Corp. (COFINA) bondholders whole because of their losses in the bonds’ restructuring, in a case that hypothetically could apply to most of Puerto Rico’s restructured bonds.

Four U.S. Department of Justice attorneys, led by Principal Deputy Assistant Attorney General Brian Boynton, explained the federal view in a filing Wednesday in a case in the United States Court of Appeals for the Federal Circuit.

The COFINA bonds were restructured based on a Puerto Rico Oversight Board adjustment plan in February 2019,

Federal attorneys made multiple arguments the federal government doesn’t have legal responsibility for compensating COFINA bondholders.

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In March, 10 holders of COFINA subordinate bonds filed suit against the United States. The lower court ruled against them and they appealed in June.

Congress’s enactment of the Puerto Rico, Oversight, Management, and Economic Stability Act resulted in COFINA’s restructuring, in the process curtailing their bond rights, security for repayment and investment value, they argue.

“The government seems obviously right,” said Yale Law School Prof. David Schleicher, who is not an attorney in the case.  “Enacting a bankruptcy law isn’t the same thing as actually harming bondholder interests, and even if it were, under Penn Central , this wouldn’t be a taking.”

In Penn Central Transportation Company v. New York City, the Supreme Court ruled in 1978 that city landmark laws preventing construction of an office building above Grand Central Terminal did not constitute an illegal taking, according to Cornell University’s Oyez Supreme Court archive.

In their brief, the federal attorneys said the lower court where the case was brought, United States Court of Federal Claims, never had jurisdiction over the case because PROMESA said the U.S. District Court for Puerto Rico was to hear all cases arising from the act.

While the plaintiffs argued a takings claim based on the Bill of Rights’ Fifth Amendment takings clause, the federal attorneys argued otherwise. PROMESA “merely establishes a general mechanism for restructuring of territorial debt” and thus the discretionary actions that led to the taking can’t be attributed to the federal government under the Fifth Amendment, they argued.

The plaintiffs cannot “have their takings claim on the actions of the Oversight Board because the board plainly does not constitute the federal government,” the federal attorneys said.

There is no evidence Congress “directed or coerced” the board to restructure the COFINA bonds, the attorneys said.

Even if the bondholders could show Congress was directly responsible for the losses, it wouldn’t be responsible for making the investors whole, because the circumstances don’t meet the conditions the Supreme Court laid out in the Penn Central Transportation case for a federal taking. These examine first, “[t]he economic impact of the regulation on the claimant,” second, “the extent to which the regulation has interfered with distinct investment-backed expectations,” and third, “the character of the government action.”

The federal attorneys asked Appeals Court Senior Judge Eric Bruggink to affirm the lower court’s judgement.

The case is Dinh v. US.

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