In re Financial Oversight and Management Board for Puerto Rico

The Employees Retirement System of the Government of the Commonwealth of Puerto Rico (the system) (plaintiff) was a pension system for government employees. The system’s board of trustees passed a resolution to issue $2.9 million in secured bonds. The resolution also stated that the bonds would be secured by certain future employer contributions and other revenues, collectively defined in the resolution as “Pledged Property.” In accordance with the resolution, the system created a security agreement for the bonds. The security agreement identified the collateral only as the pledged property defined in the resolution. The security agreement did not provide any information directly describing the collateral, attach the resolution, or state where the resolution could be found. The system then filed two UCC-1 financing statements with the Puerto Rico Department of State to perfect the bond purchasers’ security interests in the pledged property. These financing statements described the collateral only as the “pledged property described in the Security Agreement.” The security agreement was attached to the financing statements, but the resolution was not. A dispute arose between the system and some bondholders (defendants) about whether the bondholders’ security interests in the pledged property had been properly perfected. Through a government management board, the system sued in federal court for a declaration that the bondholders’ security interests were unperfected and avoidable. The district court granted summary judgment to the system, holding that the financing statements had not perfected the bondholders’ interests because they failed to adequately describe the collateral. The bondholders appealed.