Since the start of the Puerto Rico bankruptcy in May 2017, a superior court has overturned Puerto Rico bankruptcy judge Laura Taylor Swain three times on three appeals decided so far.
While the Puerto Rico Oversight, Management, and Economic Stability Act gives the Puerto Rico Oversight Board authority to manage implementation of the island's fiscal plan, its gives federal courts substantial power in its Title III bankruptcy provisions.
The track record so far suggests a pattern that may encourage further appeals of Swain's decisions as the biggest municipal bankruptcy continues.
In early May 2017 U.S. Chief Justice John Roberts named Swain, a U.S. district court judge, to oversee the bankruptcy. She has technically operated out of the Federal District Court for the District of Puerto Rico, even though some of the hearings have taken place in her New York City courtroom.
Appeals of her decisions go to the First Circuit Court of Appeals in Boston. Judges Jeffrey Howard, William Kayatta Jr., and Juan Torruella reversed one of Swains’ decisions in Sept. 22, 2017. Howard, Kayatta, and Judge Nancy Torresen vacated one Swain decision and partially vacated another, both on Aug. 8, 2018.
While no district court likes to have its decision reversed, the first circuit judges are “doing what they’re supposed to do as an appellate court,” said U.S. municipal bankruptcy expert James Spiotto.
The First Circuit’s reversals of Swain’s decisions should assure Puerto Rico bankruptcy participants that the appellant court is keeping a good eye on things, Spiotto said. “This is part of the process. That’s why the appellant court is there.”
In its decisions, the First Circuit has sometimes been calling for more refinement and sometimes for more clarification, said Spiotto, Chapman Strategic Advisors managing director. Other times the First Circuit has said more needed to be done or the court was being too restrictive in its ruling.
On Sept. 22, 2017 the First Circuit said the Official Committee of the Unsecured Creditors had the right to intervene in an adversary proceeding filed in Puerto Rico’s bankruptcy, Assured Guaranty Corp. v. The Financial Oversight and Management Board for Puerto Rico, et al.
Ironically, Swain had partly relied on a First Circuit decision in denying the committee a right to intervene. The First Circuit judges said its earlier ruling was not relevant in this case.
“The First Circuit [Court of Appeals] joined the Second and Third Circuits to recognize that the right to intervene provided by the bankruptcy code is not limited to the main bankruptcy case, contrary to the long-standing ruling in the Fifth Circuit,” wrote Kramer Levin Partner Stephen Zide in web post to the Kramer Levin web site. “However, the First Circuit also held that the scope of intervention may be qualified.”
Swain had partly relied on a Fifth Circuit ruling from 1985, Fuel Oil Supply & Terminaling v. Gulf Oil Corp, in rejecting the unsecured creditors’ efforts to intervene in the adversary proceeding.
“The First Circuit found [in September 2017], however, that ‘the weight of persuasive authority has shifted considerably’ in the 30 years since Fuel Oil, citing cases in which the Second and Third Circuits declined to follow Fuel Oil and instead held that Section 1109(b) [of the bankruptcy code] does apply to adversary proceedings,” Zide wrote.
The First Circuit sent the UCC’s motion back to the district court for Swain to determine its level of intervention.
In a different case, Ad Hoc Group of PREPA Bondholders, et al. v. The Financial Oversight and Management Board for Puerto Rico, as representative of the Puerto Rico Electric Power Authority, bond insurers along with a handful of investment funds with major holdings in PREPA had first filed a motion in the Puerto Rico District Court for a receiver in July 2017. In September 2017 Swain issued a ruling saying she had no right to appoint a receiver and questioned the wisdom of doing so.
The insurers appealed the ruling to the First Circuit Court of Appeals and on August 8 the First Circuit rejected nearly all of Swain’s arguments.
In her September 2017 decision Swain had pointed to sections 305 and 306(b) of the Puerto Rico Oversight, Management, and Economic Stability Act as barring her from lifting Title III’s automatic stay and appointing a receiver. She also said that an examination of the balance of harms weighed against granting a receiver.
On Aug. 8 a three judge panel for the U.S. Court of Appeals for the First Circuit reversed Swain’s denial of the bondholders’ request for relief from Title III’s automatic stay and called for “further proceedings consistent with this opinion.”
The appeals judges almost entirely rejected Swain’s arguments based on 305 and 306(b) and her approach considering the value of a PREPA receiver.
“We hold that section 305 does not prohibit as a matter of course the Title III court from lifting the stay when the facts establish a creditor’s entitlement to the appointment of a receiver in a different court in order to protect a creditor’s collateral should that protection otherwise be necessary and appropriate,” the circuit judges wrote.
The circuit judges said that Swain “undertook no assessment of the extent to which any collateral of the bondholders might be irreversibly harmed in the interim, or whether PREPA could demonstrate that it was adequately protecting that interest, factors a court would ordinarily examine and weigh.”
“We think it best to allow the bondholders to file a new and updated request for relief from the automatic stay so that the parties and the Title III court can focus on the merits of that request free of any thought that the request is categorically precluded.”
The bond insurers filed that request on Oct. 3.
On Aug. 8, 2018 the First Circuit took a more mixed approach to Swain’s decision in Peaje Investments LLC v. The Financial Oversight and Management Board for Puerto Rico, et al.
The appeals court judges agreed with Swain that Peaje’s Highways and Transportation Authority bonds aren’t secured by statutory lien.
However, Swain said that the Oversight Board had established adequate protection for the bondholders. The First Circuit disagreed and said Swain needed to look more deeply at the matter, Spiotto said. The First Circuit also said time had passed Swain’s September 2017 decision and she should reconsider.
The appeals court said that Swain had failed to adequately look into whether Peaje was going to experience “irreparable harm” and whether the board had given “adequate protection” to the authority and the bondholders’ claims on it. The First Circuit vacated Swain rulings on these topics and sent the case back to Swain.
