Appeals court rules in favor of Puerto Rico ERS bondholders

The First Circuit Court of Appeals ruled in favor of the Puerto Rico Employees Retirement System bondholders, saying that they have a perfected security interest in the system’s property.

“Because the bondholders’ security interest was perfected, this interest cannot be avoided under the Puerto Rico Oversight, Management, and Economic Stability Act’s incorporation of parts of the bankruptcy code,” Judge Sandra Lynch wrote in a decision written on behalf of the cases’ judges. “Accordingly, we vacate the district court’s holding on avoidance of the bondholders’ security interest,” Lynch continued.

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Judges Norman Stahl and William Kayatta Jr. were also involved in the cases. In this matter six cases were tried and decided together.

At stake is $3.2 billion in ERS bonds in default since July 2017.

The ruling overturns a ruling by Title III bankruptcy Judge Laura Taylor Swain in August 2018. This is the fourth time the First Circuit has ruled on appeals of Swain. For the fourth time it has reversed in part or in toto one of Swain’s decisions.

“This is the fourth time she has been reversed,” commented Attorney John Mudd. “At least three appeals remain. Likely First Circuit will affirm two but the appointments clause [case] is likely to be another reversal. Got to keep an eye on COFINA [proposed plan of adjustment]. No one knows what the judge will decide.”

Altair Global Credit Opportunities Fund and Puerto Rico AAA Portfolio Bond Fund led about 30 investment and mutual funds in the six cases tried together and ruled on Wednesday.

The Puerto Rico Oversight Board was the defending debtor in the case, representing ERS and several other Puerto Rico government obligors.

The board said, “The board is reviewing the court’s opinion and considering its options.”

The Circuit Court wrote that it was “remand[ing] to the district court for further proceedings in light of this opinion.”

Mudd said the next issue was the applicability of Bankruptcy Code 928 to the decision. This will determine if and how the bondholders would get their money. Settling these legal matters will probably take at least several months.

In its decision, the court affirmed Swain’s ruling that Puerto Rico Uniform Commercial Code financial statements from 2008 failed to perfect the bondholders’ security interests.

“But we find that the financing statement amendments filed in 2015 and 2016 … satisfied the filing requirements for perfection when read in conjunction with the 2008 financing statements,” the court wrote.

The bondholders had also sought declaratory judgments that they had priority liens on the ERS pledged property and that their liens on the employer contributions remain valid after the filing of ERS in Title III bankruptcy.

The court said, “Because we find the 2008 financing statements effective as amended, we remand to the district court for further consideration of the dismissals of these counterclaims in light of this opinion.”

Finally, the court upheld Swain’s rejection of bondholder arguments based on an alleged violation of a January 2017 stipulation.

Attorneys for Altair Global Credit Opportunities and the Puerto Rico AAA Portfolio Bond Fund didn’t immediately respond to a request for a comment.

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PROMESA Puerto Rico Employees Retirement System Puerto Rico Highway & Transportation Authority Puerto Rico Electric Power Authority Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico
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