IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

In re: )

)

THE FINANCIAL OVERSIGHT AND )

MANAGEMENT BOARD FOR PUERTO RICO, ) PROMESA

as representative of ) Title III

)

THE COMMONWEALTH OF PUERTO RICO )

et al., ) Case No. 3:17-03283

Debtors1 ) (LTS)

------------------------------------------------------------------------)

In re: )

)

THE FINANCIAL OVERSIGHT AND ) PROMESA

MANAGEMENT BOARD FOR PUERTO RICO, ) Title III

as representative of )

) Case No. 3:17-03566 

THE EMPLOYEES RETIREMENT SYSTEM OF ) (LTS)

THE GOVERNMENT OF THE )

COMMONWEALTH OF PUERTO RICO, )

)

Debtor. )

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - )

COOPERATIVA DE AHORRO Y CRÉDITO VEGABAJEÑA’S REPLY

TO OBJECTION OF THE EMPLOYEE RETIREMENT SYSTEM OF THE 

GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO TO 

MOTION FOR LIFT OF STAY

 

1 The Debtors in this Title III case are: (i) The Commonwealth of Puerto Rico 

(Bankr. Case No. 17-bk-3283-LTS); (ii) The Employees Retirement System of the Govt. of 

the Commonwealth of Puerto Rico (Bankr. Case No. 17-bk-3566-LTS); (iii) Puerto Rico 

Sales Tax Financing Corporation (Bankr. Case No. 17-bk-3284-LTS); (iv) Puerto Rico 

Highways and Transportation Authority (Bankr.Case No. 17-bk-3567-LTS); and (v) 

Puerto Rico Electric Power Authority (Bankr. Case No. 17-bk-4780-LTS). 

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TABLE OF CONTENTS

PAGE

TABLE OF AUTHORITIES .......................................................................................................... 3

INTRODUCTION .......................................................................................................................... 4

ARGUMENT.................................................................................................................................. 5

I. THE STATUTORY BASIS OF COOPERATIVA'S LIEN INTEREST ............................ 5

II. COOPERATIVA'S MOTION FOR RELIEF OF THE AUTOMATIC 

STAY SHOULD BE GRANTED UNDER IN RE SONNAX INDUS.,

INC., 907 F.2nd 1280 (2nd CIR. 1990) ...................................................................................... 9

CONCLUSION............................................................................................................................. 13

NOTICE OF SERVICE ................................................................................................................ 13

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TABLE OF AUTHORITIES

Cases PAGE

In re Builders Group & Dev. Corp., 502 B.R. 95 (2013)................................................................. 11

In re Sonnax Indus., Inc., 907 F.2d 1280 (2nd Cir. 1990) ......................................... 9, 10, 11, 12

Pepper v. Litton, 306 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939) ................................................ 11

Rivera-Flores v. Puerto Rico Telephone Co., 64 F.3d 742 (1st Cir. 1995) .................................... 10

U.S. v. Puerto Rico, 287 F.3d 212 (1st Cir. 2002) ....................................................................... 10

Statutes

11 U.S.C. § 362 ...................................................................................................................... 4, 5, 9

48 U.S.C. § 2161 ...................................................................................................................... 4, 10

Other Authorities

2011 L.P.R. 196.............................................................................................................. 5, 6, 7, 8, 9

P.R. Act 106-2017.......................................................................................................... 5, 9, 10, 12

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TO THE HONORABLE COURT:

 Comes Now secured creditor Cooperativa de Ahorro y Crédito Vegabajeña 

("Cooperativa"), represented by its undersigned attorneys, and respectfully states, 

alleges, and prays the following:

INTRODUCTION

Cooperativa, a secured creditor of Debtor Employees Retirement System of the 

Government of the Commonwealth of Puerto Rico ("ERS"), served its Lift Stay Notice on 

August 15, 2018 pursuant to Section III.Q of the Sixth Amended Notice, Case Management 

and Administrative Procedures (ECF 3804-1) to counsel for the Financial Oversight and 

Management Board for Puerto Rico, as representative of the Debtors, and to counsel for 

the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF"). On 

September 12, 2018, AAFAF's counsel notified its disagreement with Cooperativa's 

proposed modification of the automatic stay. 

