Hearing Date and Time: July 25, 2018 at 9:30 a.m. (AST)

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

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In re:

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO,

as representative of

THE COMMONWEALTH OF PUERTO RICO, et al.

Debtor.

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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.

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PROMESA

Title III

Case No. 3:17-bk-03283 (LTS)

PROMESA

Title III

Case No. 3:17-cv-01685 (LTS) 

Case No. 3:17-bk-03566 (LTS) 

--------------------------------------------------------------------- x

REPLY OF CERTAIN SECURED CREDITORS OF THE EMPLOYEES 

RETIREMENT SYSTEM OF THE GOVERNMENT OF THE 

COMMONWEALTH OF PUERTO RICO IN SUPPORT OF 

MOTION FOR RELIEF FROM THE AUTOMATIC STAY1

 1 Movants hereby reply to the objections filed by the (a) Financial Oversight and 

Management Board for Puerto Rico on behalf of ERS (Dkt. 292), which was joined by the 

American Federation of State, County and Municipal Employees (Dkt. 294) and the Official 

Committee of Unsecured Creditors (Dkt. 296); and (b) the Official Committee of Retired 

Employees of the Commonwealth of Puerto Rico (Dkt. 293), which was also joined by the 

American Federation of State, County and Municipal Employees (Dkt. 294) and the Official 

Committee of Unsecured Creditors (Dkt. 296).

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TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT ................................................................................................... 1

ARGUMENT................................................................................................................................. 2

I. Relief From The Automatic Stay Is Appropriate Where, As Here, Movants’ Claim 

Against ERS’s Property Is Far More Than Colorable ....................................................... 2

II. Movants’ Property Interests Are Not Adequately Protected ............................................. 8

III. Movants Are Entitled To A Prompt Hearing On The Motion To Lift The 

Automatic Stay................................................................................................................. 13

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TABLE OF AUTHORITIES

Page(s)

CASES

Estate Constr. Co. v. Miller & Smith Holding Co.,

14 F.3d 213 (4th Cir. 1994) .......................................................................................................2

Grella v. Salem Five Cent Sav. Bank,

42 F.3d 26 (1st Cir. 1994)..............................................................................................1, 2, 5, 6

In re Bailey,

574 B.R. 15 (Bankr. D. Me. 2017).............................................................................................7

In re Briggs Transp. Co.,

780 F.2d 1339 (8th Cir. 1985) ...................................................................................................1

In re Buehne Farms,

No. 04-32052, 2005 WL 2456867 (Bankr. S.D. Ill. Apr. 26, 2005)..........................................7

In re Calore Express Co.,

288 F.3d 22 (1st Cir. 2002)........................................................................................................5

In re Davenport,

34 B.R. 463 (Bankr. M.D. Fla. 1983) ........................................................................................5

In re Gellert,

55 B.R. 970 (Bankr. D.N.H. 1985)............................................................................................2

In re Hunt’s Pier Assocs.,

143 B.R. 36 (Bankr. E.D. Pa. 1992) ..........................................................................................6

In re Johnson,

756 F.2d 738 (9th Cir.), cert. denied, 474 U.S. 828 (1985).......................................................2

In re Pappas,

55 B.R. 658 (Bankr. D. Mass. 1985) .........................................................................................2

In re Quality Elect. Ctrs., Inc.,

57 B.R. 288 (Bankr. D.N.M. 1986) ...........................................................................................2

In re Rice,

82 B.R. 623 (Bankr. S.D. Ga. 1987)......................................................................................5, 6

In re Shehu,

128 B.R. 26 (Bankr. D. Conn. 1991) .........................................................................................2

In re Tally Well Serv., Inc.,

45 B.R. 149 (Bankr. E.D. Mich. 1984)......................................................................................2

Matter of Vitreous Steel Products Co.,

911 F.2d 1223 (7th Cir. 1990) ...............................................................................................2, 7

Nat’l Westminster Bank, U.S.A. v. Ross,

130 B.R. 656 (Bankr. S.D.N.Y.), aff’d, 962 F.2d 1 (2d Cir. 1991) ...........................................2

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Peaje Invs. LLC v. García-Padilla,

845 F.3d 505 (1st Cir. 2017)............................................................................................ passim

Peaje Invs. LLC v. Garcia-Padilla,

No. 16-2365, 2016 U.S. Dist. LEXIS 153711 (D.P.R. Nov. 2, 2016).................................3, 10

Wright v. Union Cent. Life Ins. Co.,

311 U.S. 273 (1940)...................................................................................................................1

STATUTES

11 U.S.C. § 362(d)...............................................................................................................8, 11, 13

11 U.S.C. § 362(e) ...................................................................................................................13, 14

11 U.S.C. § 362(g)...........................................................................................................................8

