Friday, July 19, 2019

U.S. Supreme Court to fast-track Puerto Rico fiscal board appointments case

By on June 20, 2019

The U.S. Supreme Court (Claire Anderson on Unsplash)

To hear case in October, after Senate deadline to confirm members

SAN JUAN — The U.S. Supreme Court has docketed for its October term the lawsuit headed by Aurelius Investment LLC along with four consolidated cases that seek to invalidate Puerto Rico’s bankruptcy process, which was begun by the federally established Financial Oversight and Management Board.

The announcement came after the Aurelius case and a separate suit filed by the board were distributed in the June 20 conference, in which the justices get together to discuss cases.

Earlier this year, the U.S. First Circuit Court of Appeals declared that the board was not constitutionally formed because although its members were appointed by President Obama, they were not confirmed by the Senate. The Circuit Court of Appeals, however, validated the board’s actions under the Puerto Rico Oversight, Management,and Economic Stability Act’s (Promesa) Title III bankruptcy case and gave Congress time to fix the constitutional problem.

President Trump this week sent the nominations of the seven members to Congress, which has until July 15, the deadline established by the Circuit Court, to act. Despite a Senate confirmation, the board members’ terms were already slated to expire Aug. 30.

Earlier this month, lawyers for Aurelius and for bond insurer Assured Guaranty wrote to the top court, stating that the board and the U.S. Justice Department, both of which defend the board’s constitutionality, have acquiesced in their petition for a writ of certiorari that Aurelius and Assured, the Official Committee of Unsecured Creditors and the Irrigation & Electrical Workers Union Inc. (Utier by its Spanish acronym) have waived their responses to that petition. As a result, Aurelius and Assured said they did not intend to file a reply in support of their petition so they could have their cases expedited by the Supreme Court.

The top court had also heard on its June 20 conference a request from the board to review a ruling from the U.S. Court of Appeals for the First Circuit issued in January in a case against Andalusian Global Designated Activity Co. and other hedge funds involving Employees Retirement System bonds.

However, it was not immediately clear whether the Andalusian case was docketed to be heard in October as well. A record of the case in the top court shows that Andalusian filed a response two days ago.

The board’s petition regarding the latter case centers around Article 9 of the Uniform Commercial Code (UCC). The article states that a security interest is perfected by filing a financing statement but only if the financing statement provides the correct name of the debtor.

Recognizing the need for certainty, Article 9 provides objective rules for identifying a debtor’s correct name. When a debtor is an organization created by statute, its name is “the name that is stated to be the registered organization’s name” in the statute. The bondholders in the Andalusian case, the board said, failed to include on their financing statement the name “stated to be the registered organization’s name” but instead used the debtor’s former name.

The First Circuit Court nevertheless held that a creditor would have searched the UCC database using both the new and old names, and therefore the incorrect, old name was sufficient to perfect the security interest.

The question presented to the court is whether the lower court erred by inventing an exception to Article 9’s requirement that the name of a debtor for perfection purposes is “the name that is stated to be the registered organization’s name on the public organic record.”

The board said the top court should review the decision because leaving it as is will have an adverse impact on both secured lending transactions nationwide and the Title III cases in which Puerto Rico is attempting to restructure its debt.

The case is regarding the official name in English of the Employees Retirement System. The official English translation of the statute creating the system’s name identifies it as the Retirement System for Employees of the Government of the Commonwealth of Puerto Rico (RSE). The UCC allows creditors to file new statements with new names whenever the debtor changes names but the ERS creditors failed to do so.

The board said the UCC was revised in 2001 specifically to impose the requirement that names of organizations are the official ones in order to enforce secured interests.

“Moreover, the First Circuit’s ruling is indefensible because it disregards the plain text of Article 9 and resurrects a ‘reasonable creditor’ test that was deliberately eliminated from the UCC,” the board wrote.

In Jan. 24, 2008, the system issued approximately $2.9 billion in bonds pursuant to a Pension Funding Bond Resolution that called for the bonds to be secured by certain revenues collected by the retirement system and placed into debt servicing accounts.

In June and July 2008, the commonwealth’s State Department received UCC-1 financing statements attempting to perfect the bondholders’ security interest in the revenue collateral described in the Resolution. The financing statements list the debtor as Employees Retirement System of the Government of the Commonwealth of Puerto Rico, which was the system’s stated name at that time. More than seven years later, in 2015 and 2016, the department received two sets of UCC financing statements purporting to amend the 2008 financing statements to continue to name the debtor as Employees Retirement System of the Government of the Commonwealth of Puerto Rico (ERS), not RSE, in the official translation of the 2013 version of the amended Enabling Act.

When the ERS bondholders tried to lift the stay to protect their collateral, the board argued that the lien over the bonds had not been perfected. The district court agreed that the original 2008 financing statements did not perfect the bondholders’ security interest because they did not describe the collateral as required by Article 9 and did not use the RSE name.