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- The Supreme Court rejected Hertz’s appeal and held the company liable for interest payments to former bondholders.
- The legal dispute began after Hertz emerged from bankruptcy and paid off its bonds early, which bondholders claimed deprived them of future interest.
- A federal appeals court previously sided with bondholders, arguing that bondholders should be paid in full before shareholders receive dividends.
- Following the high court’s ruling, Hertz now faces an estimated payment of more than $320 million in interest and legal costs.
The Supreme Court declined to hear Hertz’s challenge to a lower court’s ruling over more than $270 million in interest payments to former bondholders.
On January 12, a three-judge panel of the High Court rejected the request for a retrial of the case (one judge was in favor of granting the request).
Representatives for Hertz could not be reached for comment on the Supreme Court’s decision.
The legal dispute arose in 2021 after the Estero-based rental car giant emerged from Chapter 11 bankruptcy and emerged a stronger company with new life.
Bondholders, who were not allowed to vote on Hertz’s restructuring plan, quickly sued for lack of compensation after the company’s bankruptcy case was completed. They argued that they needed to be “perfected” by receiving the expected interest in full at the expected rate.
Hertz’s early gains translated into millions of dollars in lost interest down the road.
The listed companies argued that bankruptcy law prohibits the accrual of “less than interest” after filing for bankruptcy protection, and that the bondholders received the amount they were entitled to based on “admitted claims.”
In September 2024, bondholders successfully appealed the bankruptcy court’s decision. The case was heard by the Pennsylvania Court of Appeals for the Third Circuit.
Thomas Ambro, one of the appellate court judges, wrote in a 51-page opinion that Hertz was “deeply cashed” after the reorganization and paid its shareholders in full, giving them $1.1 billion in cash and stock, four times the promised pre-bankruptcy interest bondholders sought on appeal.
“It’s extremely unfair to cut shareholder returns when quasi-shareholders have already received $1 billion in distributions,” he argued.
A majority of the judges found that the “absolute priority rule” requires bondholders to be paid in full at the contract rate “before an owner with a subordinate interest in the business does anything.”
In a partial dissent, Circuit Judge David Porter said he disagreed that the rule overrides the Bankruptcy Code’s general prohibition on claiming post-bankruptcy interest.
In a statement at the time, Hertz said it was disappointed in the 2-1 opinion that “reversed the bankruptcy court’s well-founded decision” that the company “met all of its legal obligations to unsecured noteholders by repaying 100% of the principal and interest outstanding at the time of the bankruptcy filing, plus post-petition interest at federal judgment rates.”
The company added, “We believe that existing Third Circuit precedent strongly supports the Bankruptcy Court’s decision.”
Mark Thomas Stancil, an attorney at Willkie Farr & Gallagher who represented the National Association Wells Fargo Bank as a trustee for a group of bondholders in the case, declined to comment. So did Christopher Mason, as did American Bankers Association attorney Nixon Peabody, who represented other bondholders.
The U.S. Department of Justice’s Solicitor General recommended that Hertz’s motion be dismissed, noting that “both the Fifth and Ninth Circuits have held that if a debtor is solvent, an unimpaired creditor must pay in full all post-claim interest due under the contract.”
Hertz’s stock price fell after the Supreme Court refused to hear the appeal.
The lawsuit continues to increase the amount owed to bondholders, now estimated at more than $320 million. The same goes for Hertz’s legal costs.
Hertz Global Holdings completed its move to Estero in 2016 after building a new, modern global headquarters off U.S. 41.
The Company’s subsidiaries and licensees operate the Hertz, Dollar, Thrifty and Firefly rental car brands, as well as the Hertz Car Sales brand in the United States and the Hertz 24/7 car sharing business in Europe.
Laura Layden is a business and government reporter. Email laura.layden@naplesnews.com..
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