OTHER AUTHORITIES

3 COLLIER ON BANKRUPTCY ¶ 362.10 (16th 2018)..........................................................................8

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PRELIMINARY STATEMENT

1. The Supreme Court has long recognized that adequate protection is a constitutional 

imperative. E.g., Wright v. Union Cent. Life Ins. Co., 311 U.S. 273, 278 (1940). “By providing a 

creditor with a means of protecting its interest through [the] adequate protection requirement, the 

competing interests of the debtor’s need to reorganize and the secured creditor’s entitlement to 

constitutional protection of its bargained-for property interests are reconciled.” In re Briggs 

Transp. Co., 780 F.2d 1339, 1342 (8th Cir. 1985). Thus, § 362 of the Bankruptcy Code, 

incorporated into PROMESA, provides that in the absence of adequate protection, a court “shall” 

grant relief from the automatic stay. 11 U.S.C. § 362.

2. Ignoring these longstanding principles, ERS advances two indefensible reasons 

why the Court should absolve ERS and the Commonwealth of their statutory and constitutional 

obligations to provide adequate protection. 

3. First, ERS asserts that the Court may not grant relief from the automatic stay 

because there is a pending dispute regarding the validity of Movants’ liens. But the First Circuit 

has held that the only thing at issue in a § 362 hearing is whether the creditor has a “colorable” 

claim of a lien on property of the debtor. Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 32 (1st 

Cir. 1994). That standard is plainly satisfied here.

4. Second, ERS asserts that the value of Movants’ collateral has not diminished since 

the Title III petition date. This, too, is utterly incorrect. Since ERS’s Title III filing, the Oversight 

Board and the Commonwealth have diverted all of Movants’ collateral and dissipated substantial 

amounts to make payments to subordinate creditors. There can be no doubt that Movants’ 

collateral has decreased in value. Indeed, the Commonwealth’s admitted plan is to reduce the 

value of Movants’ collateral to zero.

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5. The remaining objections are similarly meritless and the Motion should be granted.

ARGUMENT

I. Relief From The Automatic Stay Is Appropriate Where, As Here, Movants’ Claim 

Against ERS’s Property Is Far More Than Colorable.

A. Stay relief is appropriate where a creditor has a colorable claim to property of the 

debtor and Movants’ claim against ERS’s property is far more than colorable.

6. ERS is wrong when it asserts that stay relief may not be granted if there is a dispute 

regarding the validity of a lien. Oversight Board Br. ¶¶ 21-27. The First Circuit has held that 

§ 362 hearings to lift the automatic stay “do not involve a full adjudication on the merits of claims, 

defenses, or counterclaims, but simply a determination as to whether a creditor has a colorable 

claim to property of the estate.” Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 32 (1st Cir. 

1994); see also Matter of Vitreous Steel Products Co., 911 F.2d 1223, 1234 (7th Cir. 1990) 

(“Questions of the validity of liens are not generally at issue in a 362 hearing, but only whether 

there is a colorable claim of a lien on property of the estate.”) (emphasis in original). The First 

Circuit reasoned that “[t]he limited grounds set forth in the statutory language, read in the context 

of the overall scheme of § 362, and combined with the preliminary, summary nature of the relief 

from stay proceedings” have led most courts to reach the same conclusion. Grella, 42 F.3d at 32 

(citing cases).2

 “To allow a relief from stay hearing to become any more extensive than a quick 

determination of whether a creditor has a colorable claim would turn the hearing into a fullscale 

adversary lawsuit, and would be inconsistent with [the § 362] procedural scheme.” Id. at 33.

 2 E.g., Estate Constr. Co. v. Miller & Smith Holding Co., 14 F.3d 213, 219 (4th Cir. 1994); 

In re Johnson, 756 F.2d 738, 740 (9th Cir.), cert. denied, 474 U.S. 828 (1985); Nat’l Westminster 

Bank, U.S.A. v. Ross, 130 B.R. 656, 670 (Bankr. S.D.N.Y.), aff’d, 962 F.2d 1 (2d Cir. 1991); In re 

Quality Elect. Ctrs., Inc., 57 B.R. 288, 290 (Bankr. D.N.M. 1986); In re Pappas, 55 B.R. 658, 

660-61 (Bankr. D. Mass. 1985); In re Gellert, 55 B.R. 970, 974-75 (Bankr. D.N.H. 1985); In re 

Tally Well Serv., Inc., 45 B.R. 149, 151-52 (Bankr. E.D. Mich. 1984); In re Shehu, 128 B.R. 26, 

28-29 (Bankr. D. Conn. 1991)).

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7. And, of course, Movants have a claim against ERS’s property that is far more than 

merely “colorable.” In fact, this Court and the First Circuit have both already recognized that 

Movants hold valid and enforceable liens on ERS’s property. Peaje Invs. LLC v. Garcia-Padilla, 

No. 16-2365, 2016 U.S. Dist. LEXIS 153711, at *23-*24 (D.P.R. Nov. 2, 2016) (The ERS 

Bondholders, “pursuant to the terms of the applicable bond resolution, hold a security interest and 

lien in certain pledged property, including all future employer contributions,” which “continues 

indefinitely until ERS’s outstanding debt obligations have been satisfied in full.”); Peaje Invs. 

