The U.S. Supreme Court on Monday declined to review a lower court ruling upholding the validity of security interests by pension bondholders seeking Puerto Rican pension assets before the start of bankruptcy proceedings.
The validity of the claims themselves is still being litigated at the District Court level.
The court declined a petition by Puerto Rico's Financial Oversight and Management Board and the Employees Retirement System of the Government of Puerto Rico that sought to reverse a January lower court decision siding with ERS bondholders holding more than $3 billion of ERS bonds.
The oversight board sued to invalidate those claims and to recover principal and interest payments of nearly $400 million made to ERS bondholders.
The January decision reversed a 2018 ruling by the judge overseeing Puerto Rico's complicated bankruptcy proceedings, U.S. District Judge Laura Taylor Swain in San Juan, who said the ERS bondholders' security interest was invalid in part because of incorrect names on some of the agreements.
Her ruling was later reversed by the 1st U.S. Circuit Court of Appeals in Boston, which prompted the oversight board's petition to the Supreme Court, arguing that the Boston court "committed blatant errors of law that threaten the ability of creditors across the nation to engage in secured lending."
In their Supreme Court petition, the ERS bondholders' group countered that it is the oversight board "that seeks to undermine confidence in secured transactions by pursuing endless, meritless litigation to avoid its obligations."
The Supreme Court's denial does not affect Ms. Swain's June 27 ruling that the ERS bondholders do not have any security interest in the post-bankruptcy assets of the retirement system assets. The validity of ERS bondholder claims is still a subject of litigation.
On Oct. 15, the Supreme Court will hear arguments in another bondholder case challenging the legitimacy of the oversight board members' appointments.
On Sept. 27, the oversight board filed an adjustment plan that calls for reducing bondholder and other debt by 60% and cutting some public pension benefits by 8.5%, in order to reduce $35 billion in debt to $12 billion as it works to exit bankruptcy. That plan does not include an agreement with the ERS bondholders.
When the oversight board began in 2016, Puerto Rico had more than $50 billion in unfunded pension liabilities and no assets. By fiscal year 2018, it was able to make benefit payments only as revenue came in.