Puerto Rico oversight board to seek ERS bond clawbacks

Puerto Rico's oversight board is preparing to file a second round of lawsuits by Monday to recoup payments made to bondholders, this time involving bonds backed by the Puerto Rico's Employees Retirement System, according to court documents.

The lawsuits will seek to invalidate more than $3 billion of ERS bonds and to recover principal and interest payments of nearly $400 million made to ERS bondholders.

On Thursday, U.S. District Judge Laura Taylor Swain, who is overseeing Puerto Rico's bankruptcy cases, agreed to give the Financial Oversight and Management Board for Puerto Rico and an unsecured creditors committee legal authority to pursue the clawback litigation before the May 20 claim filing deadline.

The action was needed in case the oversight board's legal authority is invalidated by a 1st U.S. Circuit Court of Appeals in Boston challenge brought by Aurelius Capital Management and Assured Guaranty Corp. in an unsuccessful bid to dismiss Puerto Rico's bankruptcy cases involving bondholders and other creditors. The Circuit Court judge ruled Feb. 15 that oversight board members were not constitutionally appointed, but did not dismiss the claims, instead allowing until July 15 for the White House and Senate to constitutionally validate the board or reconstitute it. The oversight board also petitioned the U.S. Supreme Court to review the decision.

On May 2, the oversight board filed similar lawsuits seeking to recover more than $1 billion from investors holding general obligation bonds that the board claims were issued in excess of a constitutional debt limit, as well as from financial advisers and others involved in issuing the bonds. The board is also fighting a legal challenge to its efforts to claw back bond payments made to bondholders with $2.5 million or more of bonds. Board officials said they will not pursue the clawback claims until the court overseeing Puerto Rico's Title III bankruptcy case determines that the bonds are invalid.

The board also gave the government of Puerto Rico and local government employers until May 31 to submit plans for collecting an estimated $340 million in retirement contributions due since 2017, when Puerto Rico converted to a pay-as-you-go pension system and switched to a defined contribution system for government workers.