U.S. First Court of Appeals Reverses Lower Court and Rules that Puerto Rico Bondholders Have a Valid Claim on Pension Fund Assets

The First Circuit Court of Appeals has reversed a district court ruling from the lower court over whether bondholders of nearly $3 billion of debt issued by Puerto Rico’s Employees Retirement System (ERS) have a claim on the pension fund’s assets. The pension fund is designated for the island’s public employees.

In 2008, the ERS issued roughly $3 billion in bonds that were sold as having a first lien on all assets of the ERS system, including future governmental deposit. These types of bonds are issued by many pension funds to cover pension shortfalls and are commonly known as Pension Obligation Bonds, or POBs.

The original pension fund lawsuit was brought after the island’s government passed legislation that would allow the government to pay retirees the pension obligation they were owed from Puerto Rico’s general fund, rather than through payments to the ERS. The territory’s pension system, confronted with an almost 100% funding shortfall, had liquidated all cash assets.

According to Reuters, the Puerto Rico government then opted for a “pay-as-you-go” approach that allowed pension benefits to be paid from the general fund. The ERS bondholders argued this was unfair and would deprive ERS investors of the revenue they were promised under the bond indenture, which would have required payments to be made through the ERS and provided sufficient assets to pay the ERS bondholders.

Last year, U.S. District Judge Laura Taylor Swain, the New York-based federal judge overseeing Puerto Rico’s bankruptcy-like proceeding under Title III of PROMESA, ruled that bondholders lacked a “perfected security interest” over property that the now bankrupt public entity had pledged toward repaying this debt. In her ruling, Judge Swain found that the financial statements originally issued with the 2008 bond offering lacked sufficient information regarding collateral for the bondholders to be able to assert a “perfected” claim under the Uniform Commercial Code (UCC).

However, upon review of Judge Swain’s ruling, the First Circuit found that the bondholders in question do have valid claims. While the First Court of Appeals agreed that the initial bond offering documents lacked the specificity necessary to perfect the lien, the Appeals Court noted that this collateral was sufficiently described in revised 2015 and 2016 financial statements. As a result, according to the Appellate Court, bondholders can make their claims.

Law360 reports that following the First Circuit’s decision, Puerto Rico’s Financial Oversight Board said in an email statement that it was looking at this latest opinion and will be exploring its options. The Oversight Board, which was appointed by the U.S. federal government after the adoption of PROMESA, has been working to restructure the more than $120 billion in pension liabilities and commonwealth debt that Puerto Rico still owes.

The Appeals Court’s reversal of Judge Swain’s decision could make it harder for the Oversight Board to restructure all of Puerto Rico’s debt. The Oversight Board has already restructured the territory’s Government Development Bank (GDB) debt and is waiting for court approval over a debt deal involving COFINA (the island’s Sales Tax Financing Corporation). The Oversight Board is also trying to figure out how to tackle nearly $50 Billion of pension liabilities that remain unfunded and about $13 Billion of general obligation bonds. This process has been going on since the summer of 2016 when the U.S. Congress first passed PROMESA in an attempt to help the Commonwealth address its financial crisis.

Puerto Rico Bond Fraud Lawyers
Shepherd Smith Edwards and Kantas, LLP (SSEK Law Firm) has been hard at work for more than five years in helping investors to recoup losses they have lost from Puerto Rico bonds and closed-end bond funds. SSEK Law Firm has worked to help investors both on the island and on the mainland, recovering many millions of dollars for them. In particular, SSEK has worked with investors who purchased Puerto Rico investments from Popular Securities, UBS Puerto Rico (UBS-PR), Oriental Bank, Morgan Stanley (MS), Santander Securities (SAN), Barclays (BARC), Merrill Lynch (BSC), GMS and many others.

If you have invested in Puerto Rico debt or bond funds based on the recommendation of a financial advisor and have since sustained substantial losses, please call our Puerto Rico investment fraud attorneys today for a free, no obligation consultation. We can help you evaluate your options.

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