The following is an excerpt from the article, “Bondholders Face Stormy Seas in Puerto Rico Debt Restructuring”, written by MPM creditors’ rights attorney Brad Salyer, which appeared in the September 2018 issue of Clarks’ Secured Transactions Monthly (Vol. 34, No. 9).
The facts of the Puerto Rico Bondholder litigation. In The Financial Oversight and Management Board for Puerto Rico v. Altair Global Credit Opportunities Fund (a), LLC, et al., A.P. No. 17-213-LTS (D. P.R. 08/17/08), involving the financial restructuring proceedings of Puerto Rico, the Puerto Rico Employees Retirement System (“ERS”), by and through the Financial Oversight and Management Board (the “Oversight Board”), filed suit against bondholders of the ERS (“Bondholders”), which asserted validly perfected security interests in a range of ERS’ assets. The ERS claims were to invalidate the asserted Bondholders’ security interests.
The decision is a primer on the basics of secured transactions: debtor names, collateral descriptions, and retroactive avoidance powers of a trustee.
ERS was permitted by statute to issue debt secured by its assets. In 2008, ERS issued pension funding secured bonds to the Bondholders pursuant to a Resolution describing the collateral for the debt as including ERS revenues. The security agreement granted the Bondholders “a security interest in (i) the Pledged Property, and (ii) all proceeds thereof and all after-acquired property, subject to application as permitted by the Resolution.” The security agreement did not define “Pledged Property,” but provided that “[a]ll capitalized words defined herein shall have the meanings ascribed to them in the Resolution.”
Problematic UCC filings. Financing statements (“the 2008 UCC-1s”) were filed identifying the debtor as “Employees Retirement System of the Government of the Commonwealth of Puerto Rico” and describing the collateral as “[t]he pledged property described in the Security Agreement attached as Exhibit A hereto and by this reference made a part hereof.” The security agreement was attached to the financing statements, but the Resolution, which defined “Pledged Property,” was not attached.
In 2013, the Puerto Rico legislature, by statute, changed the name of the pension system to “Retirement System for Employees of the Government of the Commonwealth of Puerto Rico” (“RSE”). In 2016 and 2016, amendments were filed to the 2008 UCC-1s which fully described the Pledged Property (the “Amendments”). However, the debtor’s new name was not noted on any of the Amendments, identifying the debtor only insofar as the Exhibit to each amendment referred to the debtor as the “Employees Retirement System of the Government of the Commonwealth of Puerto Rico.”
Read more here. (see page 6)