Boston Court says bondholders have lien on Puerto Rico retirement bonds
SAN JUAN – The U.S. First Circuit Court of Appeals in Boston reversed a lower court ruling that invalidated a lien that certain hedge funds held over Puerto Rico Employees Retirement System bonds.
The decision means that the bondholders, a group of about 30 investment funds, headed by Altair Global Credit Opportunities, have collateral on their bonds and should be able to get paid on their investment.
At issue in the lawsuit was whether a lien on the bonds had been “perfected.” The value of the securities was $2.9 billion, according to the document.
The Appeals Court held that while the 2008 Financing Statements did not perfect the bondholders’ security interest in the “Pledged Property,” the bondholders met the requirements for perfection beginning on Dec. 17, 2015, and so reversed the district court’s ruling, the document says.
The Appeals Court said the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa) incorporation of the bankruptcy code into the statute does not allow for the avoidance of perfected liens, “and so we vacate the district court’s holding that the Bondholders’ security interest can be avoided under Promesa.”
The case was remanded to district court for further proceedings.
The appeal involves bonds issued in 2008 by the government’s Employees Retirement System, whose holders claimed they have a perfected security interest in that property under Puerto Rico’s version of the Uniform Commercial Code.
The Employees Retirement System filed suit through the island’s Financial Oversight and Management Board on July 21, 2017, seeking declaratory judgments on several issues, including the validity and perfection of the security interest over the bonds.
After both sides moved for summary judgment, the district court ruled in favor of the retirement system, finding that the bondholders’ interest was not perfected and so could be avoided under the Bankruptcy Code and that two of the bondholders’ counterclaims should be dismissed with prejudice.
Puerto Rico’s retirement system is nearly insolvent. The government moved to a pay-as-you-go basis, a system in which pension benefits are paid out of the island’s general fund, to the tune of about $1.5 billion a year.