LLC v. García-Padilla, 845 F.3d 505, 511-514 (1st Cir. 2017) (finding that the ERS Bondholders 

are secured creditors).3

8. Critically, those findings were based, in part, on admissions by ERS and the 

Commonwealth that Movants hold valid and enforceable liens. ERS admitted in prior PROMESA 

proceedings that Movants hold “valid and enforceable liens over hundreds of millions of dollars 

of ERS revenue, which [would] continue to grow.” Respondent Employees Retirement System of 

the Government of the Commonwealth of Puerto Rico’s Brief in Opposition to Motion for Relief 

From the PROMESA Automatic Stay in Altair Global Credit Opportunities Fund (A), L.L.C., et 

al. v. Governor Alejandro García Padilla, et al., No. 16-cv-2696, Dkt. 52, at 10 (Oct. 26, 2016); 

see also id. at 10-11 (“The Commonwealth granted the ERS Bondholders a first lien in and over 

 3 The ERS Bond Resolution provides for the “pledge and assignment of, and the grant of a 

security interest in and over, the Pledged Property” to Movants. ERS Bond Resolution § 501.1 & 

Exh. B, VI-36. “Pledged Property” is defined broadly to include (a) all “Revenues,” including, 

among other things, all employer contributions received by ERS or the Fiscal Agent “and any 

assets in lieu thereof or derived thereunder which are payable to [ERS] pursuant to [the Enabling 

Act]”; (b) all “right, title, and interest of [ERS] in and to” all of the property described in (a) and 

“all rights to receive the same”; (c) the funds, accounts, and subaccounts held by the Fiscal Agent; 

(d) any and all other rights and personal property of every kind pledged and assigned by ERS for 

additional security; and (e) “any and all cash and non-cash proceeds, products, offspring, rents and 

profits from any of the Pledged Property,” including, “without limitation, those from the sale, 

exchange, transfer, collection, loss, damage, disposition, substitution or replacement of” such 

property. Id. § 501 & Exh. B, VI-33, VI-36, VI-37.

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‘Pledged Property’–consisting of, among other assets, all revenues of the ERS–pending the 

discharge and satisfaction of all outstanding principal and interest. As noted, the ERS received 

approximately $486 million in employer contributions in the year ending June 30, 2015, with these 

amounts scheduled to increase by 1.25% per year beginning on July 1, 2016. In addition, ERS is 

currently receiving employer contributions from non-Commonwealth employers of approximately 

$17 million per month [during the PROMESA stay]. The ERS Bondholders have a security 

interest in those revenues also, subject only to the satisfaction of the ERS’s outstanding debt 

obligations.”).

9. And the Commonwealth admitted in prior PROMESA proceedings that “[t]he 

security interest and lien in favor of ERS bondholders is indefinite, and ends only upon satisfaction 

of the ERS’s outstanding debt obligations.” Respondents’ Brief in Opposition to Motion for Relief 

From the PROMESA Automatic Stay in Altair Global Credit Opportunities Fund (A), L.L.C., et 

al. v. Governor Alejandro García Padilla, et al., No. 16-cv-2696, Dkt. 53, at 5 (Oct. 26, 2016); 

see also id. at 13 (“When Movants purchased their ERS bonds, they expected that their debt service 

payments would be secured by a lien on all ERS revenues. . . [O]nce the temporary emergency 

period expires, Movants’ lien will attach to every penny ERS receives going forward until 

bondholders are repaid in full.”); id. at 17-18 (“The ERS receives approximately $480 million in 

employer contributions annually, and the bondholders’ security interest in those revenues 

continues indefinitely until satisfaction of the ERS’s outstanding debt obligations.).

B. ERS’s cases do not support its position that stay relief is inappropriate whenever 

the debtor challenges the validity of a creditor’s lien.

10. ERS cites three cases in support of its argument that the Court should deny stay 

relief in light of the pending challenges to the validity of Movants’ liens—decisions of bankruptcy 

courts in Florida, Georgia, and Pennsylvania. Those decisions hold no weight in light of the 

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unequivocal First Circuit precedent that relief from the automatic stay is appropriate where 

creditors have a colorable claim against property of the debtor, and they are not binding on this 

Court in any event. See Grella, 42 F.3d at 32; see also In re Calore Express Co., 288 F.3d 22, 36 

(1st Cir. 2002) (following Grella). Moreover, the cases relied upon by ERS do not stand for the 

proposition that stay relief is inappropriate whenever the debtor disputes the validity of a creditor’s 

lien. Rather, in instances where a court denied relief from the automatic stay, it did so because it 

otherwise ordered adequate protection payments or found that an equity cushion provided adequate 

protection.

