Puerto Rico ERS bondholders lose case in Title III bankruptcy

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Holders of Puerto Rico Employee Retirement System bonds lost an adversary proceeding in the Title III bankruptcy.

Title III Judge Laura Taylor Swain sided on Friday with the Puerto Rico Oversight Board, representing the ERS, and the Official Committee of Retired Employees of Puerto Rico and against 30 investment and mutual funds led by Altair Global Credit Opportunities. About $3.2 billion of ERS bonds are outstanding.

“Defendants, who hold bonds issued by ERS, assert that they have a valid and perfected security interest in a wide range of system-related employer remittances, employee loans, and amounts held in a certain segregated account pursuant to a stipulation,” Swain wrote in her decision.

The Oversight Board made four lines of argument against the defendants’ claims. Swain agreed with the first, second, and fourth, and said the third was irrelevant because the defendants’ pre-bankruptcy lien had been invalidated and wasn’t enforceable against ERS.

Responding to the board’s first line of argument, Swain cited technical reasons that the bondholders’ security interest was not properly perfected. In the context of the Puerto Rico Oversight, Management, and Economic Stability Act and its use with the ERS bonds, lacking this perfect security interest opens the bonds to the bankruptcy's impairments.

On the board’s second line of argument, Swain agreed that Section 544 of Title 11 of the United States Code (i.e. the laws concerning corporate bankruptcy) allows the board to invalidate the bondholders’ unperfected interest. Section 544 is incorporated into PROMESA.

Against the bondholders’ claims otherwise, Swain said the Section 544 can apply to liens granted prior to PROMESA’s enactment.

On the board’s fourth line of argument, Swain said both sides agreed on the facts. She said the bondholders hadn’t made legal arguments for the payment of May 2017 contributions to a segregated account. So she declined to order such a payment.

“The judge may be right,” said attorney John Mudd, who writes the Control Board Watch blog. Mudd also said that he thought it likely the defendants would appeal the decision. Altair’s lead attorneys didn’t respond to an inquiry as to whether they would appeal.

In a different court, Altair is having greater success concerning its ERS bond holdings. In a mid-July opinion, U.S. Court of Federal Claims Chief Judge Susan Braden said she was inclined to rule that the federal government was responsible for unpaid Puerto Rico Employees Retirement System bonds. She said that she would reserve actually ruling that way because time wasn’t “ripe” for the ruling, because she first wanted to see how Swain ruled on the Aurelius and UTIER challenges to PROMESA on U.S. constitutional grounds.

Swain has since rejected the Aurelius and UTIER challenges. This rejection opens the door for Braden to possibly order the federal government to compensate holders of ERS bonds for any losses they have incurred due to PROMESA and the Oversight Board’s actions.

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