Avoiding Liens in Puerto Rico

Secured creditors should file UCC-1 financing statements. A proper UCC-1 must list both the name of the debtor and a description of the collateral. In a recent case before the First Circuit, both components in initial financing statements were insufficient to perfect the secured creditors’ interests. But in this litigation in the Puerto Rico bankruptcy case, the court held that the financing statement amendments were sufficient for perfection.^[1]

Avoiding Unperfected Security Interests

A bankruptcy trustee is a lien creditor.^[2] Compared to an unperfected secured creditor, a bankruptcy trustee has superior rights.^[3] Section 544 of the Bankruptcy Code provides that a bankruptcy trustee has the power to avoid an unperfected security interest.^[4] Thus, for a secured creditor to have superior rights to a bankruptcy trustee, that creditor must perfect its security interest before the debtor files for bankruptcy.

In 2016, Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).^[5] The law incorporated several provisions of the Bankruptcy Code, such as § 544, and PROMESA created the Oversight Board, which serves as the trustee.^[6] In 2017, the Oversight Board filed a bankruptcy petition under PROMESA for the Employees Retirement System of the Government of the Commonwealth of Puerto Rico (ERS).^[7] Shortly after entering bankruptcy, ERS brought a case against several bondholders.^[8] This case arose from the issuance of about $2.9 billion in bonds, which were issued by ERS under a “Pension Funding Bond Resolution.”^[9] The bondholders held some of those bonds, and ERS purported to grant a security interest in “pledged property” to the bondholders by executing a security agreement.^[10]

In this case, ERS sought declarations that the bondholders’ security interest was not perfected — and thus could be avoided.^[11] After ERS issued the bonds, two financing statements related to the bonds were filed with the Puerto Rico Department of State.^[12] But these financing statements failed to perfect the bondholders’ security interest because they lacked a sufficient description of collateral.^[13] The issue was whether financing statement amendments that were filed in 2015 and 2016, when read in conjunction with the 2008 financing statements, satisfied the filing requirements for perfection.^[14]

Name of the Debtor

To resolve the issue of perfection in this case, the court ruled in favor of the bondholders because it found that the financing statement amendments contained a sufficient description of the collateral and an appropriate name of the debtor.^[15] Because of amendments to Puerto Rico law, the latter issue required much more analysis than the former.

Under Article 9, the standard for the appropriate name of a debtor on a financing statement depends on whether the debtor is a registered organization or an individual.^[16] Here, ERS was a registered organization because it was formed by the 1951 Enabling Act, which was a legislative enactment of the Commonwealth of Puerto Rico.^[17] Thus, when ERS is the debtor, a financing statement is sufficient to perfect a security interest in ERS’s property only if the financing statement lists the following as the name of the debtor: “the name that is stated to be the registered organization’s name on the public organic record most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name.”^[18]

The principal point of contention was the difference between two names: Retirement System for Employees of the Government of the Commonwealth of Puerto Rico (RSE) and Employees Retirement System of the Government of the Commonwealth of Puerto Rico (ERS).^[19] First, the 2008 financing statements and the financing statement amendments used ERS as the name of the debtor.^[20] Second, from 1951 to 2014, the English translation of the Enabling Act used ERS as the registered organization’s name.^[21] The 2013 amendments to the Enabling Act were published in 2014, and they use both RSE and ERS as the name.^[22] In the section that describes how the registered organization will be designated, however, the 2013 amendments use the RSE name.^[23] Because of this section in the 2013 amendments, ERS argued that the financing statements were no longer effective because they listed ERS instead of RSE as the name of the debtor.^[24]

The court ruled against ERS, holding instead that ERS remained a valid name under the UCC when the financing statement amendments were filed.^[25] First, even though ERS is not listed in the “to be designated” clause of the 2013 amendments to the Enabling Act, the ERS name is used far more often (more than 35 times) than the RSE name (three times) throughout the codified Act.^[26] Second, no evidence suggests that the legislature in 2013 intended to change the name from ERS to RSE.^[27] Third, in its bankruptcy filing in 2017, and in court filings before and after the translation of the amended Enabling Act was published in 2014, the organization listed its name as ERS instead of RSE.^[28] In sum, a financing statement here would be sufficient if it listed “Employees Retirement System of the Government of the Commonwealth of Puerto Rico” as the debtor’s name.^[29]

Conclusion

Filing proper financing statements is essential to protect a secured creditor’s interest in personal property. When the debtor is a registered organization, the secured creditor must list the name of the debtor that is listed on the debtor’s most recently filed public organic record. This way, the secured creditor will perfect its interest and have superior rights in the collateral.