Puerto Rico Borrowers Lose Appeal Over $384 Million Loan Sale

A group of borrowers in Puerto Rico lost a constitutional challenge alleging that the federal board overseeing the island’s restructuring failed to review a $384 million loan sale agreement between Puerto Rico’s Economic Development Bank and a private investment company.

The plaintiffs—including R&D Master Enterprises Inc., Pro Pave Corp., and other businesses owned by a couple on the island—lacked standing to sue the Financial Oversight and Management Board (FOMB) for Puerto Rico, the US Court of Appeals for the First Circuit said Tuesday. The appeals court upheld a lower court’s dismissal of the case.

Puerto Rico’s Economic Development Bank sold a portfolio of loans valued at over $384 million to PR Recovery and Development JV LLC, an investment company, at a discount in 2018. Soon after the sale, PR Recovery initiated collection and foreclosure actions in Puerto Rico courts against hundreds of borrowers, including the plaintiffs, according to court records.

The plaintiffs sued the federal oversight board, which was created by the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA. The 2016 law allows the board to squash some contracts involving government-backed entities on the island before they’re executed.

The borrowers claimed the oversight board’s failure to review the loan sale agreement violated their constitutional and statutory rights, forcing them to pay up on loans in a “sham transaction.” PR Recovery shouldn’t have been able to purchase the loans because individual contracts restricted the Economic Development Bank from transferring the loans to any entity that isn’t a financial institution, according to the lawsuit.

The US District Court for the District of Puerto Rico previously dismissed the case, saying the claims were brought outside of a one-year statute of limitations. The First Circuit upheld the dismissal, but on the grounds that the plaintiffs failed to show standing.

“Appellants’ complaint has failed to allege that the FOMB’s inaction caused their claimed injury, but even if it did, a court order compelling the FOMB to review the loan sale agreement might do nothing at all to redress Appellants’ injury,” the panel said.

The plaintiffs aren’t planning to appeal the ruling. “We are not seeking a cert to the Supreme Court of the United States for strategic or business reasons,” Humberto Guzman-Rodriguez, an attorney for the borrowers, said by phone.

This case is R&D Master Enterprises, Inc., et al v. FOMB, et al, 1st Cir. App., No. 22-01342, 7/25/23.