11. In In re Davenport, 34 B.R. 463, 466-67 (Bankr. M.D. Fla. 1983); Oversight Board 

Br. ¶ 22, for example, the court declined to lift the automatic stay when challenges to the validity 

of the lien were pending in another proceeding, but it did so only because there was an equity 

cushion that provided temporary adequate protection to the creditor. Here, ERS asks the Court to 

leave the automatic stay in place in the complete absence of adequate protection. 

12. Similarly, in In re Rice, 82 B.R. 623, 627 (Bankr. S.D. Ga. 1987); Oversight Board 

Br. ¶ 22, the court denied the motion for relief from stay, but nonetheless required the debtor to 

make adequate protection payments. In that case, in opposing the motion for relief from the 

automatic stay, the debtor asserted that “due to lack of consideration, fraud, duress, estoppel or 

some similar theory, part or all of the debt owed on the real estate could be discharged or set-off.” 

82 B.R. at 626. In response, the court noted that “when presented with evidence in defense of a 

motion for relief that strongly supports an inference that the lien may be invalid in such a 

proceeding, [it] would be compelled to deny the motion and leave the stay in effect for a sufficient 

time to allow the debtor to pursue other litigation.” Id. The court, however, declined to follow that 

course there because “the evidence presented was utterly insufficient to raise such an inference.” 

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Id. While the court went on to deny the creditor’s motion to lift the stay because the value of the 

real property exceeded the debt, it nonetheless ordered adequate protection payments because the 

equity cushion was small and the debtor was not making payments due on the property. Id. at 627.

13. Finally, in In re Hunt’s Pier Assocs., 143 B.R. 36, 50-51 (Bankr. E.D. Pa. 1992); 

Oversight Board Br. ¶ 22, the court concluded that a creditor there was not entitled to relief from 

the automatic stay when it had already made findings that “any security interests which [the 

creditor possessed] [were] not only subordinate to the security interests of [another creditor], but 

also avoidable by the trustee.” “Therefore, for all practical purposes, the status of [the party 

seeking relief], as to the[] [assets], [was] that of an unsecured creditor.” 143 B.R. at 51. In other 

words, unlike this case, the court in Hunts Pier Associates had already adjudicated the debtor’s 

challenge and found that the creditor was unsecured. Here, the Court has not made any 

determinations with respect to Movants’ liens.

14. ERS’s attempts to distinguish Movants’ cases are equally unavailing. In Grella, 

the First Circuit held that a creditor must establish only a colorable claim of a lien in a hearing for 

relief from the automatic stay. 42 F.3d at 32. ERS suggests that the Court should disregard this 

holding because the First Circuit went on to say that a bankruptcy court could nonetheless 

“consider counterclaims and defenses” in deciding whether to grant stay relief. Id.; Oversight 

Board Br. ¶ 25. But nothing about that statement changes the court’s holding or supports ERS’s 

position that stay relief should be denied whenever a debtor disputes the existence of a lien. The 

First Circuit was clear: “hearings [under § 362] do not involve a full adjudication on the merits of 

claims, defenses, or counterclaims, but simply a determination as to whether a creditor has a 

colorable claim to property of the estate.” 42 F.3d at 32.

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15. In Vitreous Steel, the Seventh Circuit said the same. It held that “[q]uestions of the 

validity of liens are not generally at issue in a § 362 hearing, but only whether there is a colorable 

claim of a lien on property of the estate.” 911 F.2d at 1234 (emphasis in original). ERS notes that 

the court in Vitreous Steel had made a finding that the creditor had a perfected security interest. 

Oversight Board Br. ¶ 24. But that does not change the court’s holding that only a colorable claim 

of a security interest is required to grant relief from the automatic stay. It is also irrelevant that, as 

ERS points out, the bankruptcy trustee was not challenging the lien in Vitreous Steel. Id.

16. Finally, In re Bailey, 574 B.R. 15, 19 (Bankr. D. Me. 2017) and In re Buehne Farms, 

Inc., No. 04-32052, 2005 WL 2456867, at *2 (Bankr. S.D. Ill. Apr. 26, 2005) support Movants’ 

arguments. ERS argues that Bailey is inapposite because it involved a dispute regarding the 

amount of a secured creditor’s claim, not whether the claim was secured and perfected. Oversight 

Board Br. ¶ 26. But ERS misses the point. The debtor in Bailey opposed the stay relief motion by 

challenging the creditor’s underlying claim and the court held that “[r]elief from stay hearings are 

merely summary proceedings to ascertain whether the party seeking relief has a colorable claim to 

estate property” rather than determinations of “the merits of the underlying substantive claims, 

defenses, or counterclaims.” Bailey, 574 B.R. at 19. 

17. ERS argues that Buehne Farms actually supports its position because the court there 

denied stay relief and noted that an adversarial proceeding was necessary to determine the validity 

and priority of the creditors’ liens. Oversight Board Br. ¶ 27. But ERS ignores a key aspect of the 

court’s decision: the court in Buehne Farms found that the creditors were entitled to monthly 

adequate protection payments while it resolved the debtors’ challenges to the validity and priority 

of the liens. 2005 WL 2456867, at *2.

