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Unsecured Creditors seek invalidation of $3 billion in Puerto Rico retirement bonds

By on March 13, 2019

Argues issuances in 2008 were made ultra vires

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SAN JUAN – The Official Committee of Unsecured Creditors has filed an objection to all claims that may be asserted against the Puerto Rico Employees Retirement System (ERS) based on $3 billion in bonds issued by the pension system in 2008, arguing it did not have the authority to borrow through public bonds.

It is the second objection raised by the committee, which is already joining efforts to repeal $6 billion in commonwealth general obligation bonds issued after 2012 and certain Public Building Authority bonds.

In February 2008, ERS issued three series of bonds in underwritten public offerings, the document said. These were issued as an obligation of the pension system payable solely from employer contributions made after their issuance and funds on deposit in various accounts.

“Because ERS lacked the statutory authority to borrow through a public bond offering, the bonds were issued ultra vires and are null and void,” the Committee said.

Some observers have been predicting since last year that some of the debt issued by the ERS may be declared illegal. A report a few years ago by consulting and litigation firm Conway MacKenzie and last year’s investigation into the debt raised questions about the 2008 issuances. The U.S. First Circuit Court of Appeals overturned in January a ruling by Judge Laura Taylor Swain that ERS bondholders did not have a perfected security interest over property pledged by the bankrupt entity to pay its debt.

The motion filed by the committee also sought to establish a process to deal with the objections efficiently. Specifically, the committee requested an order that would allow objections to proceed in an omnibus fashion even if the number of  ERS bond claims exceeds 100; that a mechanism be established to notify parties of the opportunity to participate in the litigation, including those that have not filed claims; and that objection procedures be established.

The committee submitted its proposed objection procedures, which it said were mostly identical to those approved by the court to deal with objections filed under the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa) Title III case that seeks to annul $6 billion in GO bonds.

“This relief is necessary because litigating the Objections on a claim-by-claim basis would be impractical and highly inefficient, if not impossible. The website maintained by Prime Clerk LLC, the Title III Debtors’ solicitation, notice and claims Agent, reflects that, to date, hundreds of individuals or entities have filed ‘bond’ claims against ERS.

“There are likely many more such claimants who have not yet filed—and, indeed, pursuant to this Court’s bar date order, need not and may never file—such a claim,” the committee said in court documents.

Through its lawyer, Luc Despins, the committee said it was confident that the simultaneous litigation of numerous bond claims can be accomplished in a streamlined manner because of the common issues of “law and fact” that predominate the claims.

“The principal questions that the Court must address in determining the validity of all such claims is whether the ERS Bonds were issued ultra vires and are therefore null and void, and whether the ERS Bonds can be validated,” the committee stressed.

It also asked the court to approve certain initial deadlines and litigation procedures. For instance, it proposed that following completion of the notice procedures, all parties that wish to participate in the litigation process must file a notice of participation within 60 days of the order granting the motion.

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