Thereafter, on October 4, 2018, Cooperativa filed its Motion for Lift of Stay Seeking 

the Modification of the Automatic Stay to Enforce Liens on Employee Withholding Funds 

Currently Held by the Employee Retirement System of the Government of the 

Commonwealth of Puerto Rico. (ECF No. 4011) On October 25, 2018, ERS filed its 

Objection. (ECF No. 4098). Cooperativa files this Reply to ERS's Objection and for each of 

the reasons stated, respectfully moves for relief from the automatic stay imposed 

pursuant to Title III of the Puerto Rico Oversight, Management, and Economic Stability 

Act ("PROMESA"), see 48 U.S.C. § 2161(a) (incorporating 11 U.S.C. § 362) in both Case No. 

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3:17-bk-03283 and Case No. 3:17-bk-03566. As additional support of the Motion, 

Cooperativa states as follows: 

1. Pursuant to 11 U.S.C. §362(d) and 2011 L.P.R. 196, Cooperativa seeks relief 

from the automatic stay to enforce its statutory lien interests in individual employee 

retirement pension accounts funds established pre-petition and prior to the enactment of 

P.R. Act 106-2017. 

2. Cooperativa's Motion for Lift of Stay (ECF No. 4011) requests that the 

automatic stay imposed in both Case No. 3:17-03283 and in Case No. 3:17-03566, be 

modified and lifted for the limited purpose of allowing it to seek to enforce its statutory 

lienhold interest on the individual employee funds currently held by ERS at this time in 

Puerto Rico state court, but assigned prepetition to Cooperativa by the individual 

borrowers. 

3. ERS's Objection misrepresents the actual property interests Cooperativa 

seeks to enforce, which property belongs to individual borrowers and was duly assigned 

to Cooperativa. The Objection also ignores Cooperativa's statutory right to the property 

it seeks to pursue in state court. Further, ERS's Objection misrepresents the impact, which 

is nonexistent, that Cooperativa's state court action will have on the Title III bankruptcy 

case because Cooperativa is not seeking to recover any property of the Debtor. 

ARGUMENT

I. THE STATUTORY BASIS OF COOPERATIVA'S LIEN INTEREST

4. ERS's Objection misrepresents Cooperativa's secured interest and the reasons 

why Cooperativa seeks relief from the automatic stay. Because Cooperativa's lien 

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interests do not attach to Title III estate property, if granted, Cooperativa's relief from the 

automatic stay will not interfere with the Title III bankruptcy case or prejudice other 

creditors seeking their portion of estate property.

5. Cooperativa's status as a secured creditor arises from state law enacted in 

2011, 2011 L.P.R. 196, which allowed credit unions, such as Cooperativa, to enter into 

individual loan agreements with ERS participants who were either officers or employees 

of the Puerto Rico government; members or employees of the Puerto Rico legislature; or 

officers or employees of public corporations and municipalities of Puerto Rico. Each loan 

agreement at issue in this proceeding was entered into after 2011, and before the 2017 

filing of the Title III case. Copy of a duly certified English translation of Act 2011 L.P.R. 

196, is attached hereto as Exhibit A.

6. 2011 L.P.R. 196 substantially modified an earlier state statute. It was 

enacted for the purpose of encouraging credit unions and other financial institutions to 

make loans to individual borrowers during a time of prolonged economic downturn in 

Puerto Rico. The statute was intended to stimulate local economies by creating a more 

favorable environment for both lenders and borrowers to enter into loan agreements. 

Under the statute, participants of the ERS who entered into loan agreements with a credit 

union, or other financial institution, could assign up to 65% of his or her contributions to 

the ERS or $25,000, whichever is less, as collateral for a loan granted by the credit union. 

7. Cooperativa participated in the loan program offered under 2011 L.P.R. 196.

To be eligible for loans, individual borrowers of Cooperativa, who were also participants 

in the ERS, agreed to pledge a portion of their retirement funds to Cooperativa to secure 

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the loan agreement. These retirement funds were salary deductions diverted directly into 

the participant's retirement account. Years before the Title III bankruptcy filing, ERS 

agreed to the assignment of individual salary contributions to be used as collateral for 

individual loan agreements. See: Exhibits A and B. 