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18. At bottom, ERS asks this Court to leave the automatic stay in place even though 

both ERS and the Commonwealth have refused to provide Movants with adequate protection. 

Section 362 does not permit this result: it states that “the court shall grant relief from the stay . . . 

such as by terminating, annulling, modifying, or conditioning such stay . . . for cause, including 

the lack of adequate protection of an interest in property of such party in interest.” 11 U.SC. 

§ 362(d)(1) (emphasis added). The fact that ERS disputes the validity and scope of Movants’ liens 

does not absolve ERS and the Commonwealth of their obligations to provide Movants with 

adequate protection until those disputes are resolved. 

II. Movants’ Property Interests Are Not Adequately Protected.

A. The debtors ultimately bear the burden of proof on the question of adequate 

protection.

19. Under § 362(g), the debtors ultimately bear the burden of proof on the question of 

adequate protection. 11 U.S.C. § 362(g); see also Peaje, 845 F.3d at 513 (“In the bankruptcy 

context . . . Congress . . . enact[ed] an express burden-shifting framework under which the movant 

‘has the burden of proof on the issue of the debtor’s equity in property,’ but the debtor ‘has the 

burden of proof on all other issues.’” 11 U.S.C. § 362(g)). ERS argues that Movants must first 

make an initial showing of the lack of adequate protection. Oversight Board Br. ¶ 29. Movants 

have plainly done so and “the burden of going forward and the ultimate burden of persuasion [is 

on ERS as] the party opposing the relief to show that the collateral is not declining in value, 

[Movants are] adequately protected by periodic cash payments, an equity cushion, replacement 

liens or otherwise, or that there is a significant likelihood of a successful reorganization in a 

reasonable time.” 3 COLLIER ON BANKRUPTCY ¶ 362.10 (16th 2018).

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B. Movants have established a legally sufficient claim that they are entitled to 

adequate protection and ERS and the Commonwealth have put forth no contrary 

evidence.

20. Movants have alleged that the value of their collateral is declining and ERS and the 

Commonwealth cannot credibly argue otherwise. See Motion Part III. Since ERS’s Title III filing, 

the Oversight Board and the Commonwealth have diverted all of Movants’ collateral. Employer 

contributions currently being made by employers—which were pledged to Movants to repay the 

ERS Bonds—are being diverted to the Commonwealth and dissipated to pay subordinate creditors. 

See, e.g., Fiscal Plan for Puerto Rico at 23 (June 29, 2018).

21. On this record, Movants are entitled to adequate protection. In litigation 

commenced prior to ERS’s Title III filing, the First Circuit held that even a temporary diversion 

of Movants’ collateral and the resulting uncertainty about ERS’s ability to repay the ERS Bonds 

established a legally sufficient claim that Movants lacked adequate protection. Peaje, 845 F.3d at 

514 (Movants “included in their district court filings a 2014 statement by ERS that uncertainty 

about future employer contributions could affect the repayment of the ERS’s bond payable.”); see

also Unofficial Transcript, Altair Global Credit Opportunities Fun (A), LLC, et al., v. GarciaPadilla, et al., No. 16-2433, at 36:21-37:1 (“But I’m just having great difficulty with your 

argument that there’s this seven-month window where the government can entirely, entirely 

destroy the value of collateral a hundred percent and yet that wouldn't in and of itself be good 

cause.”). In fact, this is what distinguished Movants from other appellants in that case, 

bondholders of the Puerto Rico Highways and Transportation Authority, who did not allege that 

the diversion of their collateral would leave their interests inadequately protected. Peaje, 845 F.3d 

at 511 (“Because [the bondholders of the Puerto Rico Highways and Transportation Authority] 

failed even to make a legally sufficient claim that it lacked adequate protection, we conclude that 

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the district court did not commit reversible error in denying its lift-stay motion without an 

evidentiary hearing. The Altair Movants, on the other hand, were entitled to such a hearing.”). 

22. ERS argued at the time that Movants were adequately protected because the 

diverted employer contributions were held in an operating account (and not dissipated). Id. at 514. 

But because it was not clear that Movants’ liens would extend to that particular account, the First 

Circuit found that it did not suffice to provide adequate protection. The court noted that, if 

Movants’ liens did not extend to the ERS operating account, Movants “face[d] the prospect of 

being left with a mere unsecured claim.” Id. That is the same potential peril that the ERS 

Bondholders confront today.

23. Movants’ allegations here go even further than those in the First Circuit record in 

Peaje. First, the diversion of employer contributions is no longer temporary; it is permanent. 

