Puerto Rico bankruptcy Judge Laura Taylor Swain rejected a motion by Employees Retirement System bondholders for her to name them the trustee of ERS.
In the alternative, the bondholders had asked Swain to appoint a third party as a trustee for ERS. Swain also rejected this. As of February 2017 the ERS had $3.2 billion of bonds outstanding.
The bondholders wanted the trustee to pursue avoidance claims.
In June 2017, the local government passed a law requiring ERS to sell its assets and transfer the net proceeds plus any of its funds to the commonwealth General Fund. The law also required employers to contribute directly to the General Fund rather than to ERS, as had been the case prior. The bondholders have said this law was illegal.
In her decision released Tuesday in the United States District Court for Puerto Rico, Swain emphasized the difference of municipal bankruptcies from private sector bankruptcies, generally, and the authority that the U.S. Congress gave the Puerto Rico Oversight Board in the Puerto Rico Oversight, Management, and Economic Stability Act, specifically.
She cited In re New York City Off-Track Betting Corp., which said “[c]ourts should be loath to appoint a trustee [under section 926] given that the court’s limited powers in a Chapter 9 [bankruptcy] case are best understood as operating within the context of constitutional and federalism concerns.”
Swain said, “PROMESA provides for the appointment of a single Oversight Board that will act as the sole statutory representative of a territory and each of its covered territorial instrumentalities in their Title III cases.” She also said that PROMESA Section 303 preserved the right of the territorial government to exercise “political or governmental powers.”
Swain also stated, “it is not unreasonable for the Oversight Board … to decline to cause ERS to challenge the authority of the commonwealth government to enact legislation restructuring and reforming its pension system in aid of the reorganization of the government of Puerto Rico and its instrumentalities. The Oversight Board is designated, in the first instance, as the entity that makes important strategic and tactical judgments in managing these restructuring proceedings, and it necessarily does so in a holistic manner.”
Swain noted that the ERS bondholders had challenged the commonwealth’s pay-go legislation on multiple fronts and using a wide range of arguments. She said that her decision Tuesday didn’t “foreclose the creditors’ abilities to pursue [these] claims.”
In the case, law firms Jones Day and Delgado & Fernández are representing Andalusian Global Designated Activity Company and about 20 other investment funds holding ERS bonds. Law firms White & Case and Sánchez Pirillo for AAA Portfolio Bond Fund and about 20 other investment funds holding ERS bonds.
