Fin. Oversight & Mgmt. Bd. for Puerto Rico v. Andalusian Global Designated Activity Co. (In re Fin. Oversight & Mgmt. Bd. for Puerto Rico)

• Decision Date: 27 June 2019
• Docket Number: Case No. 17 BK 3283-LTS (Jointly Administered), Case No. 17 BK 3566-LTS,Adv. Proc. No. 17-213-LTS
• Citation: 385 F.Supp.3d 138
• Parties: IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as Representative of the Commonwealth of Puerto Rico, et al., Debtors. The Financial Oversight and Management Board for Puerto Rico, as Representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Debtors. The Financial Oversight and Management Board for Puerto Rico, as Representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Plaintiff, v. Andalusian Global Designated Activity Company, et al., Defendants-Counterclaimants.
• Court: U.S. District Court — District of Puerto Rico

385 F.Supp.3d 138

IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as Representative of the Commonwealth of Puerto Rico, et al., Debtors.¹

The Financial Oversight and Management Board for Puerto Rico, as Representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Debtors.

The Financial Oversight and Management Board for Puerto Rico, as Representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, Plaintiff,

v.Andalusian Global Designated Activity Company, et al., Defendants-Counterclaimants.

Case No. 17 BK 3283-LTS (Jointly Administered)

Case No. 17 BK 3566-LTS

Adv. Proc. No. 17-213-LTS

United States District Court, D. Puerto Rico.

Signed June 27, 2019

PROSKAUER ROSE LLP, By: Steven O. Weise, Martin J. Bienenstock, Timothy W. Mungovan, Kevin J. Perra, Paul V. Possinger, Eleven Times Square, New York, NY 10036, LUIS F. DEL VALLE-EMMANUELLI, By: Luis F. del Valle-Emmanuelli, USDC-PR No. 209514, P.O. Box 79897, Carolina, Puerto Rico 00984-9897, Counsel for Plaintiff the Financial Oversight and Management Board for Puerto Rico, as representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico

JENNER & BLOCK LLP, By: Robert Gordon, Richard Levin, 919 Third Ave, New York, NY 10022-3908, and Catherine Steege, Melissa Root, 353 N. Clark Street, Chicago, IL 60654, BENNAZAR, GARCÍA & MILIÁN, C.S.P., By: A.J. Bennazar-Zequeira, Héctor Mayol Kauffmann, Edificio Union Plaza, PH-A piso 18, Avenida Ponce de León #416, Hato Rey, San Juan, Puerto Rico 00918, Counsel for Intervenor the Official Committee of Retired Employees of Puerto Rico

DELGADO & FERNÁNDEZ, LLC, By: Alfredo Fernández-Martínez, PO Box 11750, Fernández Juncos Station, San Juan, Puerto Rico 00910-1750, JONES DAY, By: Bruce Bennett, 555 South Flower Street, Fiftieth Floor, Los Angeles, California 90071 and Benjamin Rosenblum, Victoria Dorfman, 250 Vesey Street, New York, NY 10281 and Geoffrey S. Stewart, Beth Heifetz, Christopher J. DiPompeo, 51 Louisiana Ave. N.W., Washington, DC 20001, Counsel for Defendants ERS Bondholders Andalusian Global Designated Activity Company, Glendon Opportunities Fund, L.P., Mason Capital Management, LLC, 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., and SV Credit, L.P.

SÁNCHEZ PIRILLO LLC, By: José C. Sánchez-Castro, Alicia I. Lavergne-Ramírez, Maraliz Vázquez-Marrero, 270 Muñoz Rivera Avenue, Suite 1110, San Juan, PR 00918, WHITE & CASE LLP, By: John K. Cunningham, Glenn M. Kurtz, 1221 Avenue of the Americas, New York, NY 10036 and Jason N. Zakia, Cheryl T. Sloane, 200 S. Biscayne Blvd., Suite 4900, Miami, FL 33131, Counsel for Defendants 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, Inc. II, 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., 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

PROMESA

Title III

OPINION AND ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AS TO COUNT III AND COUNTERCLAIMS II AND III, AND DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

