A federal judge ruled on Friday that hedge fund creditors of Puerto Rico's debt can sue the United States government for the losses incurred by the investors.
Chief Judge Susan Braden of the United States Court of Federal Claims issued the decision.
What's the situation?
The bondholders — which include hedge funds Oaktree Capital Management LP, Glendon Capital, and others — say the feds set them up for losses when they passed a law that restructured Puerto Rico's debt.
Signed by President Obama, the legislation known as the 2016 Puerto Rico Oversight, Management, and Economic Stability Act was designed to avoid placing taxpayers on the hook for Puerto Rico's $73 billion in debt. But in turn, investors say, PROMESA left bondholders with the tab after restructuring was done by the Fiscal Control Board created by the law.
Braden's ruling addressed $3 billion in pension bonds which the territory sold in 2008 in an attempt to remain solvent. But after the passing of PROMESA, bondholders were unable to collect contributions to the system in order to be made whole.
Also on Friday (in a separate case), another federal judge ruled against a group of Puerto Rico's investors who were seeking to get the territory's bankruptcy case dismissed entirely.
Last year, Aurelius Capital Management filed a motion to have the bankruptcy dismissed, saying that PROMESA is unconstitutional and violated the Appointments Clause. Prior to the passage of PROMESA, Puerto Rico was prohibited by law from declaring bankruptcy.
Contrasting Braden's ruling, US District Judge Laura Taylor Swain determined that the Fiscal Control Board was actually territorial, not federal.
In a statement, the FCB responded to the decision, saying, "As stated in Judge Swain's opinion, PROMESA empowers the Oversight Board to 'approve the fiscal plans and budgets of the Commonwealth and its instrumentalities' and 'override Commonwealth executive and legislative actions that are inconsistent with approval fiscal plans and budgets."
Hedge funds aren't the only investors concerned about the handling of Puerto Rico's debt crisis. According to the founder of research firm Puerto Rico Clearinghouse, Cate Long, less than 25 percent of the territory's debt is held by hedge fund managers. The rest is held by individuals and mutual funds held by everyday investors.
She told CNN last year, "For the most part, Main Street America owns this debt. It's not as though these are vultures circling around the island."