(Adds statement from oversight board, paragraphs 10-11)
Jan 30 (Reuters) - A U.S. Appeals Court 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 Boston-based First Circuit Court of Appeals affirmed Federal Judge Laura Taylor Swain’s June decision that bondholders’ claim on employer contributions to the U.S. commonwealth’s Employees Retirement System (ERS) did not extend into bankruptcy.
The ruling is a further setback for owners of nearly $3 billion of the system’s bonds after a federal appellate court determined last year they had a legally enforceable claim as of December 2015 on assets pledged by the pension fund to pay off the debt.
A lawyer for some of the bond funds that appealed Swain’s ruling did not immediately respond to a request for comment. Puerto Rico’s federally created financial oversight board commenced a form of municipal bankruptcy in 2017 to restructure about $120 billion of debt and liabilities incurred by the Caribbean island’s government and its entities.
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.
The board said the appeals court decision “lifts a cloud” over the government’s pension payments.
“The commonwealth has no obligation to pay bondholders other than the value of encumbered assets in ERS when it commenced its case under Title III of PROMESA,” the board said in a statement.
PROMESA is a 2016 federal law that created the board and path for restructuring Puerto Rico’s debt.
A so-called plan of adjustment the board filed in court in September for Puerto Rico’s core government debt and pension liabilities included an 87% haircut or value reduction for ERS bonds.
Meanwhile, bondholders are appealing Swain’s Jan. 7 denial of their motion for the appointment of a trustee to pursue ERS claims arising from the oversight board’s role in the system’s bankruptcy.
Reporting by Karen Pierog in Chicago and Luis Valentin Ortiz in San Juan Editing by Matthew Lewis
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