Supreme Court Won’t Hear a Case to Compel Paying Puerto Rico Bondholders Currently

While we await a decision from the Supreme Court on the constitutionality of the Puerto Rico Oversight Board, the high court denied certiorari today from a decision by the First Circuit holding that bondholders cannot compel payment during the course of restructuring 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 on the First Circuit’s opinion in March, click here.

In April, bondholders filed a petition for rehearing and rehearing en banc. The First Circuit denied the rehearing motion on July 31. 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), 931 F.3d 111 (1st Cir. July 31, 2019).

Circuit Judge Sandra L. Lynch wrote a 16-page dissent from denial of rehearing en banc. In substance, she was urging the Supreme Court to grant certiorari and reverse. Correctly interpreting the import of the decision, she said that Puerto Rico cannot be compelled to pay pledged special revenues to bondholders during a proceeding under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.).

In other words, Judge Lynch said, “bondholders cannot receive payment of special revenues promised to them . . . unless [Puerto Rico] voluntarily makes such payment.” [Emphasis in original.] Id., 931 F.3d at 120.

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. His statement read like a memorandum to the Supreme Court explaining why the justices should deny certiorari.

Judge Kayatta’s four-page statement explained how Sections 922 and 928 of PROMESA 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.

Instead, Judge Kayatta said that the statute preserves a bondholder’s pre-petition liens, allowing the creditor to “assert its right to those funds during the plan-of-adjustment phase.” To read ABI’s report on denial of rehearing, click here.

Bondholders filed a petition for certiorari on September 20. The Puerto Rico Oversight Board filed papers in opposition on November 25. The justices considered the petition in a conference on January 10 and issued an order denying certiorari on January 13.

The denial of certiorari was not surprising because there was no split of circuits. The bondholders contended that the issue was extraordinarily important. Indeed, that’s true. Had the Supreme Court taken the case and reversed, reorganization for Puerto Rico might have been impossible, and likewise municipal bankruptcies under chapter 9.

On October 15, the Supreme Court heard oral argument in Financial Oversight and Management Board for Puerto Rico v. Aurelius Investment LLC, 18-1334 (Sup. Ct.). The case will decide whether the appointment of the members of the Financial Oversight and Management Board of Puerto Rico violated the Appointments Clause of the Constitution because they were not nominated by the President and confirmed by the Senate. To read ABI’s report on oral argument, click here.