Summary
The First Circuit held that Sections 922(d) and 928 of the Bankruptcy Code do not permit special revenue bondholders to commence a judicial proceeding to compel payment of pledged revenues without first obtaining relief from the automatic stay under 11 U.S.C. § 362(d). The court rejected the argument that the 1988 amendments created an exception to the stay for enforcement actions, ruling that the "application of pledged special revenues" language in § 922(d) only allows voluntary payment or application of funds already held by a creditor or trustee, not the initiation of a lawsuit. The dissent argued that the provisions require continued mandatory payment of special revenues and that the automatic stay should not bar enforcement of the liens, raising constitutional concerns under the Takings Clause and Tenth Amendment. Key topics: municipal bankruptcy (Chapter 9), automatic stay, special revenue bonds, PROMESA, § 922(d), § 928, stay relief, lien enforcement.
Topics
Practice areas
Questions Presented
- Whether sections 922(d) and 928 of the Bankruptcy Code allow creditors to commence a judicial proceeding to enforce payment of pledged special revenues without first obtaining relief from the automatic stay.
Holdings
- Sections 922 and 928 do not afford creditors a shortcut to bypass the requirement of obtaining traditional stay relief in order to bring such an enforcement action.
Key quotations
“The central issue in this case is whether the creditor-bondholders, without first obtaining permission from the Title III court, may commence a judicial proceeding against a Commonwealth debtor to obtain a court order restoring the flow of post-petition pledged special revenues from the debtor.” (111)
“At its core, this case is about whether, under municipal bankruptcy law, the government debtor must continue to pay pledged special revenues to special revenue bondholders during a bankruptcy proceeding.” (111)
Factual background
The Commonwealth of Puerto Rico, through its Oversight Board, filed a Title III petition under PROMESA. The bondholders, including insurers, held special revenue bonds secured by liens on pledged special revenues from the Puerto Rico Highway and Transportation Authority (PRHTA). The Commonwealth stopped making payments from the reserve accounts, contending that the automatic stay applied. The bondholders sought to enforce payment without first obtaining relief from the stay.
Procedural history
The bondholders filed an action to enforce payment of special revenues without obtaining stay relief. The district court (Title III court) ruled against them. The First Circuit panel in Assured Guaranty Corp. v. Fin. Oversight & Mgmt. Bd. for P.R., 919 F.3d 121 (1st Cir. 2019), held that the automatic stay applies and bondholders must seek stay relief. The Insurers petitioned for rehearing en banc, which was denied by this order.