1st-Circuit-Column-BugA debate that just concluded in the U.S. Court of Appeals for the First Circuit over bondholder rights may have significant implications for municipalities and their ability to raise money for critical infrastructure projects. By denying the bondholder-creditor’s petition for rehearing en banc, the First Circuit missed an opportunity to provide bondholders with much-needed certainty concerning their ability to enforce an issuer’s obligation to pay from special revenues pledged to secure their bonds in the event of a municipality’s insolvency proceeding without first obtaining relief from the automatic stay.

Section 362 of the U.S. Bankruptcy Code (11 U.S.C. §101 et seq.) automatically stays a broad variety of creditor actions against the debtor or the debtor’s property upon the debtor’s filing of a bankruptcy petition. See 11 U.S.C. §362(a). Although the magnitude of impact remains to be seen, the First Circuit’s failure to rectify an earlier controversial decision of the First Circuit panel may undermine confidence in the municipal bond market and deter future investment. A powerful dissent suggests that this issue is ripe for corrective legislative action and/or Supreme Court review. Assured Guar. v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), Nos. 18-1165, 18-1166, 2019 U.S. App. LEXIS 22768, at *25 (1st Cir. July 31, 2019) (Lynch, J., dissenting) (“I believe that further review is warranted, if not by this court, then by the Supreme Court.”).