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Home / Case News / Puerto Rico Board Sues to Clawback $392 Million in ERS Payments

Puerto Rico Board Sues to Clawback $392 Million in ERS Payments

June 1, 2019, Puerto RicoThe Financial Oversight & Management Board (FOMB) for Puerto Rico recently filed several claims against bondholders of the Employees Retirement System (ERS) to recover approximately $392 million in aggregate payments. The FOMB also sued the government suppliers to the ERS and Highways & Transportation Authority (HTA) to recover $119 million presumably because there was no contract.

The FOMB asserts in its complaint that ERS made various transfers in the absence of a contract and in excess of the value of the defendants’ goods and/or services. While ERS’s books and records contain contracts with certain vendors, the contracts allegedly did not correspond to the transfers made. The FOMB had to bring these claims by May 20, which marked the end of a two-year statute of limitations to file avoidance claims by the ERS and HTA.

The actions filed by the FOMB intend to recover interest and principal from bondholders who own at least $2.5 million worth of bonds that the FOMB claimed the ERS was “never authorized” to issue to the public in 2008 because the issuance was not submitted to the legislature.  The complaint contended that the alleged transfers were disbursements of public funds not authorized by law and thus the transfers, being public monies disbursed unlawfully were liable to be recovered. The Board also argued that ERS received less than a reasonably equivalent value in exchange for the 2-Year transfers because although ERS’s books and records contain contracts with the defendants, the contracts did not correspond to the transfers.

The FOMB further alleged that during the 90 days before the petition date, HTA made certain transfers of interests in HTA’s property, in the form of cash or other funds, to or for the benefit of the defendants. HTA’s 90-Day transfers to various defendants deviated from HTA’s historical payment patterns to these defendants in the timeframe preceding the 90-day transfers. The Board continued that HTA’s books and records beginning at least as early as 2012 demonstrated that it had been defraying operating deficits and satisfying the needs for capital investments through lines of credit with the Government Development Bank (GDB). From and after 2012, HTA supposedly entered into lines of credit with the GDB with no source of repayment, thereby incurring obligations that were beyond its ability to repay as they become due.