In 2016 Puerto Rico faced a financial crisis. To help stabilize the Puerto Rican economy, Congress targeted holders of bonds issued by the Puerto Rican government and over $600 million in trust funds set aside for bond repayment, creating an Oversight Board that could (and did) require that the trust funds be given to the Puerto Rican government to pay its debts, and the face value of the bonds be reduced by 45 percent.
To accomplish this, Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), creating the Oversight Board with sweeping power over the Puerto Rican economy—including the billions of dollars in secured bonds that the government had sold to them over the years. As a result, Plaintiff bondholders lost most of their investment. As the Congressional Record states, Congress specifically intended that the COFINA Bondholders [1] would “bear that loss[,]” [2] not “the American taxpayer.”
Without PROMESA, there was no lawful way for the Puerto Rican Government to access this money. But by enacting PROMESA, Congress created and authorized the Oversight Board to require the devaluation of COFINA bonds and the transfer to Puerto Rico of pledged Sales and Use Tax Revenues and other funds dedicated to bond repayment.
Representing the COFINA Bondholders, Marzulla Law brought a taking lawsuit in the U.S. Court of Federal Claims, asserting that Congress had legislatively and categorically taken the COFINA Bondholders’ property, in violation of the Fifth Amendment. The Government raised numerous arguments why this case should be dismissed but the U.S. Court of Federal Claims rejected them all save one: whether this congressional action could constitute a taking of property under the Fifth Amendment. The bondholders appealed, and are awaiting a decision on whether their case can proceed.
Roger J. Marzulla argued this case for the Bondholders earlier this year. According to an article in the Bond Buyer, the largest publication for municipal bonds, a favorable ruling in this case could have a wide impact on other Puerto Rico bond types the Oversight Board restructured in the last several years. A decision is expected in this appeal later this year.
[1] COFINA (Corporación del Fondo de Interés Apremiante) is the government-owned corporation of Puerto Rico that issues government bonds and uses other financing mechanisms to pay and refinance the public debt of Puerto Rico.
[2] Providing for Consideration of H.R. 5278, Puerto Rico Oversight, Management, and Economic Stability Act, 162 Cong. Rec. H 3581, 3582 (June 9, 2016) (Statement of Rep. Sean P. Duffy).
