Reading like a memorandum directed to the Supreme Court, three judges on the Third Circuit wrote a statement explaining why the justices should deny certiorari from a pivotal ruling in the Puerto Rico debt restructuring.
In a pair of opinions handed down on March 26, the First Circuit ruled that Puerto Rico’s secured bondholders cannot compel payment before their rights are sorted out under the island commonwealth’s debt adjustment plan. In substance, the March opinions preclude bondholders from taking home their collateral immediately, thereby short-circuiting the restructuring.
The bondholders’ insurer filed a motion for rehearing en banc from one of the opinions. Responding to a vigorous dissent by one circuit judge from denial of rehearing, the judges from the March three-judge panel wrote another opinion explaining why their original interpretation of the statute was correct.
Both appeals arose in Puerto Rico’s debt restructuring under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.). With modifications, PROMESA incorporates large swaths of chapter 9 governing municipal debt adjustments. Congress was required to enact PROMESA because the Supreme Court ruled that the commonwealth is not eligible for chapter 9 and that Puerto Rico cannot adopt laws to deal with its own insolvency.
The First March 26 Opinion
In one opinion on March 26, Circuit Judge Juan R. Torruella upheld dismissal of a lawsuit by holders of Puerto Rico general obligation bonds who sought declarations that would have restricted Puerto Rico’s use of tax revenue. The bondholders did not seek rehearing; the mandate issued; and there was no petition for certiorari. Aurelius Capital Master Ltd. v. Commonwealth of Puerto Rico (In re Financial Oversight and Management Board for Puerto Rico), 919 F.3d 638 (1st Cir. March 26, 2019). To read ABI’s discussion, click here.
In their suit resulting in the first March 26 opinion, holders of GO bonds wanted the district court to rule that certain tax revenue, known as restricted revenue, could not be used for any purpose other than the payment of their bonds and other constitutional debt and must be segregated for them alone.
The Second March 26 Opinion
The second opinion on March 26 was also written by Judge Torruella. He again upheld the district court by ruling that nothing in PROMESA enables bondholders to compel payment on their bonds during the course of proceedings and before confirmation of a plan. Assured Guaranty Corp. v. Financial Oversight and Management Board for Puerto Rico (In re Financial Oversight and Management Board for Puerto Rico, as Representative for the Puerto Rico Highways and Transportation Authority), 919 F.3d 121 (1st Cir. March 26, 2019). To read ABI’s report, click here.
In April, bondholders responded to Judge Torruella’s second March 26 opinion by filing a petition for rehearing and rehearing en banc.
Without opposition from Puerto Rico, the First Circuit denied the rehearing motions on July 31. The order did not say whether any circuit judge other than the dissenter would have granted rehearing.
Joined by the two other judges from the original panel, Circuit Judge William J. Kayatta, Jr. issued a statement on July 31 explaining why the March 26 decision was correct. He was responding to Circuit Judge Sandra L. Lynch, who wrote a lengthy dissent from denial of rehearing en banc. She believes that further hearing was warranted by the First Circuit, and “if not by this court, then by the Supreme Court.”
The statement by Judge Kayatta reads like the panel’s memorandum to the Supreme Court explaining why the justices should deny certiorari.
Judge Lynch’s Dissent
Judge Lynch wrote a 16-page, single-spaced dissent explaining why the three-judge panel was wrong in March. She believes that Puerto Rico “must continue to pay pledged special revenues to bondholders during a bankruptcy proceeding.”
Making a case for the Supreme Court to grant certiorari, Judge Lynch said that the “issue is of extraordinary importance: it goes well beyond [Puerto Rico’s debt restructuring] as to both potential municipal and state defaults, affects special revenue bonds nationwide, and has Constitutional implications.”
However, Judge Lynch correctly interpreted the panel’s March 26 opinion. She said the “bondholders cannot receive payment of special revenues promised to them . . . unless [Puerto Rico] voluntarily makes such payment.” [Emphasis in original.]
According to Judge Lynch, the alternative for the bondholders — filing a motion to modify the automatic stay — was a “burden” that Congress “likely” did not intend.
Judge Kayatta’s Statement for the Panel
Judge Kayatta’s four-page statement for the panel is a skillful explanation of how Sections 922 and 928 work together. In his view, the statute allows, but does not require, a municipal debtor to continue paying special revenue bonds during the course of a proceeding and before adoption of a restructuring plan.
Judge Kayatta seems to say that Judge Lynch wrote what she though the law ought to be, not what Congress wrote.
Judge Kayatta defined the issue as follows: Without a modification of the automatic stay, may bondholders file a lawsuit to compel payment of pledged special revenues? He said that the March opinion explained why Sections 922 and 928 “do not afford creditors a shortcut to bypass the requirement of obtaining traditional stay relief.” He said that the statutes do not even “remotely” suggest that a municipality is compelled to pay bondholders.
Instead, Judge Kayatta said that the statutes preserve the bondholders’ pre-petition liens, allowing the creditor to “assert its right to those funds during the plan-of-adjustment phase.”
Judge Kayatta’s interpretation accords with the notion under the Tenth Amendment that the federal government cannot tell states how to use their revenue and with the understanding that the automatic stay is not a taking of property under the Fifth Amendment. The ability of municipalities to pay special revenue bonds, if they wish, allows them to attempt to preserve their creditworthiness.
Any ambiguity in the statute, Judge Kayatta said, “is simply not broad enough to allow one to read these sections as allowing the bondholders to commence a collection action without first obtaining leave of court.”
Reading like a memorandum directed to the Supreme Court, three judges on the Third Circuit wrote a statement explaining why the justices should deny certiorari from a pivotal ruling in the Puerto Rico debt restructuring.
In a pair of opinions handed down on March 26, the First Circuit ruled that Puerto Rico’s secured bondholders cannot compel payment before their rights are sorted out under the island commonwealth’s debt adjustment plan. In substance, the March opinions preclude bondholders from taking home their collateral immediately, thereby short-circuiting the restructuring.
The bondholders’ insurer filed a motion for rehearing en banc from one of the opinions. Responding to a vigorous dissent by one circuit judge from denial of rehearing, the judges from the March three-judge panel wrote another opinion explaining why their original interpretation of the statute was correct.