Second, not only are employer contributions being diverted, but they are also being dissipated by 

the Commonwealth to pay other creditors. Third, there is now even less certainty that Movants’ 

liens extend to the employer contributions once dissipated or that ERS will be able to meet its 

obligations on the ERS Bonds. Unsurprisingly, ERS does not repeat its prior statements (all of 

which are admissions) that the ERS Bondholders liens cover sufficient collateral to fully 

collateralize the ERS Bondholders’ claims. In these circumstances, Movants’ entitlement to 

adequate protection stands unopposed. See Peaje, 845 F.3d at 511.

24. ERS also notes that Movants have already received $194 million in adequate 

protection payments. Oversight Board Br. ¶ 32. ERS argues that this means that no further 

adequate protection is warranted. But ERS fails to explain why, in the face of continuing ERS 

payment obligations to Movants, past adequate protection payments absolve it of making adequate 

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protection payments going forward. 4 ERS and the Commonwealth are obligated to provide 

adequate protection for the duration of the automatic stay when there is a decrease in the value of 

Movants’ collateral. As collateral continues to be diverted and spent, the value of Movants’ 

collateral continues to decrease. In the absence of adequate protection, the automatic stay must be 

lifted. See 11 U.S.C. § 362(d).

C. The Retiree Committee’s arguments are without merit.

25. The Retiree Committee argues that there is no decrease in the value of Movants’ 

collateral because ERS’s bank account decreased from January 1, 2018 to May 31, 2018 only on 

account of adequate protection payments made to ERS Bondholders. Retiree Committee Br. at 7-

8. But the funds on deposit in that account represent only a small fraction of Movants’ collateral 

and are thus a useless measure of whether Movants’ collateral is declining in value. Movants have 

liens on, among other things, all employer contributions received by the Fiscal Agent or ERS, as 

well as ERS’s right to receive those contributions in the future. The Oversight Board and the 

Commonwealth diverted all employer contributions to the Commonwealth effective July 1, 2017, 

thereby unquestionably decreasing the value of Movants’ collateral. All or virtually all of the 

amounts diverted have been spent. Because of that diversion, employer contributions are no longer 

being made to ERS and transferred to the Fiscal Agent.

26. Even cases cited by the Retiree Committee do not support its argument that 

Movants’ collateral somehow is not decreasing in value. For example, the Retiree Committee’s 

opposition, citing In re Builders Group & Development Corp., 502 B.R. 95, 122 (Bankr. D.P.R. 

2013), acknowledges that there is a “diminution if the cash collateral is transferred ‘to a party other 

than the secured party.’” Retiree Committee Br. at 8. Here, all of Movants’ cash collateral has 

 4 The joint stipulation expressly provided that Movants could seek adequate protection 

after October 31, 2017. See No. 17-bk-03566, Dkt. 170, at 4 (July 14, 2017).

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been transferred to the Commonwealth and is being used to pay other creditors—none of whom 

are the secured parties. In these circumstances, there is obviously a decrease in the value of 

Movants’ collateral.

27. Like ERS, the Retiree Committee also notes that Movants have already received 

$194 million in adequate protection payments. Retiree Committee Br. at 8-9. The Retiree 

Committee argues that Movants are not entitled to any additional payments to preserve the status 

quo. It argues that “[s]imply holding the funds pending the Court’s determination of the perfection 

issue would have adequately protected the Bondholders’ against loss and that is all the adequate 

protection that is required here.” Retiree Committee Br. at 9; see id. (citing cases holding that 

secured lenders are adequately protected when trustee held cash collateral in segregated account 

unavailable to other creditors). But this is not what is happening here. A trustee is not holding 

employer contributions received during the automatic stay in a segregated account unavailable to 

other creditors.5

 Instead, employer contributions are being diverted to the Commonwealth and 

dissipated to pay other creditors.

28. The Retiree Committee also asserts that the motion raises issues about the 

appropriate forum for disputes about ERS’s property. Retiree Committee Br. at 5. The Retiree 

Committee argues that the Court should not lift the automatic stay because it would lead to 

“protracted litigation in another forum on the very same issues that are already before this Court,” 

and “would require the Court to simultaneously lift the stay to allow the Commonwealth’s retirees 

and employees to assert their interests in the same assets.” Retiree Committee Br. at 4. These 

arguments are at odds with the applicable statutes and case law. In the absence of adequate 

 5 Notably, the First Circuit found that a “quite modest” form of adequate protection would 

be to deposit all the employer contributions collected during the stay in an account established for 

the benefit of Movants. Peaje, 845 F.3d at 514 n.5.

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protection, the automatic stay must be lifted. 11 U.SC. § 362(d)(1). Putting aside that the Retiree 

Committee has no basis to assert that stay relief would lead to “protracted litigation in another 

forum,” that fact is entirely irrelevant to the inquiry under § 362. Furthermore, granting Movants 

relief from the stay would not require the Court to also lift the stay for other parties. If and when 

those parties conclude that they should seek relief from the stay they will have to do so on the 

merits of their own cases.

