Fin. Oversight & Mgmt. Bd. for Puerto Rico v. Fin. Oversight & Mgmt. Bd. for Puerto Rico (In re Fin. Oversight & Mgmt. Bd. for Puerto Rico), Case No. 17-3283 (LTS)

617 B.R. 397

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

In re: 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, Debtor.

Cooperativa De Ahorro Y Crédito Vegabajeña, Plaintiff,

v.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, Defendant.

Case No. 17-3283 (LTS)

Case No. 17-3566 (LTS)

Adv. Proc. No. 19-00028 (LTS)

United States District Court, D. Puerto Rico.

Signed March 27, 2020

CARLOS A. QUILICHINI PAZ, JESSICA M. QUILICHINI ORTIZ, P.O Box 9020895, San Juan, PR 00901, Attorneys for Plaintiff Cooperativa de Ahorro y Crédito Vegabajeña

O'NEILL & BORGES LLC By: Hermann D. Bauer, Ubaldo M. Fernández, 250 Muñoz Rivera Ave., Suite 800, San Juan, PR 00918-1813, PROSKAUER ROSE LLP By: Martin J. Bienenstock, Stephen L. Ratner, Timothy W. Mungovan, Paul V. Possinger, Eleven Times Square, New York, NY 10036 and Michael A. Firestein, Jennifer L. Roche, 2029 Century Park East Suit 2400, Los Angeles, CA 90067-3010, Attorneys for the Financial Oversight and Management Board for Puerto Rico, as representative for Employees Retirement System of the Government of the Commonwealth of Puerto Rico

PROMESA

Title III

OPINION AND ORDER DENYING MOTION TO DISMISS PLAINTIFF'S COMPLAINT PURSUANT TO FED. R. CIV. P. 12 (B)(1) AND 12(B)(6) AND STAYING ADVERSARY PROCEEDING

LAURA TAYLOR SWAIN, United States District Judge

Before the Court is the Motion to Dismiss Plaintiff's Complaint Pursuant to Fed. R. Civ. P. 12(b)(1) and (6) (Docket Entry No. 11 in Adversary Proceeding No. 19-00028,² the "Motion") filed by the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board"), on its own behalf and as representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico ("ERS" or the "System"). The Motion seeks dismissal of the Adversary Complaint (Docket Entry No. 1, the "Complaint") filed by Plaintiff Cooperativa de Ahorro y Crédito Vegabajeña ("Cooperativa"). As explained below, the Court has subject matter jurisdiction of this action pursuant to 48 U.S.C. § 2166. The Court has considered carefully all of the submissions made in connection with the Motion³ and, for the following reasons, the Motion is denied. Nevertheless, in light of the recent filing of the Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al. (Docket Entry No. 11946 in Case No. 17-3283, the "Amended Plan"), the pendency of a schedule for consideration of the Disclosure Statement for the Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al. (Docket Entry No. 11947 in Case No. 17-3283, the "Disclosure Statement") and proceedings directed to consideration of confirmation of the Amended Plan, and the likelihood that certain issues that have been raised in this adversary proceeding can be resolved through proceedings in connection with the Amended Plan, this adversary proceeding is stayed pending the Court's decision regarding confirmation of the Amended Plan.

I. BACKGROUND

The following recitation of facts is drawn from the Complaint, except where otherwise indicated.

A. Statutory Framework

On May 15, 1951, the Legislative Assembly of Puerto Rico (the "Legislative Assembly") enacted Act No. 447-1951 (codified, as amended, at 3 L.P.R.A. §§ 761 - 788, the "Enabling Act"),⁴ which established ERS as a trust to administer pensions and certain other benefits for retired employees of the Commonwealth, certain public corporations in Puerto Rico, and certain municipalities. 3 L.P.R.A. § 761 ; (Compl. ¶ 2). On September 18, 2011, the Legislative Assembly amended the Enabling Act through the enactment of Act No. 196-2011 ("Act No. 196"). (Compl. ¶ 8.) Act No. 196 provides, in pertinent part, that

the amounts credited to a member of the System through contributions made through wage or salary withholdings, including interest, and pursuant to the provisions of §§ 761 - 788 of this title or the provisions of any law regarding superseded pension funds, may be pledged by the participant as collateral for any loan requested by him/her from any fund, association, public enterprise, or any other lending agency created ... by the Cooperative Bank of Puerto Rico or a savings and credit union to offer loans to members and non-members. The participant may pledge up to sixty-five percent (65%) of his/her contributions or twenty-five thousand dollars ($25,000) thereof, whichever is less ....