8. Section 4-110 of 2011 P.R. 1962, established that Cooperativa held a statutory 

lien on the pledged retirement funds in each individual loan. This lien, which ERS 

approved, allows Cooperativa to collect the pledged funds from the ERS if the individual 

borrower defaults and is duly notified of default. Again, the ERS was duly notified and 

agreed to the individual Commonwealth employee and/or retiree assignment of salary 

 

2 Art, 4-110, inter alia, states: “...Section – 4-110.- Loan Collections and Administration; Credit 

Priority.- The Administrator is hereby empowered to collect, from any amount a participant is entitled to 

receive as a final liquidation for accrued regular vacation or sick leave owed by the agency, entity, or 

department in which he/she worked, or from the savings liquidation that the Puerto Rico Government 

Employee Association must make, or from the contributions or interest accrued on the System, any amount 

owed for personal, cultural, or mortgage loans, or loans originated as provided in Section 2-119 of this Act, 

by said participant when he/she permanently ceases or separates from service. Debts owed to the System 

on account of personal, cultural, or mortgage loans, or loans originated or acquired by a Savings and Credit 

Union or the Cooperative Bank of Puerto Rico, as provided in Section 2-119 of this Act, shall have priority 

over any other debt of the participant. The Administrator shall determine the manner and conditions under 

which such loan amounts and any interest accrued thereon, with respect to the loans of the System, shall 

be collected.

Personal loans originated or acquired by a Savings and Credit Unions of the Cooperative Bank of 

Puerto Rico up to the limit provided in Section 2-119 of this Act, 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, the pension, benefit, or reimbursement exceeding the 

contributions designated by the participant or pensioner pursuant to Sections 2-119 and 4-106, and in the 

amount that, in case of death of the participant or pensioner, may correspond to his/her estate or any 

beneficiary as designated by him/her according to the provisions of Sections 4-105 to 4-108 of this Act. The 

statutory lien created in this Section 4-110 shall remain in full force and effect in the event that mortgage 

or personal loans are transferred by the Administrator to third parties pursuant to Section 4-106 of this 

Act. Such contributions and amounts may be applied by the Administrator to the repayment of any debt 

owed on account of any loan that the participant or pensioner may have with the System, Savings and 

Credit Unions or the cooperative Bank of Puerto Rico upon their request. Pensioners shall pledge their 

pension annuities to secure their loans with the same priority that participants pledge their contributions, 

benefits, or reimbursements. The priority among the debts owed by participants or pensioners to the 

System, Savings and Credit Unions, and the Cooperative Bank of Puerto Rico shall be determined based 

on the date on which such loans where granted...”. (Emphasis is ours).

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contributions to the ERS pension plan. With respect to each guaranteed loan, the ERS 

together with and as an attachment to the Assignment Agreement for Pensioners and/or 

Assignment Agreement for Participants, executed a Certificate of Estoppel and Recognition of 

Notification of Assignment of Funds. See Exhibits B and C. Debtor’s surprising assertion 

that “...no individual retirement accounts were ever established at ERS...”, (see: Objection at 

paragraph 10, footnote number 5), simply stated, is unfounded. Not only it is contrary to

the clear statutory language of 2011 L.P.R. 196, Sections 2-119 and 4-110, but inapposite 

to ERS’s contractual obligations under the Assignment Agreement for Pensioners and/or 

Assignment Agreement for Participants, executed a Certificate of Estoppel and Recognition of 

Notification of Assignment of Funds. See Exhibits B and C. “...The statutory lien created 

in this Section 4-110 shall remain in full force and effect in the event that mortgage or 

personal loans are transferred by the Administrator to third parties pursuant to Section 

4-106 of this Act.... The priority among the debts owed by participants or pensioners 

to the System, Savings and Credit Unions, and the Cooperative Bank of Puerto Rico 

shall be determined based on the date on which such loans where granted...”. 

(Emphasis is ours).

9. Prior to the filing of the Title III bankruptcy case, the borrowers connected 

with Cooperativa's 37 claims in the Title III case defaulted on their loans and were duly 

notified of their default status. In most cases, as demonstrated by the list of claims, 

attached hereto as Exhibit D, these borrowers sought bankruptcy protection after their 

default. During the bankruptcy proceedings, the bankruptcy court approved the 

individual debtor's assignment of their property interest in their existing ERS retirement 

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account to Cooperativa. These assigned funds, therefore, are not ERS property as of the 

date of the Title III bankruptcy filing. 

10. Contrary to ERS's Objections, Cooperativa is now seeking to enforce only 

its lien interests in the defaulted individual borrowers ERS monies, which statutory lien 

ERS approved of, and which assignment of property was later approved by the 

bankruptcy court. 