29. Finally, the Retiree Committee argues that Movants improperly sought adequate 

protection from the Commonwealth. Retiree Committee Br. at 8-9. Since the Commonwealth 

now claims an interest in property of ERS, Movants properly sought adequate protection from the 

Commonwealth and ERS.

III. Movants Are Entitled To A Prompt Hearing On The Motion To Lift The Automatic 

Stay.

30. ERS requests that the Court hold a final hearing on the Motion 14 days after entry 

of the Court’s decision in the Adversary Proceeding and that the Court continue the automatic stay 

until that hearing. Oversight Board Br. ¶ 34. ERS cites nothing to support this request and § 362 

does not permit such a result. Under § 362(e), while a court may continue the automatic stay after 

a preliminary hearing pending a final hearing and determination, the court may do so only “if there 

is a reasonable likelihood that the party opposing relief from such stay will prevail at the conclusion 

of such final hearing.” 11 U.S.C. § 362(e)(1). On the record before the Court, it is clear that ERS 

and the Commonwealth cannot prevail at a final hearing on the Motion.

31. First, relief from the automatic stay is appropriate where a creditor has a colorable 

claim on property of the debtor. As discussed above, Movants’ claim against ERS’s property is 

far more than merely colorable. ERS and the Commonwealth have admitted in prior PROMESA 

proceedings that Movants hold valid and enforceable liens on ERS’s property—liens that continue 

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indefinitely until the ERS Bonds are paid in full. See supra ¶ 8-9. And both this Court and the 

First Circuit have found that to be true. See supra ¶ 7. It is entirely irrelevant that ERS now 

disputes the validity of Movants’ liens since the Court has not ruled on those challenges. Nothing 

in the current record contradicts ERS’s admissions and the judicial findings of this Court and the 

First Circuit.

32. Second, Movants have alleged that the Oversight Board and the Commonwealth 

have permanently diverted all of Movants collateral to the Commonwealth and dissipated 

substantial amounts to make payments to subordinate creditors. ERS has not—and cannot—

dispute these facts. In prior PROMESA proceedings, the First Circuit held that even the temporary 

diversion of Movants’ collateral and the resulting uncertainty about ERS’s ability to repay the ERS 

Bonds established a legally sufficient claim that Movants lacked adequate protection. See supra 

¶ 21-23. Under that binding precedent, Movants have established a prima facie showing of 

entitlement to adequate protection. 

33. Based on the foregoing, the Court should deny ERS’s request to continue the 

automatic stay pending a final hearing and determination. The court may do so only if there is a 

“reasonable likelihood” that ERS and the Commonwealth will prevail at the conclusion of the final 

hearing, 11 U.S.C. § 362(e), and the record before the Court demonstrates otherwise. Under § 362, 

Movants are entitled to relief from the automatic stay in the absence of adequate protection.

34. Finally, Movants request that the Court conduct a prompt hearing on the Motion. 

Under § 362, if the court conducts a preliminary hearing, the final hearing must be concluded 

within 30 days of the preliminary hearing, unless the 30-day period is extended with the consent 

of the parties or the court finds that an extension is required by compelling circumstances. Id. 

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Movants do not consent to an extension with regards to the hearing on the Motion and ERS 

identifies no compelling circumstances to justify such an extension.

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In San Juan, Puerto Rico, today July 17, 2018.

By:

/s/ AlfredoFernández-Martínez ___ /s/ Bruce Bennett_____________ 

Alfredo Fernández-Martínez

DELGADO & FERNÁNDEZ, LLC

PO Box 11750

Fernández Juncos Station

San Juan, Puerto Rico 00910-1750

Tel. (787) 274-1414

Fax: (787) 764-8241

afernandez@delgadofernandez.com

USDC-PR 210511

Counsel for ERS Bondholders Altair Global

Credit Opportunities Fund (A), LLC,

Andalusian Global Designated Activity

Company, Glendon Opportunities Fund,

L.P., Mason Capital Master Fund L.P.,

LLC, Nokota Capital Master Fund, L.P.,

Oaktree-Forrest Multi- Strategy, LLC

(Series B), Oaktree Opportunities Fund IX,

L.P., Oaktree Opportunities Fund IX

(Parallel 2), L.P., Oaktree Value

Opportunities Fund, L.P., Ocher Rose,

L.L.C., and SV Credit, L.P.

