914 F.3d 694
1st Cir.2019Background
- In 2008 the Employees Retirement System (the System) issued bonds secured by "Pledged Property" defined in a Pension Funding Bond Resolution; Bondholders filed UCC financing statements in June/July 2008.
- The 2008 financing statements referenced Exhibit A (a Security Agreement) and, by reference, the Resolution for the collateral description, but did not attach the Resolution or otherwise describe collateral types in the filings.
- Revised Article 9 of Puerto Rico's UCC took effect in 2013 (English translation published 2014) and shortened initial financing-statement life from ten to five years; Bondholders filed financing-statement amendments in December 2015/January 2016 attaching an Exhibit A that fully defined "Pledged Property."
- The System (through PROMESA's Oversight Board) sued for declaratory relief in July 2017; district court granted summary judgment for the System, holding the 2008 statements failed to describe collateral and the 2015–16 amendments used an incorrect English name of the System and thus did not perfect.
- On appeal, the First Circuit held the 2008 filings alone were insufficient, but the 2015–16 amendments—read with the 2008 filings—cured the defects and perfected the security interest as of December 17, 2015; the court reversed the district court's avoidance ruling under PROMESA and remanded on two counterclaims, but affirmed dismissal of the January 2017 stipulation claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were the 2008 financing statements sufficient to perfect the security interest? | Bondholders: reference to Security Agreement/Resolution sufficed by incorporation. | System: financing statements must themselves describe collateral or attach the description to provide public notice. | Held: 2008 filings insufficient—no description of collateral, Resolution not attached or located at filing office. |
| Did the 2008 financing statements lapse before the 2015–16 amendments (so amendments could not cure defects)? | System: revised Article 9 shortened term to 5 years, so 2008 statements lapsed. | Bondholders: transition/savings rules and practice preserve 10-year term for pre-2014 filings. | Held: 10-year rule applied to 2008 filings; they had not lapsed when amended. |
| Could the 2015–16 financing-statement amendments, read with the 2008 filings, satisfy Article 9 perfection requirements? | Bondholders: amendments attached Exhibit A with full collateral description and used a searchable debtor name; together they cure defects. | System: amendments used an incorrect English name ("Retirement System for Employees..."), so they failed name requirement. | Held: Amendments provided adequate collateral description and used an acceptable debtor name ("Employees Retirement System of the Government of the Commonwealth of Puerto Rico"); perfection achieved Dec. 17, 2015. |
| Could the Oversight Board avoid the liens under PROMESA (incorporating Bankruptcy Code §544) if the interest was unperfected? | System/Oversight Board: if unperfected at Title III commencement, strong-arm power allows avoidance. | Bondholders: if perfected pre-PROMESA, avoidance is unavailable. | Held: Because interest was perfected before PROMESA, court did not decide whether PROMESA permits retroactive avoidance and vacated district court avoidance ruling. |
Key Cases Cited
- Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (U.S. 2018) (explains trustee's "strong-arm" avoidance principles under § 544)
- Colt Def. LLC v. Bushmaster Firearms, Inc., 486 F.3d 701 (1st Cir. 2007) (standard of review on summary judgment)
- In re Montreal, Me. & Atl. Ry., Ltd., 799 F.3d 1 (1st Cir. 2015) (Article 9 notice/perfection goals)
- Webb Co. v. First City Bank (In re Softalk Publ'g Co., Inc.), 856 F.2d 1328 (9th Cir. 1988) (distinguishing private security agreements from public notice function of financing statements)
- Uniroyal, Inc. v. Universal Tire & Auto Supply Co., 557 F.2d 22 (1st Cir. 1977) (UCC filing requirements are clear; notice purpose)
- Gen. Elec. Credit Corp. v. Nardulli & Sons, Inc., 836 F.2d 184 (3d Cir. 1988) (perfected security interest takes priority over trustee/hypothetical lien creditor)