Laura Taylor Swain (GFR Media) (semisquare-x3)
Laura Taylor Swain (GFR Media)

The Unsecured Creditors Committee (UCC) filed a second objection before Judge Laura Taylor Swain, this time to the Pension Obligation Bonds (POBs).

Just when the Board, the government and certain creditors have signed a stipulation to give order to a new claim by Puerto Rico Employees Retirement System (ERS) creditors, the UCC 

filed a motion before judge Swain stating that $3.1 billion in bonds issued under the Aníbal Acevedo Vilá administration are null and void since the ERS lacked the statutory authority to borrow from capital markets.

In  a 55-page motion -with documents related to the issuances of POBs attached- the UCC alleged that the government does not have to pay bonds issued by the pension system since, even the legislatura admitted in a later statute that the transaction was “illegal”.

According to Luc A. Despins, a lawyer at Paul Hastings firm representing UCC, the ERS does not have authority to issue public bonds and the authority to do that is granted by law.

The UCC motion joins another motion the committee filed to annul $ 6 billion in General Obligations that Puerto Rico issued between 2012 and 2014 and also some Public Buildings Authority (PBA) bonds, since they say some of the agency´s leases were not rent payments.

A second motion filed by the group created by the U.S. Trustee program for Title III cases seeking to annul POBs bonds held by Oaktree Capital

The UCC objection is not new. 

During the Luis Fortuño Administration, the ERS hired Conway MacKenzie to analyze POBs. They concluded that the ERS issued bonds without having the authority to do so.

POBs were created as a strategy to bring funds to the ERS before its growing erosion of assets.

The plan was to borrow and invest that money in the capital market under the premise that the return on investment would be enough to inject capital into the pensions system and, in turn, pay bondholders.

The idea was to issue $ 7 billion but it was interrupted when the government decided that the transaction was not convenient for the ERS.

According to the UCC, the strategy - would be implemented with GOs, but the House of Representatives never passed the initiative.

POBs creditors

The UCC motion comes after the Boston First Circuit Court of Appeals revoked Swain´s ruling to favor ERS creditors.

Swain concluded that the government did not perfect the lien, that is employers contributions that were the main source of repayment, since the entity mentioned had a different name than ERS. The federal appellate court reversed that decision.

The First Circuit Court´s decision open the door for other ERS bondholders to go to court and file motions under Title III requesting to be appointed as trustees for the pensions system. The process has resulted in a stipulation signed by the Board and POBs creditors to explain how they will address the dispute.

The Board and the Supreme Court

Yesterday, the Board said they will resort to the U.S. Supreme Court to review the decision by the First Circuit Court of Appeals that recognized ERS bondholders as secured creditors.

During the general hearing yesterday, Martin Bienenstock, a lawyer representing the Board, told Swain they will bring the POBs claim to the federal court while reiterating the petition for certiorari in the case for the unconstitutionality of the Board.

Bienenstock added that the Board will also defend itself before the litigation on the government budget and that the entity seeks  to file a debt adjustment plan by April. 

However, yesterday, the Board told el Nuevo Día that they expect to have an adjustment plan as soon as possible and in order to do so they continue conversations with creditors. The Board said they goa lis to confirm the government adjustment plan before the end of 2019.


However, GOs creditors don´t seem to agree with the plans outlined by the Board.

Yesterday, during the general hearing, Mark Stancil, an attorney from Robins Russell representing GO bondholders, said that the board’s decision seeking to invalidate  part of the debt will only bring more litigation that will cost Puerto Rico between $100 and $200 million in lawyers´ fees. 

“For Stancil, the Board has the tools but has renounced (its role) and added that the Board has failed to implement the structural reforms stated in the fiscal plan, including the repeal of Law 80, the Unjust Dismissal Act.

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