Bruce Bennett (pro hac vice)

JONES DAY

555 South Flower Street

Fiftieth Floor

Los Angeles, California 90071

Tel. (213) 489-3939

Fax: (213) 243-2539

bbennett@jonesday.com

Benjamin Rosenblum (pro hac vice)

James M. Gross (pro hac vice)

JONES DAY

250 Vesey Street

New York, NY 10281

Tel. (212) 326-3939

Fax: (212) 755-7306

brosenblum@jonesday.com

jgross@jonesday.com

Geoffrey S. Stewart (pro hac vice)

Beth Heifetz (pro hac vice)

Christopher J. DiPompeo (pro hac vice)

Sparkle L. Sooknanan (pro hac vice)

JONES DAY

51 Louisiana Ave. N.W.

Washington, DC 20001

Tel. (202) 879-3939

Fax: (202) 626-1700

gstewart@jonesday.com

bheifetz@jonesday.com

cdipompeo@jonesday.com

ssooknanan@jonesday.com

Counsel for ERS Bondholders Altair Global

Credit Opportunities Fund (A), LLC,

Andalusian Global Designated Activity

Company, Glendon Opportunities Fund, L.P.,

Mason Capital Master Fund L.P., LLC,

Nokota Capital Master Fund, L.P., OaktreeForrest Multi- Strategy, LLC (Series B),

Oaktree Opportunities Fund IX, L.P., Oaktree

Opportunities Fund IX (Parallel 2), L.P.,

Oaktree Value Opportunities Fund, L.P.,

Ocher Rose, L.L.C., and SV Credit, L.P.

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17

/s/ Alicia I. Lavergne-Ramírez /s/ John K. Cunningham

José C. Sánchez-Castro

USDC-PR 213312

jsanchez@sanpir.com

Alicia I. Lavergne-Ramírez

USDC-PR 215112

alavergne@sanpir.com

Maraliz Vázquez-Marrero

USDC-PR 225504

mvazquez@sanpir.com

SÁNCHEZ PIRILLO LLC

270 Muñoz Rivera Avenue, Suite 1110

San Juan, PR 00918

Tel. (787) 522-6776

Fax: (787) 522-6777

Counsel for Puerto Rico AAA Portfolio

Bond Fund, Inc., Puerto Rico AAA

Portfolio Bond Fund II, Inc., Puerto Rico

AAA Portfolio Target Maturity Fund, Inc.,

Puerto Rico Fixed Income Fund, Inc.,

Puerto Rico Fixed Income Fund II, Inc.,

Puerto Rico Fixed Income Fund III, Inc.,

Puerto Rico Fixed Income Fund IV, Inc.,

Puerto Rico Fixed Income Fund V, Inc.,

Puerto Rico GNMA & U.S. Government

Target Maturity Fund, Inc., Puerto Rico

Investors Bond Fund I, Puerto Rico

Investors Tax-Free Fund, Inc., Puerto

Rico Investors Tax-Free Fund, Inc. II,

Puerto Rico Investors Tax-Free Fund III,

Inc., Puerto Rico Investors Tax-Free Fund

IV, Inc., Puerto Rico Investors Tax-Free

Fund V, Inc., Puerto Rico Investors TaxFree Fund VI, Inc., Puerto Rico

Mortgage-Backed & U.S. Government

Securities Fund, Inc., Tax-Free Puerto

Rico Fund, Inc., Tax-Free Puerto Rico

Fund II, Inc., and Tax-Free Puerto Rico

Target Maturity Fund, Inc.

John K. Cunningham (pro hac vice)

Glenn M. Kurtz (pro hac vice)

WHITE & CASE LLP

1221 Avenue of the Americas

New York, NY 10036

Tel. (212) 819-8200

Fax (212) 354-8113

jcunningham@whitecase.com

gkurtz@whitecase.com

Jason N. Zakia (pro hac vice)

Cheryl T. Sloane (pro hac vice)

WHITE & CASE LLP

200 S. Biscayne Blvd., Suite 4900

Miami, FL 33131

Tel. (305) 371-2700

Fax (305) 358-5744

jzakia@whitecase.com

csloane@whitecase.com

Counsel for Puerto Rico AAA Portfolio

Bond Fund, Inc., Puerto Rico AAA

Portfolio Bond Fund II, Inc., Puerto Rico

AAA Portfolio Target Maturity Fund, Inc.,

Puerto Rico Fixed Income Fund, Inc.,

Puerto Rico Fixed Income Fund II, Inc.,

Puerto Rico Fixed Income Fund III, Inc.,

Puerto Rico Fixed Income Fund IV, Inc.,

Puerto Rico Fixed Income Fund V, Inc.,

Puerto Rico GNMA & U.S. Government

Target Maturity Fund, Inc., Puerto Rico

Investors Bond Fund I, Puerto Rico

Investors Tax-Free Fund, Inc., Puerto

Rico Investors Tax-Free Fund, Inc. II,

Puerto Rico Investors Tax-Free Fund III,

Inc., Puerto Rico Investors Tax-Free Fund

IV, Inc., Puerto Rico Investors Tax-Free

Fund V, Inc., Puerto Rico Investors TaxFree Fund VI, Inc., Puerto Rico

Mortgage-Backed & U.S. Government

Securities Fund, Inc., Tax-Free Puerto

Rico Fund, Inc., Tax-Free Puerto Rico

Fund II, Inc., and Tax-Free Puerto Rico

Target Maturity Fund, Inc.

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