(Adds statement from Puerto Rico’s oversight board, paragraph 4)
WASHINGTON, Oct 7 (Reuters) - The U.S. Supreme Court on Monday declined to take up a dispute over the assets of Puerto Rico’s largest public sector pension fund even as the U.S. Caribbean island territory’s bankruptcy enters a major new phase.
The justices left in place a January 2019 lower court ruling that found that bondholders who own nearly $3 billion of debt issued by Puerto Rico’s Employees Retirement System have a legitimate claim on the pension fund’s assets. The justices refused to hear an appeal by Puerto Rico’s federally created financial oversight board of that ruling.
The Financial Oversight and Management Board of Puerto Rico said the decision will not affect the proposed plan of adjustment it filed in federal court on Sept. 27 for the bankrupt island’s core government debt, which includes an unfunded pension liability of more than $50 billion.
The plan’s allocation of a 13% recovery for bondholders’ investment was not contingent on the outcome of this case, according to a board statement.
Meanwhile, litigation over the validity of the bonds and the scope of bondholders’ security interest is ongoing.
The pension fund litigation dates back to 2017, when the board initiated Puerto Rico’s bankruptcy and challenged claims by bondholders on those assets.
U.S. District Judge Laura Taylor Swain, who is handling the matter, had ruled that the bondholders “do not possess a perfected security interest” over property pledged by the retirement system to pay the debt. The judge’s ruling pointed to the use of an incorrect version of the pension fund’s name in financing statements.
The Boston-based 1st U.S. Circuit Court of Appeals reversed the ruling, deciding that “the bondholders met the requirements for perfection beginning on December 17, 2015.”
In its petition to the high court, the board argued that the appeals court’s reversal threatened “the ability of creditors across the nation to engage in secured lending” by treating the incorrect name issue as an unique circumstance.
After running out of pension assets, Puerto Rico’s government turned to a “pay-as-you-go” system in which all public pension costs are paid through its general fund annually.
The court took its action on Monday on the first day of its new nine-month term.
On Oct. 15, the Supreme Court is due to hear arguments in another case involving the Puerto Rico oversight board over whether the board’s members were lawfully appointed.
Reporting by Karen Pierog in Chicago Additional reporting by Lawrence Hurley in Washington Editing by Matthew Lewis