II. COOPERATIVA'S MOTION FOR RELIEF OF THE AUTOMATIC 

STAY SHOULD BE GRANTED UNDER IN RE SONNAX INDUS.,

INC., 907 F.2nd 1280 (2nd CIR. 1990)

11. ERS's objections under the In re Sonnax Indus., Inc., 907 F.2d 1280 (2nd Cir. 

1990), factors applied by courts to determine cause to lift the automatic stay under 11 

U.S.C. §362(c) are also flawed for the following reasons: 

12. First, contrary to ERS's objection, P.R. Act 106-2017, enacted August 23, 

2017, the statute which now precludes government employees from making 

contributions to ERS or to receive retirement benefits, is not applicable to Cooperativa's 

motion for relief from the automatic stay and does not bar relief in any way. As explained 

above, Cooperativa's lien interest in a portion of the individual borrowers' retirement 

funds attached before the enactment of Act 106-2017. 

13. Further, the 2017 law has no retroactive effect. In fact, Art. 7.6 of the law 

specifically states that all loans that the Retirement Systems had already granted and 

approved prior to the date of the law "...shall be administered in accordance with the statutes 

under which they were granted." (Translation is ours). This includes loans previously 

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issued in accordance with Law 196-2011. Further, Art. 3.06 of P.R. Act. 106-2017 states 

that "...[p]articipants of the New Defined Contributions Plan shall have ergo omnes property 

rights over the balances in their Defined Contributions account." (Translation is ours). Art. 7.6 

plainly states that all prior loans—including the ones Cooperativa seeks to enforce at this 

time—must be administered under the statute that granted them, and not by P.R. Act. 

106-2017. 

14. It is axiomatic that a legal presumption exists that a statute may not be applied 

retroactively unless the statute expressly so states. Rivera-Flores v. Puerto Rico Telephone 

Co., 64 F.3d 742 (1st Cir. 1995). See also: U.S. v. Puerto Rico, 287 F.3d 212 (1st Cir. 2002). In 

this case, P.R. Act 106-2017 specifically states that it has no retroactive effect as to the loans 

at issue here. Therefore, ERS's objection that "...movant's borrowers have no present rights 

against ERS", (See: Objection at paragraph 10), is erroneous under the specific circumstances 

of the borrowers' loans with Cooperativa. Cooperativa is seeking to enforce existing, pre2017 loans with enforceable statutory liens on collateral securing loans it executed with 

borrowers and duly acknowledged by the ERS.

15. Second, cause exists to grant relief from the automatic stay under the second 

Sonnax factor, for the narrow purpose of enforcing its statutory lien interest because 

Cooperativa's proposed state court action will not interfere with the Title III centralized 

claims process in any way. This is because Cooperativa's lien interests are attached to 

property which individual borrower previously assigned to Cooperativa and which are 

not, therefore, part of ERS's Title III bankruptcy estate. Furthermore, for this same reason, 

ERS erroneously mischaracterizes Cooperativa's proposed state court lien enforcement 

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claims. Contrary to ERS's claim, the state court lien enforcement claims will not burden ERS 

with defending numerous lawsuits in various forums. Under PROMESA, 48 U.S.C. § 

2161(c)(5), "property of the estate" means, as it does under Title 11, property of the debtor. 

The collateral Cooperativa seeks in its proposed state lawsuits is property of the individual 

borrowers, not ERS property. The collateral is only held by the ERS. 

16. Again, the individual borrowers pledged a portion of the ERS retirement 

funds at the time the loans were executed. Later, while in bankruptcy, the court approved 

the assignment of this property by the individual borrowers to Cooperativa. It would be 

grossly inequitable and unjust for this Court to ignore the controlling state law which 

governs these individual loans and the court approved assignment of the retirement funds 

to Cooperativa. Congress did not preempt the pre-Title III governing statutes and none can 

be inferred. See: In re Builders Group & Dev. Corp., 502 B.R. 95 (2013). This Court is bound 

to apply this rule and other rules of equity jurisprudence to ensure that manifest justice is 

done. Pepper v. Litton, 306 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939). 

17. Third, cause exists for Cooperativa to be relieved from the automatic stay 

under the sixth Sonnax factor. That is, contrary to ERS's misrepresentations or its 

confusion about the nature of Cooperativa's proposed state court lien-enforcement 

action, Cooperativa is seeking to enforce its statutory lien interest in certain borrower's 

retirement funds, its rights arise under state law and are not "...completely derivative of 

[each] borrower." (See: Objection at paragraph 10). Furthermore, ERS, the debtor, is not the 

main party to the proposed state court litigation. 

