Puerto Rico Board, FAFFA, UCC appeal court ruling that favors PREPA bondholders

Several parties have asked the U.S. Court of Appeals for the First Circuit to reconsider its November decision that affirmed Puerto Rico Electric Power Authority bondholders’ lien on the authority’s net revenues.

The Puerto Rico Oversight Board, Puerto Rico Fiscal Agency and Financial Advisory Authority and the Unsecured Creditors Committee are asking the court to reconsider its opinion that PREPA bondholders have a claim for all the principal and interest due, which the judges said in November was just under $8.5 billion. By contrast, U.S. District Court Judge Laura Taylor Swain had ruled in spring 2023 they had a claim on only $2.4 billion.

The group of judges first ruled in favor of the bondholders in June, which the board, FAFAA and UCC asked them to reconsider.

“The First Circuit is reluctant to grant motions for reconsideration,” said Puerto Rico Attorney John Mudd. “In this case it is even less likely to grant it since it is the second opinion it has issued on the subject. I see this as a way of gaining time while the board determines its options before Judge Swain.”

The board said in a statement Friday, “The dispute is about whether the net revenues are only money and bank accounts. The Oversight Board believes they are. The First Circuit and bondholders currently assert they are not.”

The outcome will determine the legal requirements for the perfection of the bondholders’ lien, the board said. Money and bank accounts generally require creditors have possession or control of them, whereas other forms of collateral generally can have security interests perfected by filing public notices.

The FAFAA and the UCC filed petitions for rehearing supporting the board’s position. “The court improperly classified the collateral under Article 9 [bankruptcy] before identifying what property the net revenues are,” the UCC said. The committee questioned the court’s finding the net revenues were “general intangibles.”

The board also attacked the appeals court judges’ view that net revenues can be seen as general intangibles.

“In my opinion, the First Circuit will deny rehearing of [the] Oversight Board’s second petition and the Oversight Board can go to the U.S. Supreme Court,” said Puerto Rico Clearinghouse Principal Cate Long. “The Supreme Court of the United States will also deny hearing the case in my opinion because there is no circuit split.”

“The Oversight Bord massively errs in ignoring the text of federal statute, 11 USC §928, which governs the ‘pledge’ of special revenues,” Long said. Instead, she said she believes the board “descends to an argument involving case law for a corporate bankruptcy. … That case and its reasoning are irrelevant for defining a municipal special revenue pledge.”

Long said in the board’s reading, if PREPA decides not to transfer revenue, then it is not pledged.

“That makes a pledge ephemeral,” she said. “It also undermines state and federal laws designed to allow these pledges.”