Id. § 785 (emphasis supplied). Act No. 196 also provides that "[p]ersonal loans originated or acquired by ... savings and credit unions of the Cooperative Bank of Puerto Rico up to the limit provided in [ 3 L.P.R.A. § 785 ], and personal, mortgage, and cultural loans originated by the System shall be secured, with priority over any other debt, by the contributions made and those subsequently accrued in the System [.]" Id. § 785a (emphasis supplied). In the event of a default on such loans, Act No. 196 provides that, after notice to a borrower (sometimes referred to herein as an "employee-borrower") and a thirty-day grace period, "the individual contributions of the participants, or the balance in their savings account shall be garnished and, whichever may be the case, applied to the debt." Id. "[T]he application, garnishment, and payment to the Cooperative Bank ... or the savings and credit unions shall be carried out by the Administrator [of ERS] within sixty days" of the bank's request, which must be accompanied by a certification that thirty days have elapsed since the employee-borrower was initially notified of his or her default. Id.

On August 23, 2017, in light of ERS's then-impending insolvency, the Legislative Assembly further amended the Enabling Act through the enactment of Act No. 106-2017 ("Act No. 106"). (See Compl. ¶ 15.) Act No. 106 required the Commonwealth to assume ERS's obligations to pay public pensions and contemporaneously eliminated employer and similar contributions to ERS. See Act No. 106, § 1.3.⁵ To implement this "pay-as-you-go" system for funding pension costs, Act No. 106 directs ERS to liquidate its assets and contribute the proceeds therefrom and any other available funds to the Commonwealth. Id. § 1.4. Nonetheless, Act No. 106 expressly provides that all loan programs of any nature that ERS may have had in place at the time that Act No. 106 came into force "shall be governed by the laws under which they were granted." Id. § 7.6.

B. Loans Granted by Cooperativa Under Act No. 196

Cooperativa, a financial credit union located in Vega Baja, Puerto Rico, is one of numerous financial institutions that extended loans under the program established by Act No. 196. (Compl. ¶¶ 1, 8.) Specifically, Cooperativa entered into loan agreements with various participants of ERS, each of whom agreed to pledge up to the lesser of "65% or $25,000 of his or her ERS contributions" as collateral for the loans, assigning those individual contributions to the lender. (Id. ¶¶ 9, 10.) Cooperativa further alleges that, to document these pledges, participating borrowers and ERS executed "Assignment Agreement[s] for Pensioners" (Compl., Ex. A) and/or "Assignment Agreement[s] for Participants" (id., Ex. B) (the "Assignment Agreements"), as well as "Certificate[s] of Estoppel and Recognition of Notification of Assignment of Funds" ("Certificates of Estoppel") that were annexed to the Assignment Agreements. (Compl. ¶ 9.)

The "Assignment Agreement for Pensioners" form annexed to the Complaint provides that the borrower (referred to in the Assignment Agreements and Certificates of Estoppel as the "Debtor") "assigns and grants to" the bank creditor (referred to in the Assignment Agreements and Certificates of Estoppel as the "Creditor") as loan collateral a "contingent lien of $_____... , the amount of which does not exceed TWENTY FIVE PERCENT (25%) of the pension or benefit they receive from the System, (the ‘Product of the Annuities’)." (Compl., Ex. A at 1-2.) Subdivision (e) of the "Representations and Guarantees" section recites that "this Agreement creates a valid lien in favor of the Creditor in relation to the pension/benefits of the Debtor to the System." (Id. at 3.) Subdivision (h) of that section provides that "[t]he Loan ... shall be guaranteed ... by the Annuities and those that are subsequently accumulated with the System, the pension, benefit or reimbursement, which exceeds the Annuities assigned by the Debtor .... The Debtor will guarantee the loan with [his or her] retirement annuity." (Id. ) An attached "Notification of Assignment" form letter addressed to the administration of ERS is captioned "Notification of Assignment of the Product of Annuities of _____ in the Government Employees and Judiciary Retirement System Administration" and informs the administration that it is "hereby notified that under the terms and provisions of the ASSIGNMENT AGREEMENT between ... [the Debtor] and ... [the Creditor] ... the undersigned accepts and agrees that the amounts [he or she] receive[s] by way of Annuities from ... [the System] have been assigned up to TWENTY FIVE PERCENT (25%), equivalent to $ ____in guarantee of a loan as collateral to the Creditor." (Id. at 8.) The following paragraph is a proviso to the foregoing provisions: "Provided, however, that the Annuities shall continue to be credited to the Debtor, until they receive written notification from the Creditor ... , with instructions to the contrary." (Id. )

A "Certificate of Estoppel and Recognition of Notification of Assignment of the Product of Annuities" constitutes a second attachment to the Assignment Agreement for Pensioners. (See id. at 9.) The Certificate of Estoppel form provides that the administration of...