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NEW YORK A U.S. federal appeals court has
decided creditors of Puerto Rico’s pension bonds are entitled to
a hearing on whether they can proceed with a lawsuit against the
island’s government over a fiscal emergency law it passed last
The First U.S. Circuit Court of Appeals on Wednesday ruled
holders of bonds issued by Puerto Rico’s Employee Retirement
System, its biggest public pension, are entitled to a hearing,
overturning a November ruling by a federal judge in Puerto Rico.
The appeals court said the lower court was correct, however,
in blocking a similar lawsuit by bondholders of Puerto Rico’s
The lawsuits were two of many filed last year against the
ailing U.S. territory, after former Governor Alejandro Garcia
Padilla instituted an emergency law allowing him to maintain
public services by diverting revenue streams that had been
earmarked as collateral for bondholders.
Under a federal Puerto Rico rescue law known as PROMESA,
passed in 2016, lawsuits over debt payments are frozen while the
island tries to reach consensual restructuring deals with
holders of $70 billion in debt issued by myriad public entities.
But many creditors sued anyway, arguing the fiscal emergency
law was unconstitutional, and saying the so-called “stay” of
litigation did not apply to them.
Puerto Rico’s courts have largely denied these efforts,
keeping the stay in place. In November, a San Juan federal judge
blocked a handful of these creditors from pursuing their
lawsuits without holding a hearing on the issue.
Wednesday’s appeals court ruling vacates that decision with
respect only to the pension bondholders. It does not allow their
lawsuit to proceed, but says the bondholders at least deserve a
hearing before a court can decide whether it should proceed.
The pension bondholders have said the government’s diversion
of funds is harmful to them because it may not leave enough
money in the coffers to pay them back.
Puerto Rico’s main employee pension faces a shortfall of
more than $45 billion, and is less than 1 percent funded, which
experts say is among the lowest in the history of U.S. public
The appeals court also disagreed with the lower court’s
decision not to allow Puerto Rico’s federal oversight board to
participate in any litigation.
The board, created under PROMESA to manage Puerto Rico’s
finances, had sought to intervene in the lawsuits, to oppose the
creditors’ efforts to lift the stay. PROMESA “appears to grant
the board such a right,” the appeals court said.
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