Puerto Rico’s Title III bankruptcy judge Laura Taylor Swain handed a victory to holders of Employers Retirement System bonds Wednesday by directing that interest payments continue to be made.

The order for the payments is valid until the judge makes a decision about the bondholders’ claim of a valid lien. The Judge gave no indication when she would make a determination on the claim.

Puerto Rico Title III bankruptcy Judge Laura Swain introduced Chief Mediator Barbara Houser on Wednesday.
Puerto Rico Title III Judge Laura Taylor Swain said wanted to receive a proposed order on ERS payments by Dec. 27. U.S. Courts

Attorney John Mudd, who represents a municipality in the Title III case, asked to comment on the ruling, responded, “Is that the harbinger of her deciding ERS bondholders have a lien?”

The system had $3.16 billion in outstanding bonds as of February.

On July 17 Swain approved an order for a stipulation in the dispute between bondholders and the system that required that ERS continue to pay interest due on the bonds.

According to the Nov. 28 filing by the Puerto Rico Funds – mutual funds that hold $720 million of uninsured ERS bonds – “paragraph F of the Joint Stipulation required ERS to transfer funds for the monthly interest payments to [bond trustee] Bank of New York Mellon until the conclusion of this court’s ruling on the parties’ summary judgment motions.”

According to the funds’ attorney, John Cunningham, the interest payments were made through the start of November. In the middle of November the Puerto Rico Fiscal Agency and Financial Advisory Authority sent a letter to BNYM saying that the latter shouldn’t have distributed the November payment, Cunningham said.
The ERS didn’t release the Dec. 1 payment, said Cunningham, a partner at White & Case.

In response, Peter Friedman, representing FAFAA, said the creditors were claiming a legal principal of “adequate protection” was giving them the right to the payments and that adequate protection isn’t appropriate when there are concerns about the validity of the liens.

Robert Gordon, representing the Official Retiree Committee, said that for adequate protection to be properly granted the claimant must have a lien and diminished collateral. Gordon, a partner with Jenner & Block, said neither of these things were the case.

At the end of the arguments, Swain chose to deliver a decision from the bench. She said the stipulation’s direction that interest be paid was open ended and did not end with October, as FAFAA claimed. Swain said the ERS claim that the transfer of interest is optional is wrong.

Swain directed the system to continue to make the interest payments and BNYM to continue to distribute them.

Swain said she wanted to receive a proposed order by Dec. 27 that both sides agree to or, if this proves impossible, an order accompanied by FAFAA’s objections.

In another matter discussed Wednesday morning, Atara Miller, representing bond insurer Ambac Assurance, said in the last few days FAFAA had started to transfer additional information about the sales and use tax revenues. Because of this Ambac was pulling back its motion for a court order at Wednesday’s hearing, she said.
Ambac had been seeking the court to order Puerto Rico to release more information about the sales and use taxes.

Miller, a partner with Milbank, Tweed, Hadley & McCloy LLP, said that the two sides still don’t agree about everything but that they wish to continue to meet and see if they can resolve the matter amicably.

Judge Judith Dein, who is handling discovery issues in the case, asked the sides to provide her an update on Jan. 5.

Swayne said the next Title III omnibus hearing will be on Jan. 10.

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