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18. Fourth, cause exists for Cooperativa to be relieved from the automatic stay 

under the seventh Sonnax factor because, as stated above, the statutory liens Cooperativa 

seeks to enforce are attached to property currently held by ERS, but are not the Debtor's 

property. Thus, contrary to ERS's misstatements, granting Cooperativa relief from the 

automatic stay will not drain ERS's resources or result in protracted litigation. As 

explained above, under 2011 L.P.R. 196, the collateral securing the loan agreements 

between Cooperativa and the individual borrowers is property belonging to the 

individual borrowers—a certain percentage of their pre-2017 salary contributions to their 

ERS retirement account—and not to ERS. The "Pay-Go" law referenced in ERS's objection 

is also not applicable to Cooperativa's proposed state lien enforcement actions. 

19. Fifth, cause exists for Cooperativa to be relieved from the automatic stay 

under the tenth and eleventh Sonnax factors because the interests of judicial economy and 

efficiency support Cooperativa's motion. The distinction raised in ERS's objection that 

Cooperativa seeks to initiate suit in state court, rather than complete pending lawsuits is 

not material. Because the collateral Cooperativa seeks to recover by enforcing its 

statutory liens is not part of the bankruptcy estate, it is extremely beneficial to the 

bankruptcy court to allow Cooperativa's 37 claims to be resolved directly and efficiently 

in state court.

20. Finally, cause exists for Cooperativa to be relieved from the automatic stay 

because the Sonnax balance-of-harm factor weighs heavily in favor of Cooperativa's 

motion. Because Cooperativa's proposed state court action does not involve ERS's 

property, the state claim will not have a detrimental impact on the debtor. If Cooperativa 

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is required to hold off on pursuing and enforcing its statutory liens on loans which have 

been in default for years and where the bankruptcy court has already assigned the 

individual borrower's property interest to Cooperativa, until the Title III bankruptcy case 

is dismissed, Cooperativa will be greatly and unnecessarily harmed. Contrary to ERS's 

assertions, postponing the liquidation of Cooperativa's claims is not a hardship shared 

with other creditors, because the collateral Cooperativa seeks to liquidate was previously 

assigned to Cooperativa pre-petition, and is not property of the ERS. Under the specific 

circumstances of Cooperativa's secured status and its proposed state court actions, the 

balance of harm weighs in favor of granting Cooperativa's motion for relief from the 

automatic stay for cause at this time. 

CONCLUSION

For each of the reasons stated herein, Cooperativa de Ahorro y Crédito Vegabajeña

respectfully requests this Court to grant its Motion for Lift of Stay and for whatever 

further relief this Court deems just and proper at this time.

Respectfully submitted.

NOTICE OF SERVICE

I certify that on this date I filed a true and correct copy of the foregoing 

Cooperativa de Ahorro y Crédito Vegabajeña’s Reply to Objection of the ERS of the 

Government of the Commonwealth of P.R. to Motion to Lift Stay, with the Clerk of the 

Court using the CM/ECF system, which will send notification of such filing to all 

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CM/ECF participants: Hermann Bauer, Esq., Hermann.Bauer@oneillborges.com; Ubaldo 

M. Fernández Barrera, Esq., ubaldo.fernandez@oneillborges.com; counsel to The 

Financial Oversight & Management Board For Puerto Rico; Diana M. Pérez, Esq,

dperez@omm.com; Luis C. Marini Biaggi, Esq., lmarini@mpmlawpr.com; Carolina 

Veraz-Rivero, Esq., cvelaz@mpmlawpr.com; counsel to the Puerto Rico Fiscal Agency 

and Financial Advisory Authority; and by USPS to the U.S. Trustee.

In San Juan, P.R, this 1st day of November 2018.

 /s/ Carlos A. Quilichini Paz

USDCPR 120906

Jessica M. Quilichini Ortíz

USDCPR 223803

Attorneys for Cooperativa de

Ahorro y Crédito Vegabajeña

Post Office Box 9020895

San Juan, Puerto Rico 00902-0895

Telephone: (787) 729-1720

Facsimile: (787) 724-6000

Email: quilichinipazc@microjuris.com

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