LAURA TAYLOR SWAIN, United States District Judge

The Employees Retirement System of the Government of the Commonwealth of Puerto Rico ("ERS" or "Plaintiff"), by and through the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board"), commenced this adversary proceeding against certain secured bondholders of ERS (the "Defendants" or the "Bondholders"² ) pursuant to the terms of a stipulation entered into by the parties on July 14, 2017. (See Docket Entry No. 40 in Adversary Proceeding No. 17-00213,³ Ex. B (the "Stipulation").) The terms of the Stipulation provided, in relevant part, that on or before July 21, 2017, ERS "shall file an adversary complaint with this Court, seeking solely declaratory relief regarding ... the validity, priority, extent and enforceability of the prepetition and postpetition liens and security interests asserted by the Bondholders with respect to the ERS Bonds." (Stip. ¶ 6.A.) The Stipulation further provided, in relevant part, that the Bondholders "shall have the right, but not the obligation, to counterclaim on ... matters pertinent to the main claims." (Id. ) ERS filed the Complaint on July 21, 2017, seeking declarations concerning the scope, validity, and perfection of Defendants' asserted security interest. Defendants filed the Answer and Counterclaims (Docket Entry No. 36, the "Answer"), asserting nine counterclaims seeking declaratory relief with respect to the scope, validity, and perfection of their asserted security interest. On November 3, 2017, the parties filed cross-motions for summary judgment. (See Docket Entry No. 91, the "Plaintiff's Motion" and Docket Entry No. 94-1, the "Defendants' Motion.")

On August 17, 2018, this Court issued the Opinion and Order Granting and Denying in Part Cross Motions for Summary Judgment ("MSJ Order"), granting in part summary judgment in favor of ERS and denying Defendants' Motion in its entirety. See Financial Oversight & Mgmt. Bd. for P.R. v. Altair Glob. Credit Opportunities Fund (a), LLC, et al. (In re Fin. Oversight & Mgmt. Bd. for P.R. ), 590 B.R. 577 (D.P.R. 2018). The Court based its decision principally on the finding that Defendants did not possess a perfected security interest in any of the Pledged Property as defined in the Resolution. On appeal, the United States Court of Appeals for the First Circuit reversed and vacated this Court's determination regarding perfection, holding instead that Defendants had "satisfied the filing requirements for perfection as of December 17, 2015," and remanded for further proceedings two of Defendants' counterclaims that had not yet been addressed in light of the previous disposition. Altair Glob. Credit Opportunities Fund (a), LLC v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 914 F.3d 694, 703 (1st Cir. 2019).

Following remand, the parties jointly requested that the Court determine an issue encompassed by Count III of the Complaint and Counterclaims II and III of the Answer that had been briefed by the parties in connection with their cross-motions for summary judgment but was not addressed by the Court in its MSJ Order.⁴

This issue, defined by the parties as the "Section 552 Issue," concerns the "applicability of Section 552(a) of the Bankruptcy Code and whether it prevented any security interest from attaching to revenues received by ERS during the postpetition period" and is now ripe for adjudication. (Docket Entry No. 247, Joint Informative Motion Regarding Recommended Procedure Concerning Filing of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico's Amended Complaint and Adjudication of Undecided Issue (the "Joint Informative Motion"), at ¶ 3.) The parties agreed on the portion of the prior record upon which the Section 552 Issue should be determined, enumerating relevant materials in Exhibit B to the Joint Informative Motion.

The Court has considered carefully all of the arguments and submissions cited by the parties in connection with the Section 552 Issue. For the following reasons, summary judgment is granted in favor of ERS and denied in favor of Defendants with respect to Count III of the Complaint and Counterclaims II and III of the Answer.

I. BACKGROUND

The following facts are undisputed unless otherwise indicated.⁵ The Court found the following facts to be undisputed in its MSJ Order:

On May 15, 1951, the legislature of the Commonwealth of Puerto Rico (the "Commonwealth" or "Puerto Rico") enacted Act No. 447-1951 (codified, as amended, at 3 L.P.R.A. §§ 761 – 788, the "Enabling Act"). (Pl.'s 56(b) ¶ 1; Defs.' 56(b) ¶ 10.) The Enabling Act established ERS to administer the payment of pensions and certain other benefits for the retired employees of the Commonwealth, certain public corporations in Puerto Rico, and certain municipalities. See 3 L.P.R.A. § 761 (2016). As originally codified, the official English-language version of the Enabling Act denominated the retirement and benefits system as the "Employees Retirement System of the Insular Government of Puerto Rico and its Instrumentalities." (Docket Entry No. 92, the "Possinger Declaration," Ex. 1.)⁶

The Enabling Act provides that ERS may both issue debt and secure such debt with the assets of ERS. On January 24, 2008, ERS issued senior and subordinate pension funding bonds (collectively, the "ERS Bonds") pursuant to a Pension Funding Bond Resolution (Compl., Ex. D, the "Resolution"). (Pl.'s 56(b) ¶ 4; Defs.' 56(b) ¶ 22.) Pursuant to the Resolution, the holders of the ERS Bonds (the "ERS Bondholders" or "Bondholders") were granted a security interest in certain "Pledged Property." Specifically, Pledged Property is defined in the Resolution to include the following:

1. All Revenues.

2. All right, title and interest of the System in and to Revenues, and all rights to receive the same.

3. The Funds, Accounts, and Subaccounts held by the Fiscal Agent, and moneys and securities and, in the case of the Debt Service Reserve Account,

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