Holders of Puerto Rico Employees Retirement System bonds have petitioned the bankruptcy judge to appoint them as system trustee.
The investment funds holding the bonds said in a court filing Tuesday that ERS had independent interests from government’s interests since they have been put into Title III bankruptcy, and that the Oversight Board has trampled the ERS's interests.
The funds pointed out that Judge Laura Taylor Swain had recognized that the Puerto Rico Sales Tax Finance Corp. (COFINA) had separate interests from the commonwealth government and she had appointed a trustee for it during the restructuring of its bonds.
“The motion raises some interesting and complicated questions, which as a practical matter must be addressed sooner or later,” said municipal bankruptcy expert James Spiotto. “While the appointment of a trustee under Section 926 [of the bankruptcy code] is unusual, the legislation and actions of the commonwealth as to ERS are equally unique.”
The board put ERS into the Title III bankruptcy in May 2017, when it had $3.2 billion of debt outstanding. The board submitted a plan of adjustment to the court in September that would award the ERS bondholders 15 cents on the dollar.
Swain put issues concerning ERS and Puerto Rico central government debts into confidential mediation this summer. However, in October, due to the support of several ERS parties, the disputes returned to open litigation.
The bondholders’ motion is a potential means for undoing the plan’s treatment of their bonds, said Spiotto, who is managing director at Chapman Strategic Advisors. In its motion statement, the bondholders said that ERS was set up in 1951 to be an independent, self-governing trust.
The central government historically provided 59% of employer contributions to ERS, with the balance coming from Puerto Rico’s municipal governments and public corporations. When ERS was put into Title III bankruptcy, the commonwealth government owed ERS more than $411 million, the bondholders stated.
The board has claimed to serve as the representative of ERS and the commonwealth after putting both into Title III, even though the commonwealth owes ERS substantial amounts of money, the bondholders said Tuesday.
The board’s filing of the Title III petition for ERS on May 21 “triggered the operation of the automatic stay to protect ERS’s property,” the bondholders said Tuesday. However, pursuant to the board’s fiscal plan the local legislature passed a resolution in June 2017 requiring ERS to sell its assets and transfer the net proceeds plus any of its funds to the commonwealth General Fund. The law also required employers to make contributions directly to the General Fund rather than ERS.
The board approved this law.
In August 2017 Puerto Rico’s governor signed a law that set up an employer “pay-go fee” to the General Fund to fund pensions, which had been ERS’s responsibility. The law also required the replacement of the ERS board, to allow the liquidation of ERS’s property.
The bondholders said the Oversight Board's actions were contrary to ERS’s interests. The bondholders have asked the board to pursue avoidance claims against the commonwealth on behalf of ERS but the board has declined to do so. Bankruptcy avoidance claims are claims aimed at rectifying illegal actions during or immediately preceding a bankruptcy.
The bondholders asked the judge to appoint a trustee to pursue the avoidance claims that the board has failed to seek for them.
They asked Swain to appoint either themselves as a trustee or an independent party as a trustee to pursue these avoidance actions. Alternately, they suggested appointing the former trustee of COFINA in the bankruptcy, Bettina Whyte, to be the trustee.
They asked that the judge indicate the ERS is to pay the trustee’s expenses.
Spiotto said that effectively the bondholders want the trustee to undo the commonwealth’s actions regarding ERS over the last few years.
