(Reuters) - A U.S. District Court judge on Thursday ruled that bondholders' claim on the assets of Puerto Rico's public employee pension system ended when the system filed for bankruptcy in May 2017.
The ruling is a setback for owners of nearly $3 billion of bonds sold by the system after a U.S. Appeals Court in January determined they had a legally enforceable claim as of December 2015 on assets pledged by the pension fund to pay off the debt.
But Judge Laura Taylor Swain decided the claim on employer contributions to the Employees Retirement System did not extend into bankruptcy.
The judge is hearing cases involving the U.S. Commonwealth's attempt to restructure about $120 billion of debt and pension obligations.
After completing restructurings for Puerto Rico's sales tax-backed debt and its Government Development Bank, the island's federally created financial oversight board is addressing core government debt. The board recently announced an agreement with a court-appointed committee representing more than 167,000 retirees that includes reductions in certain pension payments.
Robert Gordon, a partner at Jenner & Block and the retiree committee's lead counsel, called Swain's latest ruling "very important and appropriate."
"In combination with the plan support agreement recently reached by the Official Retiree Committee with the oversight board and other plan support agreements recently made, it appears that momentum is developing toward a plan of adjustment for Puerto Rico,” he said in a statement.
The board has said a plan was coming soon even though Puerto Rico's government opposes pension cuts it includes and only a small percentage of bondholders have agreed to a restructuring of general obligation and Public Buildings Authority debt.
Prior to its bankruptcy filing, Puerto Rico’s pension system liquidated almost all of its cash assets and the government moved to a pay-as-you-go system in which pension benefits are paid out of the island’s general fund.
