Investment funds sue Puerto Rico for payment of bonds
SAN JUAN – Thirty-one investment funds that hold secured bonds issued by the Puerto Rico Employees Retirement System (ERS), have sued the government of Puerto Rico to have employees’ contributions put in a separate account for their benefit.
In a lawsuit filed Sept. 21, the plaintiffs said they are aware of the challenges Puerto Rico faces and support the U.S. Congress in addressing the commonwealth government’s fiscal, management and structural problems. They said they intend to work with the oversight board established by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) to manage Puerto Rico’s finances to renegotiate the debt.
“However, in the interim, the Commonwealth has failed to recognize the constitutional and contractual rights of Movants and other secured creditors. Movants therefore seek limited relief within the Promesa framework in order to protect their property interests and challenge the improper diversion of their property,” they said.
The ERS is one of three public retirement systems in Puerto Rico. In 2008, it issued pension funding bonds, whose proceeds were used to increase funds available to pay retired public employee benefits. To secure the bonds, the ERS granted the plaintiffs, through a fiscal agent, a pledge and assignment of, and the grant of a security interest and lien in and over all future
employer contributions, and the ERS’s right to those contributions, among other things. No other
holder of debt issued by the commonwealth or any of its instrumentalities has a lien on this
On April 6, the commonwealth enacted the Puerto Rico Emergency Moratorium
and Financial Rehabilitation Act, which “failed to respect the constitutional and contractual rights of Movants and gave the Governor unfettered authority to declare a complete moratorium on debt payments by certain government entities, including the ERS,” the suit reads.
On June 30, the federal government enacted Promesa, which provides tools to institute fiscal and economic reforms for the Commonwealth. On the same day, the governor issued Executive Order 2016-31, which declared that the ERS is in a state of emergency and suspended its contractual obligation to transfer employer contributions to the system’s fiscal agent for payment on its outstanding bonds. The order also suspended the commonwealth’s obligations to make employer contributions to the ERS up to the amount of debt service payable by the ERS during fiscal year 2017. The ERS continues to receive employer contributions from non-commonwealth employers, however, the order doesn’t alter or suspend those employer obligations to make required contributions. All of the contributions that are currently being made are subject to the lien and security interest granted by the ERS to secure ERS bonds.
The plaintiffs said the commonwealth has made no effort to provide adequate protection and has expressly refused to do so. “Prior to filing the instant motion, Movants made a written request to the commonwealth seeking adequate protection but the commonwealth denied that request. Movants therefore seek relief from the Promesa stay. Promesa provides that the court ‘shall’ grant relief from the Promesa stay for ‘cause,’ and the absence of adequate protection to
compensate Movants for the impairment of their liens and security interests constitutes ‘cause’
under Promesa,” the plaintiffs said.
If the stay remains in place, the judge should then set aside employer contributions collected during the automatic stay in an account established for their benefit, according to the firms.
Currently, federal Judge Francisco Besosa is slated to rule whether to grant a relief from the Promesa stay to four other litigants in a separate case. A ruling is slated to be issued sometime next month.
The plaintiffs in the most recent lawsuit include Altair Global Credit Opportunities Fund (A) LLC, Claren Road Credit Master Fund Ltd., Claren Road Credit Opportunities Master Fund Ltd., Glendon Opportunities Fund, L.P., Nokota Capital Master Fund L.P., Oaktree-Forrest Multi-Strategy LLC (Series B), Oaktree Opportunities Fund IX L.P., Oaktree Opportunities Fund IX (Parallel 2) L.P., Oaktree Value Opportunities Fund, L.P., Ocher Rose L.L.C., Puerto Rico AAA Portfolio Bond Fund Inc., Puerto Rico AAA Portfolio Bond Fund II Inc., Puerto Rico AAA Portfolio Target Maturity Fund Inc., Puerto Rico Fixed Income Fund Inc., Puerto Rico Fixed Income Fund II Inc., Puerto Rico Fixed Income Fund III Inc., Puerto Rico Fixed Income Fund IV Inc., Puerto Rico Fixed Income Fund V Inc., Puerto Rico GNMA & U.S. Government Target Maturity Fund Inc., Puerto Rico Investors Bond Fund I, Puerto Rico Investors Tax-Free Fund Inc., Puerto Rico Investors Tax-Free Fund II Inc., Puerto Rico Investors Tax-Free Fund III Inc., Puerto Rico Investors Tax-Free Fund IV Inc., Puerto Rico Investors Tax-Free Fund V Inc., Puerto Rico Investors Tax-Free Fund VI Inc., Puerto Rico Mortgage-Backed & U.S. Government Securities Fund Inc., SV Credit L.P., Tax-Free Puerto Rico Fund Inc., Tax-Free Puerto Rico Fund II Inc., Tax-Free Puerto Rico Target Maturity Fund Inc., and UBS IRA Select Growth & Income Puerto Rico Fund.